CHESNARA PLC

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General information and accounting policies and judgements Section B - Risk and capital management Section C - Segmental information Section D - Performance in the year Section E - Balance sheet assets Section F - Insurance and reinsurance contracts Section G - Balance sheet liabilities Section H - Shareholder equity Section I - Additional disclosures Company Financial Statements Company Balance Sheet Company Statement of Cash Flows Company Statement of Changes in Equity Notes to the Company Financial Statements Section J - Notes to the financial statements ADDITIONAL INFORMATION Financial calendar Key contacts Notice of the Annual General Meeting Explanatory notes to the Notice of the Annual General Meeting Appendix to AGM Notice Alternative Performance Measures Reconciliation of metrics Glossary Note on terminology Cautionary and forward looking statements ANNUAL REPORT & ACCOUNTS 2023 OVERVIEW WELCOME TO THE CHESNARA ANNUAL REPORT & ACCOUNTS FOR YEAR ENDED 31 DECEMBER 2023 CHESNARAANNUALREPORTANDACCOUNTS20231 OVERVIEW 2023 FINANCIAL HIGHLIGHTS COMMERCIAL CASH EcV † † GENERATION EARNINGS EXCLUDING THE IMPACT EXCLUDING THE IMPACT OF FX MOVEMENTS OF ACQUISITIONS AND DIVIDEND PAYMENTS £53.0M £59.1M 2022: £46.6M 2022: £84.7M LOSS GROUP FUNDS UNDER † † SOLVENCY MANAGEMENT 205% £11.5BN 2022: 197% 2022: £10.6BN Δ DIVIDEND GROWTH IFRS PROFIT BEFORE TAX 3% £1.8M INCREASE IN PROPOSED 2022: £62.1M LOSS FULL YEAR DIVIDEND FOR TH 19 CONSECUTIVE YEAR M&A DELIVERY 2 ACQUISITIONS IN THE YEAR † Alternative Performance Measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the Additional Information section of this Annual Report and Accounts. Δ This is the first reporting year under IFRS 17 and all prior comparatives have been restated in line with the requirements of the new standard. 2 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 OVERVIEW CONTENTS OVERVIEW IFRS FINANCIAL STATEMENTS 06 An introduction to Chesnara 134 Independent Auditor’s Report to the members of Chesnara plc 08 Delivering our strategy 142 Consolidated Statement of 10 2023 highlights Comprehensive Income 12 Measuring our performance 143 Consolidated Balance Sheet 14 Chair’s Statement 144 Consolidated Statement of Cash Flows 16 Chief Executive Officer’s Report 145 Consolidated Statement of Changes in Equity STRATEGIC REPORT Notes to the Consolidated Financial 24 Our strategy, business model, Statements and culture & values 146 Section A – General information and 26 Our strategy accounting policies and judgements 28 Our culture & values 169 Section B – Risk and capital management 30 Section 172 reporting 185 Section C – Segmental information 38 Business review 188 Section D – Performance in the year 45 Capital management 197 Section E – Balance sheet assets 48 Financial review 206 Section F – Insurance and reinsurance 59 Financial management contracts 61 Risk management 235 Section G – Balance sheet liabilities 71 Corporate and social responsibility 241 Section H – Shareholder equity 243 Section I – Additional disclosures CORPORATE GOVERNANCE Company Financial Statements 94 Board profile and board of directors 254 Company Balance Sheet 96 Governance overview by the Chair 255 Company Statement of Cash Flows 98 Corporate Governance Report 256 Company Statement of Changes in Equity 103 Nomination & Governance Committee Report Notes to the Company Financial Statements 105 Directors’ Remuneration Report 257 Section J – Notes to the financial statements 120 Audit & Risk Committee Report ADDITIONAL INFORMATION 128 Directors’ Report 131 Directors’ Responsibilities Statement 264 Financial calendar 264 Key contacts 265 Notice of the Annual General Meeting 267 Explanatory notes to the Notice of the Annual General Meeting 271 Appendix to AGM Notice 274 Alternative Performance Measures 276 Reconciliation of metrics 278 Glossary 279 Note on terminology 280 Cautionary and forward looking statements OVERVIEW View towards Tower Bridge, London 06 An introduction to Chesnara 08 Delivering our strategy 10 2023 highlights 12 Measuring our performance 14 Chair’s Statement 16 Chief Executive Officer’s Report 4 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 Photography, Nirmal Rajendharjumar CHESNARAANNUALREPORTANDACCOUNTS20235 OVERVIEW OVERVIEW AN INTRODUCTION TO CHESNARA CHESNARA PLC IS A LIFE ASSURANCE AND PENSIONS CONSOLIDATOR WITH OPERATIONS IN THE UK, SWEDEN AND THE NETHERLANDS. At Chesnara, with customers at the forefront of all we do, we focus on three things: 1. The efficient management of life assurance and pension policies. 2. Creating value through acquiring new companies or books of business. 3. Writing new business where we are confident that conditions will ensure the products are value adding and ultimately support longer-term cash generation. This focus has enabled us to deliver strong levels of cash generation, a growing dividend and a robust and stable solvency position over the last 19 years. And we look forward with confidence in our ability to continue this delivery in the future. Who we are and where we came from OUR STRATEGIC OBJECTIVES Chesnara plc is a responsible and well capitalised European life and pensions consolidator, formed in 2004 and listed on the London Stock Exchange. The group comprises both open-book and closed-book operations. 01 The group initially consisted of Countrywide Assured, a closed life and pensions book demerged from Countrywide plc, a large estate agency group. MAXIMISE VALUE Since incorporation, the group has grown through: FROM EXISTING BUSINESS – the acquisitions of predominantly closed UK businesses (into Countrywide Assured) – the purchase of an open life and pensions business in Sweden, now known as Movestic; and 02 – acquisitions of both a closed-book acquisitive group (Waard Group) and an open life and pensions business in the Netherlands (Scildon). ACQUIRE LIFE AND See pages 7 to 9 for further detail on our history and businesses. PENSIONS BUSINESSES Looking forward, we are committed to transitioning to be a sustainable and net zero group across our operational and financed emissions and this commitment is a key factor in our corporate decision making. 03 What we do ENHANCE VALUE THROUGH We help protect customers and their dependants through the provision of life, PROFITABLE NEW BUSINESS health and disability cover and by providing savings and pensions products to enable policyholders to meet their financial needs in the future. OUR CULTURE & VALUES – RESPONSIBLE RISK BASED MANAGEMENT 6 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 OVERVIEW How we create value Customer Shareholder – We deliver effective customer service – Surpluses emerge from the existing books – Growth from both our proven acquisition model operations with good standards of service, of business through efficient management of and from writing profitable new business has † clear communication and competitive the policy base and good capital management a positive impact on the Economic Value fund performance. practices. These surpluses enable dividends of the business and supports longer-term to be paid from the subsidiaries to Chesnara, cash generation. – Product reviews across the group help ensure which in turn fund the attractive shareholder good customer outcomes and, in the UK, have – Customers are charged AMCs (annual dividend and support our desire to be a share been updated to be aligned to the new Consumer management charges) for unit-linked products held for the long term by our shareholders. Duty requirements. and pay premiums for insurance policies. The diagram below illustrates the primary – Customers can also be confident in the security sources of growth that then ultimately of their policies through the robust solvency contribute towards surplus emergence. levels we operate our businesses to. Future acquisitions New business Synergies Real world returns Risk margin The categories of potential upside (which are not shown to scale) will emerge over time Economic Value Total potential (illustrative) Commercial Value (illustrative) How we operate UK – Chesnara has a centrally defined governance – Our team has significant experience and † and Risk Management Framework operating a proven track record in governing, acquiring FUNDS UNDER MANAGEMENT across the group and all its divisions. and successfully integrating life and pension £4.2bn businesses. – This framework is designed to deliver long-term † POLICIES : c291,000 peace of mind to our customers, shareholders, – Acquisitions form a key part of our strategy employees, regulators, outsourcing partners and are assessed against stringent financial and local communities. criteria adopting a robust risk-based due diligence process. SWEDEN – Our management teams have clear responsibilities and are accountable for the delivery of set – We maintain robust solvency and liquidity levels as † FUNDS UNDER MANAGEMENT objectives and the identification and management part of our wider Capital Management Framework. £4.4bn of risks and opportunities, including those arising – In the UK, we adopt an outsourced operating from climate change. † model to the fullest extent possible, whereas POLICIES : c284,000 – We are committed to transitioning to be our overseas divisions use outsourced services a sustainable and net zero group and this on a more limited basis. commitment is a key factor in our corporate NETHERLANDS decision making. † FUNDS UNDER MANAGEMENT £2.8bn † POLICIES : c395,000 CHESNARA GROUP † FUNDS UNDER MANAGEMENT £11.5bn † POLICIES : c970,000 † Alternative Performance Measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the Additional Information section of this Annual Report and Accounts. CHESNARAANNUALREPORTANDACCOUNTS20237 OVERVIEW DELIVERING OUR STRATEGY • WHAT WE’VE DONE 13 SUCCESSFUL ACQUISITIONS ACROSS 3 TERRITORIES Our deals demonstrate flexibility and creativity where appropriate: – From value enhancing ‘bolt-on’ deals to more transformative acquisitions – Capability to find value in the UK, Netherlands and beyond – Flexible and efficient deal funding solutions – Ability to find expedient solutions to de-risk where required We have a well-established and robust framework against which we assess M&A ensuring that activity: – Enhances cash generation in the medium term – Delivers positive impact on the Economic Value per share in the medium term – Is within Chesnara’s risk appetite – Has been subject to appropriate due diligence – Delivers positive customer outcomes † Alternative Performance Measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the Additional Information section of this Annual Report and Accounts. 8 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 DIVIDEND HISTORY CASH GENERATION dividends to our shareholders. A proposed full year 2023 dividend of 23.97p per share represents an increase of 3% on the prior year. This is our nineteenth successive year of dividend growth; an unbroken track record since entry Dividend per share history Pence per share 11.9 126 10 2004 2004 12.5 176 23 We recognise the importance of providing stable and attractive 189 37 13.1 15.1 187 53 183 69 15.6 263 85 16.0 16.4 355 103 295 123 16.9 311 142 17.4 376 163 17.9 18.4 417 185 455 209 18.9 19.5 603 237 20.1 723 267 626 298 20.7 19 successive years of dividend growth to the FTSE in May 2004, and we have paid cumulative dividends of £465m. 670 329 21.3 21.9 637 362 22.6 624 396 512 430 23.3 24.0 525 465 2023 2023 OVERVIEW † † Cumulative commercial cash generation of £256m has exceeded dividends paid to shareholders by over 52% over the last five years The group generates cash to service its dividends and debts, and reinvest in the business including through acquisitions. We define cash generation as the movement in the group’s surplus Own Funds above the group’s internally required † capital. Our commercial cash generation metric looks through the impact of technical components like the symmetric adjustment to show the group’s view of the surplus being generated. Cumulative commercial cash generation over the last five years represents 152% of the total dividends over the same period. FOCUSING ON OUR THREE STRATEGIC OBJECTIVES HAS ENABLED US TO DELIVER SUSTAINABLE GROWTH IN CASH GENERATION OVER THE LONG TERM. WE ARE CONFIDENT WE CAN CONTINUE TO DELIVER THIS IN THE FUTURE. Economic Value history £m † ECONOMIC VALUE GROWTH EcV Over 315% of value growth since listing in 2004 Cumulative dividend † Long-term Economic Value (EcV) growth is achieved through a combination of efficient management of the existing policies, investment returns above risk free rates of return, acquisitions and writing profitable new business. The growth since listing includes £148m of new equity and is net of cumulative dividend payments. EcV growth supports longer-term cash generation. CUSTOMERS Our primary responsibilities remain to our customers – We look after c1 million policies for customers that have their pensions, life assurance or other savings and investments with us. – Customers and their advisors can be confident that they hold policies with a well-capitalised group where financial stability is central to our culture and values. – Our investment returns remain competitive across the group. – We also deliver good customer outcomes across our businesses. * 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. CHESNARAANNUALREPORTANDACCOUNTS20239 OVERVIEW 2023 HIGHLIGHTS CASH GENERATION £53.0M 2022 £46.6m £32.5M 2022 £82.7m 3 1 COMMERCIAL CASH GENERATION GROUP CASH GENERATION (excluding the impact of acquisitions) (excluding the impact of acquisitions) The group has again reported strong results across both cash metrics in 2023. Group cash generation includes a material adverse impact from the symmetric adjustment (SA) of £13.1m (2022: +£28.2m). The recovery we have seen across equity markets since 2022, whilst a positive overall for the group, means we are required to hold additional capital which has a short-term impact on cash generation. Commercial cash generation looks through the SA impact and is deemed to better reflect the underlying business performance. Total divisional commercial cash, excluding FX impacts, was £76.5m which provides over 210% coverage of the 2023 full year dividend. The strong group and divisional commercial cash result shows that Chesnara continues to deliver cash generation through a wide variety of market conditions. Financial review p50 SOLVENCY FuM 205% 2022 197% £11.5BN 2022 £10.6bn 4 GROUP SOLVENCY FUNDS UNDER MANAGEMENT The group’s solvency has increased in the year and is well above our FuM have increased by c8.5% since the start of the year. This is due normal operating range of 140-160%. The ratio does not include any to a combination of investment returns on the existing business and the temporary impacts from either transitional benefits or a positive value added through both new business written and the acquisitions closing SA position. The solvency position benefits from the capital completed in the year. Financial statements p143 efficiencies of the Tier 2 debt raised in 2022 and provides substantial headroom for future acquisitions. Capital management p45 ECONOMIC VALUE £524.7M 2022 £511.7m £59.1M 2022 £ ( 84.7 ) m 5 6 ECONOMIC VALUE ECONOMIC VALUE EARNINGS EcV has increased since the start of the year, as positive earnings EcV earnings of £59.1m have been delivered (pre-dividend payments (£59.1m) offset the impact of dividend payments (£35.4m) and FX impact). Acquisition gains and real world returns have provided and foreign exchange consolidation impacts (£10.8m). the most material contributions, with Part VII synergies and new Financial review p53 business further positive contributing factors. Financial review p52 £10.1M 2022 £9.5m 7 COMMERCIAL NEW BUSINESS PROFIT Commercial new business profits exceed the prior year return with the UK division also contributing new business alongside Movestic in Sweden and Scildon in the Netherlands. Business review pages 40 to 43 IFRS £1.8M 2022 £62.1m loss £10.3M 2022 £26.1m loss IFRS PRE-TAX PROFIT TOTAL COMPREHENSIVE INCOME (2022 restated as a result of IFRS 17 being applied retrospectively) (2022 restated as a result of IFRS 17 being applied retrospectively) The IFRS results are being reported for the first time on an IFRS 17 Total comprehensive income includes a foreign exchange loss of £7.8m basis in the Annual Report and Accounts, and the comparatives have (2022: £6.9m gain). Financial review p57 been adjusted to apply this retrospectively. Profit before tax of £1.8m includes a net insurance service loss of £5.1m and an investment result of £71.7m (2022: £13.3m profit and £39.0m loss respectively). The adoption of IFRS 17 provides some more insight into the future profits that are expected to emerge from the group’s life insurance business. However, the accounting standard does not include the group’s significant amount of policies that are classified as investment contracts, which also represent a future profit stream for the business. As a result, whilst IFRS 17 does provide some level of alignment with the valuation regime of Solvency II, it does not replace it and therefore the group continues to primarily focus on Solvency II and its derivative KPIs of Economic Value and cash generation in assessing the performance of the business. 10 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 OVERVIEW PROPOSED DIVIDEND INCREASED BY 3% FULL YEAR DIVIDEND INCREASED FOR THE 19TH CONSECUTIVE YEAR Increase in the full year dividend for the year of 3% to 23.97p per share (8.36p interim and 15.61p proposed final), supported by material divisional cash contributions in the year and strong group solvency. Both of the acquisitions that were executed in the year are expected to positively support future cash generation and we continue to have clear line of sight to sources of mid to long-term cash generation. ECONOMIC BACKDROP VOLATILE INVESTMENT MARKET CONDITIONS HAVE CONTINUED Overall, it has been a period of economic growth although volatility has remained across most asset classes. As a result there have been comparatively modest investment returns and mixed economic results in our operating divisions with varied economic factors having impacted each of the businesses and our key financial metrics in different ways. We have seen some equity market growth which has had a positive impact on the UK’s and Sweden’s EcV growth but has dampened cash generation in these territories, and we have seen the impact of falling yields putting some downward pressure on the EcV of our Dutch businesses, but less so on cash generation. Sterling appreciation against both EUR and SEK has caused adverse foreign exchange impacts on the translation of our overseas divisional results, although this has had some mitigation from our foreign exchange hedge. As we look forward there continues to remain some uncertainty around economics with inflation and interest rates persisting at a higher level than forecast by central banks. ACQUISITIONS THE GROUP CONTINUES TO EXPAND THROUGH M&A 2023 was another busy period for Chesnara with two acquisitions in the year, delivering a combined day one EcV gain of £28.4m. Following the announcement late in 2022, we completed the acquisition of the insurance portfolio of Conservatrix in the Netherlands, with an EcV gain of £21.7m and increase in Waard’s policies under administration of c70,000. In May, expansion in the UK continued for the second year running, with the acquisition of a protection portfolio from Canada Life. The acquisition has initially been executed through entering into a 100% reinsurance agreement with Canada Life, and these policies will subsequently transfer to the division through a Part VII transfer process. The transaction has delivered an immediate EcV gain of £6.7m and additional policies of c47,000 to the UK division. Our 2024 acquisition pipeline looks positive and we remain optimistic about the outlook for future deals. We have the operational bandwidth, material solvency headroom, liquid resources and other financing levers to support our ambitions. OPERATIONAL DELIVERY NEW OUTSOURCING PARTNERSHIP, BUSINESS INTEGRATIONS, NEW PEOPLE AND IFRS 17 DELIVERY In the UK, we have entered into a new long-term strategic partnership for the outsourcing of operations for the majority of the division, providing surety over the future operating costs of the business over a minimum 10-year period. The Part VII transfer of the policies of CASLP to Countrywide Assured was also successfully completed at the end of 2023. In the Netherlands the Conservatrix insurance portfolio was successfully integrated into the Waard Group. At a group and divisional level, IFRS 17 has been implemented for this first reporting year, with reporting processes now bedding down into our business as usual operations following several years of planning and implementation. From a people perspective we have seen some key changes over the course of the year, with three new divisional CEOs joining the group, coupled with the announcement of the change in our Group CFO, planned for the first half of 2024. SUSTAINABILITY WE ARE COMMITTED TO BECOMING A SUSTAINABLE CHESNARA The group’s sustainability programme has progressed well over the course of the year. We are committed to delivering against our three key targets: to be a net zero emitter; to invest in positive solutions; and to be an inclusive place for all stakeholders. We have successfully baselined our financed and operational emissions and also set our initial interim targets for financed emissions. More detail can be found in our Annual Sustainability Report (www.chesnara.co.uk/sustainability). Notes: Items 1 to 9 below are Alternative Performance Measures (APMs) used by the group to supplement the required statutory disclosures under IFRS and Solvency II, providing additional information to enhance the understanding of financial performance. Further information on these APMs can be found throughout the Financial Review and in the APM appendix on pages 274 and 275. 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. CHESNARAANNUALREPORTANDACCOUNTS202311 OVERVIEW MEASURING OUR PERFORMANCE Throughout our Annual Report and Accounts we use measures to assess and report how well we have performed. The range of measures is broad and includes many measures that are not based on IFRS. The financial analysis of a life and pensions business also needs to recognise the importance of Solvency II figures, the basis of regulatory solvency. In addition, the measures aim to assess performance from the perspective of all stakeholders. Financial analysis of a life and pension business The IFRS results form the core of the Annual Report and Accounts and hence The non-IFRS APMs have at their heart the Solvency II valuation known as retain prominence as a key financial performance metric. However, this Own Funds and, as such, all major financial APMs are derived from a defined Annual Report and Accounts also adopts several Alternative Performance rules-based regime. The diagram below shows the core financial metrics that Measures (APMs). sit alongside the IFRS results, together with their associated KPIs and interested parties. These measures complement the IFRS metrics and present additional insight into the financial position and performance of the business, Further detail on APMs can be found in the appendix on pages 274 and 275. from the perspective of all stakeholders. FINANCIAL STATEMENTS ADDITIONAL METRICS I Solvency II valuation IFRS net assets Capital requirements (Own Funds) R (£359.9m) (£683.7m) See page 276 Solvency Capital SCR plus for reconciliation Requirement management buffer of IFRS to SII. I P R IFRS profits Economic Value Solvency I B Balance sheet Earnings Percentage Absolute Stakeholder focus: P Policyholders I Investors II R Regulators New business Cash generation B B Business partners Key performance indicators EcV Commercial GroupDivisional SOLVENCY ECONOMIC VALUE CASH GENERATION Solvency is a fundamental financial measure EcV is derived from Solvency II Own Funds (SII). Cash generation is used by the group as a which is of paramount importance to investors It recognises the impact of certain items that measure of assessing how much dividend and policyholders. It represents the relationship are not recognised in SII Own Funds, and also potential has been generated, subject to between the value of the business as measured takes a more commercial view of the risk ensuring other constraints are managed. on a Solvency II basis and the capital the business margin than under Solvency II. Group cash generation is calculated as the is required to hold – the Solvency Capital An element of the EcV earnings each period is the movement in the group’s surplus Own Funds Requirement (SCR). Solvency can be reported Economic Value of new business. By factoring in above the group’s internally required capital, as an absolute surplus value or as a ratio. real world investment returns and removing the as determined by applying the group’s Capital Solvency gives policyholders comfort regarding impact of risk margins, the group determines the Management Policy, which has Solvency II the security of their provider. This is also the case value of new business on a commercial basis. rules at its heart. for investors together with giving them a sense Divisional cash generation represents the of the level of potential surplus available to invest movement in surplus Own Funds above local in the business or distribute as dividends, subject capital management policies within the three to other considerations and approvals. operating divisions of Chesnara.Divisional cash generation is used as a measure of how much dividend potential the divisions have generated, subject to ensuring other constraints are managed. Commercial cash generation excludes the impact of technical adjustments, modelling changes and corporate acquisition activity; representing the group’s view of cash generated by the business. Further details on pages 45 to 47 and 274 & 275. Further details on pages 52 & 53 and 274 & 275. Further details on pages 50 & 51 and 274 & 275. 12 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 OVERVIEW OPERATIONAL AND OTHER PERFORMANCE MEASURES In addition to financial performance measures, this Annual Report and Accounts includes measures that consider and assess the performance of all our key stakeholder groups. The diagram below summarises the performance measures adopted throughout the Annual Report and Accounts. KEY STAKEHOLDERS Measure What is it and why is it important? Customer How well we service our customers is of paramount importance and so through various means service levels we aim to assess customer service levels. The business reviews within the Annual Report and 38-43 Accounts refer to a number of indicators of customer service levels. Broker Broker satisfaction is important because they sell our new policies, provide ongoing service to satisfaction their customers and influence book persistency. We include several measures within the Report 38-43 and Accounts, including direct broker assessment ratings for Movestic and general assessment of how our brands fare in industry performance awards in the Netherlands. Policy This is a measure of how the assets are performing that underpin policyholder returns. It is investment important as it indicates to the customer the returns that their contributions are generating, and 38-43 performance options available to invest in funds that focus on environmental, social and governance factors. Industry This is a comparative measure of how well our investments are performing against the rest performance 38-43 assessments of the industry, which provides valuable context to our performance. Emissions and Tracking our scope 1, 2 and 3 emissions is a core part of our transition to be a net zero and energy usage Funds Under Management † Policyholder 87-89 sustainable group. This shows the value of the investments that the business manages. This is important because Policy count † Investor Regulators Business Total Shareholder Returns New business profitability partner scale influences operational sustainability in run-off books and operational efficiency in growing 7 books. Funds Under Management are also a strong indicator of fee income. Policy count is the number of policies that the group manages on behalf of customers. This is important to show the scale of the business, particularly to provide context to the rate at which 7 the closed-book business is maturing. In our open businesses, the policy count shows the net impact of new business versus policy attrition. This includes dividend growth and yield and shows the return that an investor is generating on the shares that they hold. It is highly important as it shows the success of the business 59 in translating its operations into a return for shareholders. This shows our ability to write profitable new business which increases the value of the group. This is an important indicator given one of our core objectives is to ‘enhance value through 40-43 profitable new business’. New business This shows our success at writing new business relative to the rest of the market and market share is important context for considering our success at writing new business against our target 40-43 market shares. Gearing ratio The gearing 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 56-59 by debt plus equity, with the equity denominator adding back the net of tax CSM liability, as measured under IFRS. Knowledge, This is a key measure given our view that the quality, balance and effectiveness of the skills and board of directors has a direct bearing on delivering positive outcomes to all stakeholders. experience 94-95 of the board This includes holding the management teams accountable for the delivery of set objectives of directors and the proper assessment of known and emerging risks and opportunities, e.g. those arising from climate change. KEY Primary interest Secondary interest * For the purposes of this key performance indicator assessment, business partners refers to major suppliers and outsource partners. † Alternative Performance Measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the Additional Information section of this Annual Report and Accounts. Page CHESNARAANNUALREPORTANDACCOUNTS202313 OVERVIEW CHAIR’S STATEMENT THE GROUP HAS DELIVERED STRONG CASH GENERATION AND ECONOMIC VALUE GROWTH DURING THE PERIOD WHILST CONTINUING TO HAVE A STRONG SOLVENCY POSITION. THIS HAS SUPPORTED AN INCREASE IN THE FULL YEAR DIVIDEND FOR A 19TH CONSECUTIVE YEAR AND PROVIDES HEADROOM FOR FUTURE M&A. Strong cash generation and solvency † Chesnara has continued its strong track record of delivering cash generation across a variety of market conditions in 2023. Total commercial cash generation of £53.0m supports us continuing to extend our dividend growth track record. We are recommending that our shareholders will receive a final dividend of 15.61p per share, an increase of 3% in the full year dividend for the 19th consecutive year. Having a strong and stable solvency position provides financial security for customers and is also critical to the investment case for both our equity and debt investors. And having material solvency headroom also supports our ability to execute further M&A. I am pleased to report a continued strong Solvency II ratio of 205%. This remains significantly above our normal operating range of 140-160%, providing us with considerable strategic flexibility. Our solvency position remains underpinned by a well-diversified business model, a focus on responsible risk-based management and resilient and reliable cash flows from our businesses. And our businesses have delivered EcV growth even after the impact of FX and dividends. Steve talks about these financial dynamics further in his report. People and operational delivery Across the group, our people continue to deliver, which includes the execution of another two deals in the period. Firstly, we completed the acquisition of the Conservatrix insurance portfolio in the Netherlands on 1 January. Later in May, we announced the acquisition of Canada Life’s protection portfolio in the UK, which has been initially executed through a reinsurance arrangement. The deals have created significant value for investors with £28.4m of day 1 EcV gains and we expect them to be an important source of value in the long term. Our teams in the Netherlands and UK have worked extremely hard to integrate the newly acquired businesses and portfolios, including Sanlam Life and Pensions (CASLP) which we purchased in the previous year. We have completed the Part VII transfer of the CASLP policies into LUKE SAVAGE, CHAIR our main UK insurance company, Countrywide Assured, which has also had a positive impact on cash generation and EcV, and the insurance portfolio of Conservatrix is now fully integrated into the Waard Group. Another major development during the period has been the announcement of a new outsource partner in the UK, SS&C. This positive development creates a sound commercial and operational foundation for long-term customer support and business development. In Movestic we have continued to work on improving our customer service, launching a new unique digital service in the year that allows customers to customise how they utilise their occupational pension scheme. We have also continued to build our custodian business through new partnerships in the year. And, in the Netherlands, Scildon has continued with its IT upgrade programme, improving its customer and broker front-end capabilities. The transition to the new insurance contract accounting regime, IFRS 17, has gone live in 2023 and our full year accounts have fully complied with the statutory requirements of the new standard. This is the culmination of several hard years of planning and execution from teams across the group. And finally, we have also been working hard to transition a number of leadership roles. During the year, September saw Pauline Derkman become CEO of Scildon and Jackie Ronson become our UK CEO and in December Sara Lindberg become our CEO of Movestic. We wish them the very best in their roles. On behalf of the board, I also wanted to thank Gert-Jan Fritzsche, Linnéa Echorville and Ken Hogg for everything they have done for Scildon, Movestic and CA respectively over the six, six and seven years they were CEOs of their respective businesses. 14 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 OVERVIEW We also announced that David Rimmington will not be seeking re-election at The path to sustainability will be long and complicated but we are investing our Annual General Meeting in May 2024 and that he will be stepping down in sustainability-focused resource and infrastructure to support the group on from the board and leaving his role as Group Finance Director at that meeting. this journey. A very visible and encouraging development was the success He will be replaced by Tom Howard who will become Group Chief Financial of our first group-wide Sustainability Summit held in June. I was hugely Officer, subject to regulatory approval, and should start with us no later than encouraged by the level of engagement from all levels across the group 1 May 2024. On behalf of the board, I want to thank David for everything and by the clear alignment of ambitions leading to the identification of key he has achieved at Chesnara over the last ten years and he leaves with our workstreams and objectives. The objectives are a mix of items that create best wishes. At the same time, we are delighted to be welcoming Tom to solid foundations for longer-term change together with some shorter-term Chesnara plc. He has extensive financial services experience, particularly actions that will begin to make a real world positive impact. I am confident in life insurance and asset management, as well as expertise in M&A; that we will deliver against those objectives and I look forward to updating these skills align strongly with the group’s strategic ambition. you on our progress. 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. Outlook We remain mindful that significant periods of operational delivery, although Overall, it has been a good year of delivery and strong cash generation. rewarding, can be stressful and so we remain committed to investing in staff The start of 2024 has continued to show volatile market conditions with welfare programmes to support our people. inflation and interest rates persisting at higher levels than we have seen in recent years. That said, we have seen more positive signs from equity Purpose markets and stronger signals from central banks that we will return to normality in terms of macro-economic conditions. At Chesnara, we help protect customers and their dependants through the provision of life, health, and disability cover or by providing savings and Our business model has delivered positively in these volatile environments, pensions products to meet future financial needs. These are very often and we continue to expect the UK and European M&A markets to be active. customers that have come to us through acquisition, and we are committed Our strong and stable solvency, alongside the parent company cash balance, to ensuring that they remain positively supported by us. leaves us well positioned to participate in these markets. We have always managed our business in a responsible way and have And as we reach our 20th year as a listed company, the board and I look a strong sense of acting in a fair manner, giving full regard to the relative forward to continuing to deliver for our shareholders in the future. interests of all stakeholders. Delivering cash generation, EcV growth and solvency will always remain of key importance for many reasons. These include our desire to offer competitive returns to shareholders and fund our debt investor coupon payments but also because it creates financial stability for customers. We continue to be very conscious of the need for the business to serve a wider purpose, with an increasing balance of focus across the 3Ps: Profit, People and Planet. Governance is a core foundation to our business model and we have a well-established Governance Framework. We continue to increase our focus on environmental and social matters and are committed to becoming Luke Savage a sustainable Chesnara. Alongside this document, we have published our Chair 2023 Annual Sustainability Report which details our wider ambitions and 27 March 2024 progress against our targets and commitments. I encourage you to read the report and please provide any feedback or thoughts to me or a member of the Chesnara team. 3% INCREASE IN TOTAL 2023 DIVIDEND TO 23.97p, OUR 19TH YEAR OF CONSECUTIVE RISES. † Alternative Performance Measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the Additional Information section of this Annual Report and Accounts. CHESNARAANNUALREPORTANDACCOUNTS202315 OVERVIEW CHIEF EXECUTIVE OFFICER’S REPORT THE GROUP HAS GENERATED MATERIAL EcV EARNINGS AND DELIVERED STRONG CASH GENERATION. OUR PEOPLE HAVE DELIVERED TWO ACQUISITIONS, SECURED A NEW UK STRATEGIC PARTNERSHIP AND MADE THE SUCCESSFUL TRANSITION TO IFRS 17. AND WE ARE CONTINUING TO SEE PLENTY OF M&A OPPORTUNITIES. Introduction & results The key strategic areas of focus for 2023 have remained the same across Chesnara, namely: 1. Running in-force insurance and pensions books efficiently and effectively; 2. Seeking out and delivering value enhancing M&A opportunities; and 3. Writing focused, profitable new business where we are satisfied an appropriate return can be made. The momentum behind our acquisition strategy has continued with a further two deals recognised in the year (five now in the last two years). These two acquisitions have added £28.4m of immediate additional value to the group against consideration paid of £9m and total group capital deployed of £35m. Conservatrix and Robein Leven are now both fully integrated into Waard and the UK completed the Part VII of CASLP policies into CA in December, which has created synergies that have had a positive impact on cash generation and EcV. We also saw an improved contribution from new business for the period at £10m, including nearly £2m from the UK. We have c1 million customers in Chesnara and we take the responsibility of delivering for them every day very seriously. Our UK team has been working hard to implement the new UK Consumer Duty regulation which will help continue to ensure we focus on good outcomes and value for money for customers. A major highlight in the year is the signing of a new outsource arrangement in the UK, which we announced in May. Sixty-eight Chesnara colleagues transferred to SS&C in August and we have a major programme of activity underway to migrate our UK policies to our new operating platform, including both CASLP and those policies being acquired from Canada Life UK. SS&C will be a key partner for us, enabling the UK business to continue to deliver high quality and cost effective servicing with the capacity and flexibility to support continued M&A developments in the UK where we see good opportunities. In Scildon, work has continued to improve the efficiency and usability of our Individual Life platform which has seen positive feedback from brokers. And for Sweden, further automation and use of AI, alongside STEVE MURRAY, CEO the build of digital tools such as the pension calculator, have also been material developments. As Luke mentions, there has been an increased focus on defining and delivering the group sustainability vision in line with the commitments we set out in our Annual Sustainability Report (ASR), including our new initial interim targets for financed emissions. We are committed to a 50% reduction by 2030 in our scope 1 and 2 financed emissions investments that are within our control or influence, which represents a material component of our assets under management. We will also be working with partners and customers for those assets where we have less control or influence, for example those where policyholders self-select their own investments. We remain strongly committed to net zero by 2050 for all our financed emissions and so our targets will expand over time to include all asset classes. THE PART VII TRANSFER OF THE SANLAM BOOK COMPLETED IN DECEMBER AND WORK IS PROGRESSING WELL ON THE MIGRATION OF POLICIES TO OUR NEW PLATFORM. 16 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 OVERVIEW DIVISIONAL COMMERCIAL CASH ECONOMIC VALUE GENERATION REPRESENTS GREW MATERIALLY c212% COVERAGE OF THE 2023 BY 12% OR £59.1M. Δ SHAREHOLDER DIVIDEND. TWO ACQUISITIONS Divisional commercial cash generation £m HAVE ADDED £28.4M OF ADDITIONAL VALUE TO THE GROUP. STRONG SOLVENCY 25.7 AT 205%, WELL ABOVE Divisional NORMAL OPERATING Total 76.5 RANGE OF 140-160%. 2.3 WE HAVE SET OUR INITIAL 48.5 INTERIM EMISSIONS REDUCTION TARGETS ON OUR INVESTMENTS. UK Sweden Netherlands 50% REDUCTION BY 2030 FOR LISTED EQUITY AND CORPORATE FIXED INCOME INVESTMENTS THAT ARE WITHIN OUR CONTROL OR INFLUENCE. * Pre-dividend payment & FX impacts. Δ Excluding FX consolidation impacts. † Alternative Performance Measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the Additional Information section of this Annual Report and Accounts. CHESNARAANNUALREPORTANDACCOUNTS202317 OVERVIEW CHIEF EXECUTIVE OFFICER’S REPORT The production of our transition plans will be a key step in identifying the more Whilst the move to IFRS 17 has been a very material programme of work for detailed actions we will take to tackle all our financed emissions and will also the group, you will note that my wider review continues to focus on metrics factor in how we manage a just transition which considers the needs of all linked to Solvency II. We continue to believe that the Solvency II metrics stakeholders, including nature and biodiversity. I am pleased to report that better support a commercial assessment of the business and remain the we are taking tangible steps on our journey, including implementing new metrics upon which we manage the group. platforms and tools to enable us to baseline our financed and operational emissions. I share Luke’s confidence that we will be able to successfully Cash generation, group liquidity and deliver against our sustainability objectives and look forward to providing updates on our future progress. strong solvency After five years of intensive work, there has also been a significant focus on At the heart of the Chesnara financial model and investment case ensuring we could report on the new IFRS 17 basis. I am delighted to report is resilient cash generation and stable solvency, across a wide variety that our 2023 financial statements are compliant. of market conditions. Process-wise, we are in good shape regarding transitioning from the project to recurring business as usual operations and the financial impact of the transition to the new reporting framework is positive and in line with the WE HAVE STRONG LINE OF guidance we gave investors alongside our full year 2022 results. † SIGHT TO SOURCES OF CASH Pre the proposed FY dividend and FX impacts, the group Economic Value grew materially by 12% (up £59.1m) and we saw all components of the GENERATION AND SUBSTANTIAL ‘Chesnara Fan’ growth model deliver positively over the year. We invested further in central resources to support major projects such as IFRS 17 and RESOURCES TO FUND FUTURE M&A activity as well as continuing to pay the coupon on our £200m Tier 2 debt instrument. ACQUISITIONS. The derivative we put in place towards the end of 2022 to reduce the exposure of our capital surplus to extreme FX movements has been renewed and slightly broadened in 2023. Whilst this mitigates against extreme movements we do remain exposed to the risks and opportunities relating to FX movements within the cap and floor of the derivative. A primary driver of the hedge was to reduce the capital we need to hold against currency risk and to limit more extreme EcV exposure, rather than to fully hedge FX exposures across all metrics. During 2023 sterling has strengthened slightly against the euro and Swedish krona resulting in a negative FX impact on EcV of £10.8m. The group continued to generate cash with total commercial cash generation of £53.0m. We see this as a stong result given the underlying economic conditions in the year. Our cash generation has benefitted from delivering a mass lapse reinsurance arrangement in the UK towards the end of the year, and has also been positively impacted by the UK’s Solvency II reform, which resulted in a reduction in the level of risk margin we are required to hold in our UK business. In terms of cash resources, we have again seen a significant flow of dividends in the period from our divisions with £71.3m having been remitted to Chesnara during the year. This contributed to a £16m increase in the parent company surplus cash balance (including holding companies) and a closing amount of £124m (which is post payment of the full year 2022 and interim 2023 dividends). Our group solvency ratio has also improved further during the period closing at 205% (31 December 2022: 197%). As Luke highlighted, this is materially above our normal operating range of 140-160% and provides us with substantial headroom to support further strategic activity. Our inaugural IFRS 17 numbers show a £51.5m increase in net equity as at 31 December 2022. As at 31 December 2023 total net equity is £359.9m with a contractual service margin (CSM) of £166.5m. This results in a leverage ratio of 29.2% (including the CSM net of tax) which is a significant reduction compared to the ratio of 37.6% reported at 31 December 2022 under the previous IFRS reporting regime.Whilst the CSM gives a useful indication of future profits on our insurance business it should be noted that in fact only 42% of our total portfolio is classified as insurance.As such, the CSM by no means represents the full future profit of the group as it excludes investment contracts.Further information regarding IFRS 17 is included on pages 54 to 58 of this report with additional detailed disclosure in the IFRS Financial Statements section. 18 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 OVERVIEW Strong cash generation The long-term outlook for growth remains † The total group commercial cash generation (excluding the impact positive, particularly through M&A of acquisitions) during the year was £53.0m (2022: £46.6m). This more The ‘Chesnara fan’ illustrates the additional areas of growth potential than covers the proposed full year 2023 dividend of £36.1m. the group may benefit from that aren’t fully reflected in our Economic † Looking at how our businesses have generated cash, the divisional Value metric. † commercial cash generation for the year, excluding FX translation impacts, was £76.5m (2022: £28.3m). This represents c212% coverage of the total Future acquisitions 2023 dividend and shows we continue to have significant future dividend New business paying capacity. The cash generation results include some positive impacts Synergies from management actions taken during the year, including the impact of mass Real world returns lapse reinsurance in the UK and the benefits from the UK Solvency II reforms. Risk margin The Chesnara parent company cash (including holding companies) and The categories of potential instant access liquidity fund balance at the year end has increased to £124m upside (which are not shown to (31 December 2022: £108m). Cash reserves have benefitted from the £71m scale) will emerge over time of divisional dividend receipts during the year. This provides substational resources for future acquisitions and further supports the sustainable funding Economic Value Total potential (illustrative) Commercial Value of the group dividend and payment of our Tier 2 debt coupon. The group (illustrative) continues to retain a Revolving Credit Facility with a further £100m of capacity and an additional £50m accordian. We have previously highlighted that, over the medium term, we expect all Looking forward, we continue to have a strong line of sight to future cash components of the growth model to be positive, although there can be a level generation over the medium and longer term from the unwind of risk margin of shorter-term volatility in each element. Over the year all components have and SCR, investment returns above risk free rates, wider synergies and made positive contributions, although synergy-related gains are offset by the management actions. And that’s before further potential benefits from impact of central costs (development costs and Tier 2 interest). new business and further acquisitions. Although there are limitations to tracking the growth metrics over short time periods, it remains useful to assess how the results for the period mapped Strong solvency against the value growth components of the ‘Chesnara fan’. During the year we have seen a further increase in the group solvency ratio A key element of the growth model is real world investment returns. to 205% (2022: 197%). The reported EcV of the group assumes risk free returns on shareholder and policyholder assets. Given the direct link to external market performance this Solvency ratio source of value tends to be the most volatile of the growth sources. During the year, real world returns added c£43m to EcV. This gain partially offsets the significant Economic Value reduction from lower real world investment returns Normal operating solvency range 160% we saw in 2022, whilst demonstrating the value potential from even modestly beneficial economic conditions. 140% Over time, we expect improvements to operational effectiveness to be a source of value creation, be that through M&A synergies, scale benefits or other positive management actions (such as our recently announced partnership with SS&C). During the year, the deals completed have 155%156%152%197%205% generated positive synergies. I am also pleased to report £10.1m of value growth resulting from commercial new business profits which have slightly increased versus 2022. Absolute Absolute Absolute Absolute Absolute surplus surplus surplus surplus surplus Acquisitions in the period have also added £28.4m of EcV. We see continued £211m £204m £191m £298m £351m momentum behind the M&A strategy which is now materially contributing 2019 2020 2021 2022 2023 to the growth of the group. It’s worth noting that further value growth expectations from these deals are not recognised in the day 1 gains. 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 Focused writing of new business solvency ratio does not adopt any of the temporary benefits available from Solvency II transitional arrangements, although we do apply the volatility Writing new business is the third area of focus in the Chesnara strategy. adjustment in our UK and Dutch divisions. The ratio does include the benefit Not only is new business value-adding in its own right, importantly it adds of the capital efficiencies relating to the Tier 2 debt raised in 2022. scale which in turn enhances operational effectiveness and improves the sustainability of the financial model. During the year, we have seen positive We expect to utilise this additional capital surplus as we undertake † commercial new business profits of £10.1m (2022: £9.5m). This has acquisitions, which should result in the ratio reverting back to within included a contribution of almost £2m from the UK. the robust and stable 140% to 160% historical range. † We have grown our Funds Under Management (FuM) in 2023, largely through the completion of the acquisition of the insurance portfolio of Conservatrix and we have also reported a growth in underlying asset values. † Alternative Performance Measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the Additional Information section of this Annual Report and Accounts. CHESNARAANNUALREPORTANDACCOUNTS202319 OVERVIEW CHIEF EXECUTIVE OFFICER’S REPORT † Growth in FuM Confidence in our ability to execute future M&A Funds Under Management £bn We remain optimistic about the prospect of future acquisitions and believe Growth of 61% since 2018 that we can deliver further value-accretive deals. Even relatively small transactions can have a material positive cumulative impact, as the group delivers synergies from integrating businesses and portfolios into its existing operations. 2023 has continued to see an active M&A market across European insurance for deals of £1bn and below with large international insurance groups 7.1 7.7 8.5 9.1 10.6 11.5 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 macroeconomic environment, we expect the 2018 2019 2020 2021 2022 2023 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 are indicative of the momentum that we have in this key strategic objective, providing confidence in our ability to execute future M&A. FOLLOWING THE RECENT We continue to have material financial resources to deploy, with cash balances of £124m at a parent and holding company level. Our Revolving ACQUISITIONS, WE NOW LOOK Credit Facility is not currently utilised and creates an additional level of working capital capacity of £150m. For more transformational deals, we retain AFTER C1 MILLION POLICIES FOR the ability to raise equity and are mindful of the potential benefits from other funding arrangements, such as joint ventures or vendor part-ownership. CUSTOMERS WHO HAVE £11.5BN Our assessment of the market potential, our track record of delivery and the OF THEIR ASSETS WITH US. 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. Continued delivery of acquisitive growth People changes The primary purpose of Chesnara when it was formed back in 2004 was to There have been a number of changes in key personnel of the group over acquire other closed-book businesses and acquisition activity has been a core the course of the year, as summarised below. component of our historical EcV growth. As well as the immediate benefit – In February 2023, we announced that after six years as our Scildon CEO, from incoming EcV, acquisitions also improve the future growth outlook by Gert-Jan Fritzsche would be leaving the business. Having conducted a full enhancing the potential from the other value elements of the ‘Chesnara fan’. market search, we were delighted to announce in July that Pauline Derkman Successful acquisitions have been key to Chesnara’s development historically agreed to take up the position of Scildon CEO on 1 September. She has and will remain so in the future. During 2023 we delivered two acquisitions. a huge amount of Dutch market experience, including M&A, from her time The acquisition of the insurance portfolio of Conservatrix, a specialist provider at Aegon, ASR and PWC. of life insurance products in the Netherlands, was completed on 1 January – In August 2023 we also announced that after six years as Movestic CEO, 2023 having been originally announced in July 2022. The insurance portfolio Linnéa Ecorcheville would be leaving the business. Sara Lindberg, who is has increased Waard’s number of policies under administration by over 50%, a key member of our Movestic management team, was initially appointed transforming Waard into a second material closed-book consolidation as interim CEO whilst a formal market search was performed. Sara was part business alongside Chesnara’s existing UK platform. The Conservatrix of this process and it was clear that Sara was the strongest candidate to transaction increased the group’s EcV by £21.7m and provides further EcV fulfil this position, not least given her strong performance in the interim role, accretion potential, including from future real world investment returns and and she was consequently appointed as CEO on a permanent basis. the run-off of the risk margin. We have already seen significant recycling of – In September 2023 we announced that after seven years Ken Hogg, our UK some of the capital deployed to support the acquisition. CEO, would be leaving the business. We were delighted to announce that On 16 May 2023 Chesnara announced the acquisition of the onshore Jackie Ronson would be taking up the role of UK CEO and started with individual protection line of business of Canada Life UK, which was closed Chesnara on 14 September. She brings with her over 25 years of experience to new business in November 2022. As a result of the acquisition, the life across financial services and beyond, working in a range of businesses from insurance and critical illness policies for approximately 47,000 customers start-ups to FTSE 100 organisations. will transfer to Chesnara’s UK subsidiary, Countrywide Assured plc (CA). Regulatory approval was received for all three new appointments and In the interim period, Canada Life UK will reinsure the portfolio to CA, a full transition of responsibilities completed. I want to thank Gert-Jan, effective from 31 December 2022. The initial commission as part of the Ken and Linnéa for all their efforts at Chesnara and wish them the very reinsurance agreement was £9.0m, funded from internal group resources, best for the future. and the transaction has increased the group’s Economic Value by £6.7m. – And in December, we announced that David Rimmington, Group Finance Positive progress continues on the work to complete the transition of CASLP Director, would not be seeking re-election at the 2024 AGM and that he would into our target operating platform and the approval of the Part VII transfer step down as a director at that time. David has seen through the year end of CASLP into CA in December was a further important milestone here 2023 financial reporting process, including the inaugural annual reporting of and also had a positive impact on EcV. the group’s results under IFRS 17. I would like to thank him for his service to the business over the last 10 years, particularly the support and guidance he has given me over the last two years. We wish him well as he considers the next steps in his career. † Alternative Performance Measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the Additional Information section of this Annual Report and Accounts. 20 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 OVERVIEW – Having delivered the year end reporting process and associated releases, Outlook David will support the orderly transition of his role to Tom Howard, who will It has been pleasing to see economic earnings gains in the year as well as be joining us from Aviva in April. Tom has held a variety of senior roles within continued strong cash generation. Whilst a volatile macroeconomic backdrop Aviva plc, including Director of Mergers & Acquisitions for Aviva Group and will continue to be a material factor in all our markets, we remain confident CFO for Aviva’s Life and General Insurance business in Ireland. Tom brings that the Chesnara business model will continue to generate cash across with him European actuarial and financial reporting capabilities and a strong a wide variety of market conditions, as it has done over its history. track record of leadership in finance, M&A, capital management and business transformation. I am looking forward to working closely with Tom as we push We also remain positive on the outlook for further M&A and are starting 2024 forward delivering the group’s renewed strategy. with a positive pipeline of opportunities. The two deals delivered in 2023 providing further evidence of the renewed momentum we have behind our I am confident that these changes will put us in a strong position to deliver M& A activity. our ambitious plans for the future. Finally, the operational delivery we have seen during the year would not have A sustainable Chesnara been possible without the fantastic efforts of our teams across the group. We are committed to becoming a sustainable group and our principles are: In 2024, Chesnara will be celebrating the 20th anniversary of its listing. ‘Do no harm. Do good. Act now for later.’ As a steward and a safe harbour It’s a privilege to be leading the business in its 20th year and looking ahead for our c1 million policyholders and c£11.5bn of policyholder and shareholder I continue to believe there is a lot to look forward to here at Chesnara. assets, we have a real responsibility to help drive the change needed to deliver decarbonisation, protect nature and ensure a sustainable society and economy. The path to sustainability will be long and complicated but we are working to put sustainability at the heart of everything we do and during the year we have taken action to embed sustainability into decision making across the group. Our work is overseen by the board and our Group Sustainability Committee which is chaired by our Senior Independent Director, Jane Dale. The committee consists of executive management from across the group, Steve Murray with executive sponsorship from myself, and is focused on delivery of Chief Executive Officer real world actions. 27 March 2024 Our commitments are detailed within our Annual Sustainability Report and, simply put, we will make decisions based on all of our stakeholders, including the planet and its natural resources. Based on this, we’re committed to: 1. Supporting a sustainable future, including our net zero transition plans 2. Making a positive impact, including our plans to invest in positive solutions 3. Creating a fairer world, ensuring our group is an inclusive environment for all employees, customers and stakeholders. As I highlighted earlier, these commitments are shaping what we do and how we do it and we have set our initial interim 2030 targets for financed emissions. In addition, we will be reporting on our sustainability position and activities in line with the appropriate reporting frameworks. We have reported under TCFD (Task Force on Climate-Related Financial Disclosures) for several years, are reporting under the CFD regulations (Climate-Related Financial Disclosure) for the first time this year as required by an amendment to the Companies Act, and we have commenced our work on CSRD (the EU Corporate Sustainability Reporting Directive) reporting. CHESNARAANNUALREPORTANDACCOUNTS202321 STRATEGIC REPORT Amsterdam, Netherlands 24 Our strategy, business model and culture & values 26 Our strategy 28 Our culture & values 30 Section 172 reporting 38 Business review 45 Capital management 48 Financial review 59 Financial management 61 Risk management 71 Corporate and social responsibility 22 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 CHESNARAANNUALREPORTANDACCOUNTS202323 STRATEGIC REPORT OUR STRATEGY, BUSINESS MODEL, AND CULTURE & VALUES Our strategy focuses on delivering value to customers and shareholders, mindful of the interests of other stakeholders, through our three strategic pillars, executed across our three territories. OUR STRATEGY STRATEGIC OBJECTIVES 01 02 03 MAXIMISE THE VALUE ACQUIRE LIFE AND ENHANCE VALUE THROUGH FROM EXISTING BUSINESS PENSIONS BUSINESSES PROFITABLE NEW BUSINESS Managing our existing customers Acquiring and integrating companies Writing profitable new business efficiently, whilst delivering good into our business model is key to supports the growth of our group outcomes, is core to delivering continuing our growth journey. and helps mitigate the natural our overall 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 Read more on p27 Read more on p27 Read more on p27 HOW WE ORGANISE OURSELVES DIVISION UK NETHERLANDS SWEDEN OPERATING CA WAARD GROUP SCILDON MOVESTIC COMPANY Read more on p38 Read more on p42 Read more on p40 Underwriting linked pension Underwriting Underwriting Predominantly the underwriting business; life insurance, covering mainly term of protection, of unit-linked pensions and KEY both index-linked and unit-linked; life policies, individual savings. Also provides life and PRODUCTS endowments; whole of life; annuities with some savings health product offerings as well and some with-profit business. unit-linked and and group as custodian business. non-life policies. pensions contracts. NUMBER c291,000 c159,000 c236,000 c284,000 OF POLICIES Largely through a network of brokers Onshore bond sold through Sold through DISTRIBUTION n/a and partners, although some is sold investment platforms. a broker network. METHOD directly to customers. CHESNARA CULTURE AND VALUES – RESPONSIBLE RISK-BASED MANAGEMENT 24 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STAKEHOLDERSOBJECTIVESKPIs STRATEGIC REPORT Our strategy is delivered through a proven business model underpinned by a robust risk management and governance framework and our established culture and values. OUR BUSINESS MODEL INVESTORS CUSTOMERS REGUL ATORS STAFF SUPPLIERS AND THE PLANET PARTNERS AND NATURAL ENVIRONMENT Competitive returns Good outcomes Financial stability Attract, promote Long-term Progress to being through attractive and regulatory and retain reliable a sustainable group dividends and share compliance quality staff relationships price growth for Job satisfaction shareholders and and motivation a dependable coupon payment for debtholders Cash Good outcomes Good outcomes Staff survey Quality of Operational † generation results service emissions Investment Solvency † EcV growth return Staff retention rates Tracking expenditure Financed emissions Solvency Openness of Energy usage relationship Investment in positive solutions OUR CULTURE AND VALUES RESPONSIBLE FAIR MAINTAIN PROVIDE A ROBUST A JUST RISK-BASED TREATMENT ADEQUATE COMPETITIVE REGUL ATORY TRANSITION TO MANAGEMENT OF CUSTOMERS FINANCIAL RETURN TO OUR COMPLIANCE A SUSTAINABLE FOR THE BENEFIT RESOURCES INVESTORS GROUP OF ALL OUR STAKEHOLDERS STAKEHOLDERS – SHAREHOLDERS – CUSTOMERS – CUSTOMERS – SHAREHOLDERS – SHAREHOLDERS – ALL – DEBTHOLDERS – REGUL ATORS – DEBTHOLDERS – DEBTHOLDERS STAKEHOLDERS – STAFF – STAFF – CUSTOMERS INCLUDING – SUPPLIERS AND – REGUL ATORS THE PLANET PARTNERS – NATURAL – NATURAL ENVIRONMENT ENVIRONMENT – CUSTOMERS † Alternative Performance Measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the Additional Information section of this Annual Report and Accounts. CHESNARAANNUALREPORTANDACCOUNTS202325 STRATEGIC REPORT OUR STRATEGY Our core strategy focuses on the efficient management of our existing business and the creation of value through acquisitions and writing profitable new business. STRATEGIC WHY THIS MATTERS HOW WE DELIVER: OBJECTIVE OUR BUSINESS MODEL MAXIMISE The existing books of policies are the A centralised governance oversight and corporate management † principal source of cash generation team ensures robust and consistent governance across the group. VALUE FROM † and Economic Value and are at the Operational execution is devolved to the divisions to ensure we OUR EXISTING heart of the investment case for our benefit from our strong divisional management teams and reflects BUSINESS shareholders and debtholders. And the need to ensure processes are fit for purpose locally. The UK if we do not do a great job for our business adopts an outsourced business model with the CASLP customers then we won’t have the operating platform including sixty-eight Chesnara colleagues right to execute against our other who transferred to SS&C during 2023. Core operations are not two strategic pillars. outsourced in Sweden or the Netherlands. We create value and generate cash through: – running our in-force books of business efficiently and effectively; – executing management actions that create value and/or generate cash; – optimising the risk/reward balance in how we invest our assets and hence generate future returns; – accessing broader group synergies; and – ensuring our customer processes deliver good outcomes (recognising Consumer Duty requirements for UK customers) and remain robust and in line with customer expectations, 01 which in turn supports stronger persistency. ACQUIRE LIFE Well considered acquisitions maintain – Identify potential deals through an effective network of our own the effectiveness of the operating relationships, supplemented by advisors and industry associates. AND PENSION model, create a source of value – We assess deals by applying well established criteria which BUSINESSES enhancement and sustain the longer- consider the impact on cash generation, Economic Value and term cash generation potential of solvency under best estimate and stressed scenarios. the group. – The financial benefits are viewed in the context of the impact the deal will have on the enlarged group’s risk profile. – Transaction risk is minimised through stringent risk-based due diligence procedures and the senior management team’s acquisition experience and positive track record. – We fund deals with debt, equity or cash depending on the size and cash flows of each opportunity. – Our acquisition strategy includes both UK and non-UK markets. – We work cooperatively with regulators. 02 The Chesnara financial model supports – Our two operating subsidiaries that write the majority of the ENHANCE incremental value generation through group’s new business are Movestic in Sweden and Scildon in VALUE THROUGH writing profitable new business. the Netherlands. We also write a small amount of new business PROFITABLE NEW New business profits are a welcome in the UK post the Sanlam Life & Pensions UK acquisition. source of regular value growth which – Movestic primarily focuses on unit-linked pensions and BUSINESS supplements the growth delivered savings business, distributed largely through brokers and from our existing policy base and custodian business distributed by partners, albeit with an periodic acquisitions. ambition to grow its risk business. – Scildon sells protection products, individual savings and group pensions contracts via a broker-led distribution model. – In the UK, new business is primarily sold via advisors who can provide new customers with access to our onshore bond product 03 via a selection of investment platforms that we work with. – When writing new business we retain a keen focus on ensuring the business is profitable. 26 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT RISKS: FOR FURTHER INFORMATION ON PRINCIPAL RISKS LISTED PLEASE SEE THE RELEVANT CODES ON PAGES 63-70 HOW WE MEASURE DELIVERY UPDATE RISKS: RISKS: WHAT CAN STOP US WHAT CAN WE DO MEETING THIS OBJECTIVE ABOUT THIS † Cash generation – PR1 Adverse investment market – Where appropriate, active UK Cash generated by the existing business is an conditions can result in lower assets investment management Pages 38-39 important measure for how the business is under management and hence lower with the aim of delivering performing. It is defined as the movement in the fee income from unit-linked business. competitive investment surplus of capital resources over capital requirements For products with guarantees, this returns for policyholders. set by the board. As such, cash can be generated can increase the cost of fulfilling – Outsourcer service levels by either profits arising in the period or a reduction the guarantees. that ensure strong customer SWEDEN in capital requirements. – PR4 Increased lapses on cash service standards. Pages 40 -41 generative/value enhancing products. – Expense assumptions are EcV growth – PR4 PR6 Loss of key brokers, or deemed to be realistic and Value generation is measured by reference to the aggressive competitor pricing, can result the cost base is well controlled, † movement in Economic Value over the period. in increases in the level of customers predictable and within direct NETHERLANDS moving to competitors. management influence. Pages 42-43 Customer outcomes – PR2 Regulatory change can potentially – Close monitoring of persistency This is measured through monitoring: impact the cash flows arising from the levels and strong customer service – customer service metrics; existing business. standards help manage lapse – policyholder fund performance against industry – PR5 Expenditure levels could exceed rates and ensure customers and market expectations; those assumed. do not unknowingly exit when – customer complaint levels; and – PR1 Foreign currency fluctuations can it is not in their interest to do so. – our compliance with regards to regulatory impact the sterling value emerging from – Utilise reinsurance and hedging conduct matters. overseas operations. strategies, including FX, where – PR10 Inaccurate model results may lead appropriate. to poor decisions regarding strategic, operational or investment matters. Cash generation – PR3 A lack of value adding acquisition – Operating in three territories Page 44 Collectively our future acquisitions must be suitably opportunities come to market, increases our options thereby cash generative to support the funding of the the investment case for Chesnara reducing the risk that no further Chesnara dividend. diminishes over time. value adding deals are done. – PR3 PR9 There is the risk that we make – A broader target market also EcV enhancement an inappropriate acquisition that increases the potential for deals Acquisitions are required to have a positive impact adversely impacts the financial strength that meet our strategic objectives. on the Economic Value per share in the medium term. of the group. – Each acquisition is supported Customer outcomes – PR10 Inaccurate model outputs during by a financial deal assessment Acquisitions must ensure we protect, or ideally due diligence stage could potentially model which includes high quality enhance, customer interests. lead to overestimating the value of financial analysis. This is reviewed acquisitions resulting in over payment. and challenged by management Risk appetite and the board, mitigating the risk Acquisitions should normally align with the group’s of a bad deal being pursued. documented risk appetite. If a deal is deemed to sit outside our risk appetite the financial returns must be suitably compelling. EcV enhancement – PR8 The attractiveness of products can – In Sweden, we continue to extend SWEDEN We measure the amount of Economic Value be influenced by economic conditions, the breadth of broker support Pages 40 -41 added through selling new contracts. politics and the media. and develop more direct and – PR6 PR8 PR9 New business volumes automation capabilities. are sensitive to the quality of service – Ensure high quality of service to to intermediaries and the end customer. existing network of intermediaries. – PR8 In Sweden, new business remains – Focus on other margin drivers NETHERLANDS relatively concentrated towards several beyond product pricing, such as Pages 42-43 large brokers and private banks. the fund management operation. – PR8 A competitive market puts pressure – In the Netherlands, enhance on new sales margins. business processes and product – PR10 Inaccurate assumptions modelling offering to be attractive to brokers † Alternative Performance Measure (APM) used to enhance resulting in writing unprofitable and consumers. understanding of financial performance. Further information on APMs can be found in the Additional Information section new business. of this Annual Report and Accounts. CHESNARAANNUALREPORTANDACCOUNTS202327 STRATEGIC REPORT OUR CULTURE & VALUES Our long established and proven culture & values underpin the delivery of our core strategic objectives. Risk management is at the heart of our robust Governance Framework. Our values are strongly influenced by the recognition of our responsibility to a range of key stakeholders including customers, regulators, wider society and our investors. CULTURE & VALUES WHY IMPORTANT? FAIR TREATMENT MAINTAINING A JUST The fair treatment of customers across the group is our primary responsibility. OF CUSTOMERS ADEQUATE TRANSITION TO It is also important to the Chesnara FINANCIAL A SUSTAINABLE business strategy as it promotes stronger relationships with our RESOURCES GROUP customers, distributors and regulators. is at the heart is a key basis of When applying the terms of our customer contracts, coupled with of good business our strategy. We guidance and requirements set out conduct. are committed to by our local regulators (including Consumer Duty in the UK), we place Effective capital ensuring that our a high priority on ensuring good management operations and outcomes for our customers. is a key requirement investments are that underpins our sustainable and cultural objectives. that sustainability Further information is at the heart of regarding the our decision making group's solvency across the group. position is included Further information on pages 45 to 47. is included on pages 71 to 91 and in our Annual Sustainability Report. RESPONSIBLE In managing the business, it is essential that our decision making assesses the RISK-BASED risk impact of the decision. We achieve MANAGEMENT this by understanding the key risk drivers FOR THE BENEFIT of the business plan and strategy and by making sure we monitor these risks OF ALL OF OUR across our whole range of stakeholders. STAKEHOLDERS PROVIDE A As a public company, it is imperative that we offer an attractive investment COMPETITIVE proposition for investors. Given the RETURN TO OUR majority of our shareholders hold our SHAREHOLDERS shares through ‘income funds’, it is important that we deliver an attractive and sustainable dividend. Debtholders also want confidence we can pay any interest coupon. We also recognise the benefit of an investment that offers clarity and consistency of performance. ROBUST Working constructively with our regulators and complying with regulatory REGULATORY requirements and guidance is imperative COMPLIANCE to the delivery of our objectives. The regulators’ desire for robust and responsible governance is very much part of our culture and a principal aim of the Chesnara board. 28 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT WHAT WE HAVE DONE THE OUTCOMES Across the group we have continued to focus on delivering good outcomes to our customers, – Generally, a low level of complaints across the group recognising Consumer Duty requirements for UK customers. Divisional highlights include: has continued. – Sweden: Continued with its digitalisation journey, through the development of a unique digital – We acquired the Conservatrix insurance portfolio, service, where customers can manage their occupational pension, and the launch of new providing certainty to its policyholders and staff digital medical underwriting and digital investment tools to enhance customer experiences. following a prolonged period of disruption. The division has also focused on other ways it can support its customers. Customers Policyholders had been unable to access their approaching retirement are offered an advisory service by a dedicated team of experts who products for a number of years and there was some can support them in their retirement planning process. short-term disruption, as much higher levels of – UK: Focused on continuing to deliver a good level of service to our customers. The division requests for information were made, which has continued work on ensuring it continues to meet the high standards expected by its subsequently led to some backlogs. These backlogs regulators. This has included focusing on delivering its ongoing operational resilience were managed within the year and complaints have programme, as well as compliance with the new Consumer Duty rules in July 2023 for two now reverted back to pre-acquisition levels. products open to new business and actions required to meet this for the remainder of the – Transparent customer communications, supporting book by the regulatory deadline of 31 July 2024. The division has also continued with its better customer outcomes. activity of seeking to stay in contact with customers and to reunite customers with unclaimed – Good ongoing service levels over the course of assets.The UK’s administrative outsource service partners are held to stringent service the year, with a high level of customer satisfaction. level requirements. – More individually adapted communication and – Netherlands: For Waard’s latest acquisition, a key focus has been on ensuring that customers services, leading to higher customer engagement. continue to receive a continued high standard of service throughout the change in ownership process and that new staff are successfully onboarded. Scildon has been working on simplifying its product portfolio and further digitalising its customer and advisor portals. It has also focused on continuing to provide flexible solutions to its customers, mindful of the impact of the cost of living crisis. – Where complaints do arise, we continue to manage them in accordance with the appropriate regulatory practice. – We closely monitor any regulatory developments to ensure we continue to treat our customers fairly in accordance with any changing regulatory requirements. – The ORSA process has been fully utilised in the context of providing risk oversight over – Robust solvency over the course of the year. the course of the year. – Ongoing constructive dialogue with regulators across – Delivered our continuous improvement regime regarding how we manage risk the different territories in which the group operates. across the group, supported by our annual systems of governance review. – Continued our track record of increasing our dividend for the last 19 years, even during – Dividend growth track record continues, with 3% turbulent investment market conditions. dividend per share growth in 2023. – Maintained a robust solvency position in all divisions and at group level which – Over the past five years, £167m of dividends supports the continued dividend growth and provides substantial headroom have been paid. for future acquisitions. – Further growth potential in both the UK and Europe – Completed two value adding acquisitions over the course of 2023. as a result of the acquisitions that were completed during the year as well as future M&A opportunities. – Maintenance of robust levels of solvency across the group and all divisions throughout – Ongoing constructive relationships with UK, Swedish the year. and Dutch regulators. – Continued to place a high priority on compliance and maintaining an open dialogue – Continued adherence to internal governance policies with our regulators. and principles. – Progressed our sustainability strategy during the year, including: continuing the work – Continued oversight for the group’s sustainability of the Group Sustainability Committee which is responsible for overseeing climate- agenda and targets, including working to set the initial related risks and opportunities of the group; successfully baselined our financed interim targets which were approved in March 2024. and operational emissions and set our initial interim targets for financed emissions; – IFRS 17 project completed and compliance with established our Positive Solutions Framework and baselined our existing investments; reporting requirements achieved in 2023, with this set and we took the first steps to embed sustainability into decision making. of financial statements being the first IFRS 17 formally – Completed the group’s IFRS 17 project, broadly in line with plan. audited report. CHESNARAANNUALREPORTANDACCOUNTS202329 STRATEGIC REPORT SECTION 172 • THE BOARD’S APPROACH Our Section 172 reporting seeks to communicate the board’s approach to decision making, who our key stakeholders are and how they are considered by the board when making decisions. Section 172 statement The directors of Chesnara believe that they have acted in a way that they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have had regard (amongst other matters) to: a) the likely consequences of any decision in the long term; b) the interests of the company's employees; c) the need to foster the company's business relationships with suppliers, customers and others; d) the impact of the company's operations on the community and the environment; e) the desirability of the company to maintain a reputation for high standards of business conduct; and f) the need to act fairly between members of the company. The following disclosures provide further insight supporting the above statement over the course of 2023. The disclosures have been split into three key sections: The board’s approach The overall approach taken by the board in ensuring that the requirements of Section 172 are met. This covers the key stakeholders that the board considers are important to the long-term success of the company; how the Key stakeholders company depends on these stakeholders; how key stakeholders are impacted by the decisions of the company; and how we engage with those stakeholders. This covers the significant decisions made by the board during the year and how the directors have considered key Significant decisions stakeholders in making these decisions. THE BOARD’S APPROACH Role of the Chair As described on page 98 within the Corporate Governance Report, it is the role of the Chair to lead the board in the determination of the group’s strategy; to ensure that the board is furnished with sufficient information in order to support its decision making; and to ensure that relevant stakeholders have been taken into account when making decisions. Business planning The principal process supporting the longer-term decision making of the board is the group business planning process. This is a three-stage process that takes place throughout the course of the year, as follows: STAGE 1 STAGE 2 STAGE 3 Strategic planning Review and challenge of divisional Detailed business plans supported and group operational plans by financial projections The first stage of the business planning Following completion of the strategic planning, Following review and feedback from the process incorporates reviewing and challenging including any associated feedback to the operational planning stage, final business the strategy of the group as a whole. It presents operating business units, operational plans are plans are produced at both a divisional and an opportunity to ‘stand back’ and review the developed and critically reviewed by the group. group level. These include the final operational overall strategy of the group. Approving the The key objectives within the operational plans deliverables for the short to medium term strategy provides a framework for the group are explicitly linked to the strategic objectives and their associated consequences, alongside and its business units to prepare more detailed of the group in order to ensure that the key the projected financial outcomes of delivering operational plans. management actions that have been identified the plans. support delivery of the group strategy. † Alternative Performance Measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the Additional Information section of this Annual Report and Accounts. 30 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT This section of the strategic report is therefore designed to provide insight into how the directors of Chesnara have discharged their responsibilities under Section 172 of the Companies Act, and in particular having had regard to the matters set out in Section 172 (1) (a) to (f) when performing their duties. The business planning process for 2023 confirmed that the board wishes to continue to pursue the following strategy: 01 02 03 MAXIMISE THE VALUE FROM ACQUIRE LIFE AND ENHANCE VALUE THROUGH EXISTING BUSINESS PENSIONS BUSINESSES PROFITABLE NEW BUSINESS Managing our existing customers Acquiring and integrating companies Writing profitable new business supports efficiently whilst delivering good into our business model is key to the growth of our group and helps outcomes is core to delivering our continuing our growth journey. mitigate the natural run-off of our book. overall strategic aims. The strategy of the group is executed whilst ensuring that the group conducts its affairs in line with the following core culture and value principles: – Fair treatment of customers – Responsible risk-based management for the benefit of all of our stakeholders – Providing a competitive return to our investors – Robust regulatory compliance – Maintaining adequate financial resources – A just transition to a sustainable group. These are described in more detail on pages 24 to 29. Key financial metrics in the business planning process: Each key objective within the group business plan is supported by relevant information in order to support the review and challenge process by the board, having regard to the † ECONOMIC VALUE factors required by Section 172 (1) (a) to (f). † Further information on how the board considers each key stakeholder group is provided CASH GENERATION on pages 32 to 34. SOLVENCY As referred to above, business plans are supported by associated financial budgets and projections. This helps to ensure that both the shorter-term and longer-term financial IFRS PROFITS consequences of following the plan are appropriately considered in the context of all our stakeholders, in particular our shareholders. The key financial items/metrics that DIVISIONAL AND GROUP DIVIDENDS are projected are shown to the right. EXPENSES Having a clear view of all of these metrics supports the directors in assessing whether the business plan is expected to meet the expectations of our stakeholders. † NEW BUSINESS PROFIT EXPECTATIONS Corporate Governance and Responsibilities Map Complementing the business planning process for making decisions is the existence of the ‘Chesnara Corporate Governance and Responsibilities Map’, which operates at group board level and with business unit equivalents in place to reflect territory-specific considerations. The objectives of the maps are to “…set out the mechanisms of governance for Chesnara and the framework of governance requirements to be observed across the group, including principles, policies, delegations of authority and decision making arrangements”. Each map contains a framework that supports decision making and includes relevant guidance on what decisions can be made locally and what requires escalation to the Chesnara board. It also provides guidance on what information is required to support board decision making. Board papers and matters discussed The board agenda and associated supporting documents are designed to support the board in directing the business, which includes, amongst other things, discharging its responsibilities in relation to Section 172 (1) (a) to (f). For each meeting, a suite of relevant board papers is produced, with one of the key sources of information produced for the board, over and above the group business planning process, being the group’s quarterly management information (MI) pack. This is designed to be a ‘one stop’ holistic view of the group as a whole and covers, amongst other things, the following items of relevance to the requirements of Section 172: – Divisional updates, including financial results, business plan progress, key customer initiatives, regulatory interactions, operational performance (including updates on key outsourcer, supplier and employee matters); – Matters pertaining to investor relations; – Consolidated financial results across various different metrics; – Investment performance analysis, covering both customer and shareholder returns; – Progress updates on key objectives within the business plan; – Risk matters affecting the group; – Regulatory updates across the group; – Internal audit matters; and – Sustainability updates. CHESNARAANNUALREPORTANDACCOUNTS202331 CUSTOMERS EQUITY INVESTORSDEBT INVESTORS STRATEGIC REPORT SECTION 172 • KEY STAKEHOLDERS The following table identifies the key stakeholders that the board considers are important to the long-term success of the company. It provides insight into how the company engages with these stakeholders and how they are considered when making strategic decisions. Matters arising in relation to each stakeholder group are communicated by management to the board in an MI pack at each board meeting. DEPENDENCIES OF IMPACT OF BUSINESS HOW WE ENGAGE KPIs MONITORED BUSINESS ON THE ON THE STAKEHOLDER WITH THE STAKEHOLDER RELATING TO THE STAKEHOLDER STAKEHOLDER Our customers are key Our primary concern is ensuring Our primary engagement with customers comes from a Policy lapses to the long-term success that our customers have combination of outward communication, coupled with customer Complaints of the group, both in policies with a financially contact, be it through policy changes, queries or claims. terms of retaining existing strong company that gives Customer From an outwards communication perspective, our aim is to customers and attracting them good outcomes. Our survey scores ensure we provide transparent and understandable information new ones to our open financial management and to our customers, be it in the form of regular written letters/ books of business. culture & values statements booklets, information available on our website or through Without our customers, ensure that this is embedded any other material made available to customers. Chesnara would cease across the group. We closely to exist. manage all aspects of the From the perspective of responding to customer contact, customer journey, covering we seek to make our processes as helpful to the customer customer experience, as possible, mindful of different customer group preferences. communications, policyholder This involves ensuring that our customer contact staff are expectations, product value well trained for telephony or email correspondence and making for money, and our solvency. other technology available where feasible (such as the use of apps). We obtain feedback on the way we engage with our customers through periodic market research or customer focus groups. Having a strong and stable Any business decision that We primarily engage with investors through the following Significant investor shareholder base is seen is made that affects either key channels: purchases/sales as critical for the long-term the future dividend payments – Formal public financial reporting, which we produce every Investor register success of the group. of the group, or its long-term six months. Our shareholder support sustainability, may be of Investor feedback – Meetings with current and potential investors during the year, facilitates pursuing our significant interest to our including as part of investor roadshows after formal results Share price long-term strategy, investors. If either of those and at investor conferences. including the potential elements are put under Dividend for raising new capital pressure, it could reduce – Our Annual General Meeting. for acquisition purposes. confidence in the group, TSR – Periodically, we hold ‘investor days’ with our shareholders and could lead to a reduction and other market related stakeholders, which are designed in shareholder returns. to provide further insight into our business and give investors an opportunity to meet a wider range of Chesnara senior management. – Periodically, we will contact investors for feedback in advance of formal publication of particular matters, such as material changes to our Remuneration Policy. In the event that we are looking to raise additional debt or equity, our investors are actively engaged at the appropriate point in the process. The support of our debt Any business decision that is We primarily engage with debt investors through the following Debt investor feedback investors facilitates the made that affects the group’s key channels: Price of listed pursuit of our long-term long-term sustainability may – Formal public financial reporting, which we produce every debt instruments strategy, including the be of significant interest to six months. potential for raising new our debt investors, and any – Meetings with debt investors, including as part of investor capital for acquisition decision that could reduce roadshows after formal results and at investor conferences. purposes. capacity is likely to reduce confidence in the group. – Our Annual General Meeting. 32 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 SUPPLIERS AND PARTNERS STRATEGIC REPORT It is worth noting that not all stakeholders have the same interests and whilst there is considerable overlap, they can at times conflict. The board’s role is to weigh these factors up when setting the strategy and operational plans of the business. DEPENDENCIES OF IMPACT OF BUSINESS HOW WE ENGAGE KPIs MONITORED BUSINESS ON THE ON THE STAKEHOLDER WITH THE STAKEHOLDER RELATING TO THE STAKEHOLDER STAKEHOLDER † Key suppliers and Our various suppliers and Bankers: Our regular engagement with banks takes the form Gearing ratio partners include our partners are impacted by of quarterly covenant compliance reporting, which is required † EcV position bankers, outsourcers, Chesnara as follows: for our existing Revolving Credit Facility (RCF) debt intermediaries and arrangements. On a more ad-hoc basis we will engage with – Bankers: They earn a return Solvency professional services our bankers in the event of a change in our business or to seek on the facilities they provide and Key intermediary providers. We depend new funding, say to support an acquisition. In the event of an take a keen interest in ensuring KPIs, including on these for delivering acquisition where we would like to secure more short-term we manage our finances and sales volumes, various aspects debt funding, we work with our bankers and other advisors strategy in a way that minimises profitability of our business to ensure that we are providing relevant information in order their risk of loss. and customer model, covering: to support the banks’ loan decision making process. – Outsourcers: Our outsourcers complaints – Bankers: Access to have an opportunity to share in Outsourcers: We view having strong, open and honest ongoing short-term Service levels the growth of the group through relationships with our outsourcers as key to the long-term lending to support further acquisitions or portfolio success of our business. We engage with our outsourcers Adherence to our business. transfers. Our outsourcers rely through various scheduled meetings, focusing on a combination timescales – Outsourcers: Supporting on the ongoing financial stability of specific function-driven relationship meetings and wider the day-to-day policy of the group in order to ensure meetings focusing on the overall relationship. We view it as Level of overruns administration, customer that the services they provide important that our outsource partners are suitably informed Quality of service contact and associated continue to be paid for regarding business developments in Chesnara, and that accounting of our by Chesnara. Chesnara is aware of any relevant business changes in our Credit rating applied business, primarily outsourcers. This ongoing communication enhances the to Chesnara plc and – Intermediaries: Selling our in the UK. relationships and works towards maintaining the longer-term its subsidiaries products will be a source of success of the group. – Intermediaries: immediate and ongoing revenue Investment Distributing our products for our intermediaries. When Intermediaries: We strive to work closely with our performance in Sweden and the dealing with the end customer, intermediaries, engaging in a number of ways. In both Movestic Netherlands. intermediaries will rely on quality and Scildon, all intermediaries have access to a partner website, information being provided by – Suppliers: Support and where they can administer customer processes and obtain us in a timely manner. advice from our key information as required. The Swedish division also hosts annual suppliers, including – Suppliers: For those key suppliers meetings to engage with intermediaries, facilitating two-way professional services. of Chesnara, we are likely to be discussion around products, services and market developments. an important source of revenue, Other areas of engagement include frequent meetings with – Derivative counterparty: and therefore Chesnara’s ongoing intermediaries, on an individual basis. Provision of financial success in terms of delivering instruments to enable Suppliers: A number of Chesnara’s suppliers take the form its growth plans and remaining us to manage our risk of the provision of a service or advice as opposed to the supply financially stable will be of profile in line with of goods. For these suppliers our engagement focuses on interest to our suppliers. our tolerances. ensuring that the service or advice is fit for purpose and meets – Derivative counterparty: – Rating agency: Fitch has the intended scope. This typically involves up-front interaction They manage their own risk assigned an investment in scoping the work, coupled with close monitoring of progress exposures through the derivative grade credit rating for throughout the duration of the services. The group ensures instruments or make a return as the group’s subordinated that it adheres to supplier payment terms. market makers for the trades. debt, which supports Derivative counterparty: Once a risk exposure has been the group in raising – Rating agency: Any business identified that we want to manage, we engage with the capital at attractive decision that affects the group’s derivative counterparty about the structures available to rates of interest. long-term sustainability may mitigate that risk. We engage with them through to execution be of significant interest to Fitch, – Asset managers: Support of the trade and then via regular reporting during the life and could impact the credit the delivery of positive of the instrument. rating assigned. investment outcomes for customers through – Asset managers: Our asset Rating agency: We primarily engage with Fitch through a formal management of certain management partners earn fees annual review process. In addition, we will engage with Fitch assets on behalf of the on the assets they manage and in advance of any key events, such as acquisitions or other group and its divisions. have an opportunity to share key corporate activity. in the success of the group Asset managers: Regular meetings held with our main asset through additional assets brought management partners to review the performance and into the group through new sustainability of the investment mandates in place including business and acquisitions. their fit with our sustainability objectives. † Alternative Performance Measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the Additional Information section of this Annual Report and Accounts. CHESNARAANNUALREPORTANDACCOUNTS202333 STAFF REGULATORSTHE PLANET AND NATURAL ENVIRONMENT STRATEGIC REPORT SECTION 172 • KEY STAKEHOLDERS DEPENDENCIES OF IMPACT OF BUSINESS HOW WE ENGAGE KPIs MONITORED BUSINESS ON THE ON THE STAKEHOLDER WITH THE STAKEHOLDER RELATING TO THE STAKEHOLDER STAKEHOLDER Compliance with The manner in which Chesnara Our engagement with regulators generally takes the Relationship with regulatory requirements manages itself, both from following forms: supervisory team is fundamental to the a prudential and conduct – Regulators across the group typically have regular routines Formal feedback success of the group. perspective, will dramatically and practices in place to support the delivery of their oversight from regulators Without it, we would not affect how regulators view and objectives. This typically takes the form of periodic meetings be able to maintain our interact with Chesnara and its with management, and also involves the group furnishing existing status as a life subsidiaries. The higher risk regulators with relevant information. Chesnara fully supports and pensions provider. that the group is deemed to this process. be to the regulator, the more – The submission of quarterly and annual financial and focus that Chesnara and its risk reporting. subsidiaries are deemed to require. In addition, through – Chesnara management will also typically engage with being a member of the ABI, regulators as and when required should there be a business Chesnara also has the potential update that would warrant this; for example at the appropriate opportunity to respond to and point during an acquisition process. shape future regulatory change – Annual regulatory college meeting where a number of the in the UK. group’s regulators meet with the Group CEO and CRO. Our people are our We aim to provide a place of Chesnara and its subsidiaries have various mechanisms Staff surveys greatest assets and create work that supports and develops in place to ensure appropriate levels of engagement exist Feedback from and deliver the strategy of the group’s employees and with employees. This involves: employee forums the group. We recognise we recognise that the group’s – Completing staff feedback surveys. that to be able to meet the day-to-day culture and its overall Feedback from – Holding regular update briefings covering matters such as expectations that we have remuneration and benefits appointed NED business performance, policy updates or any other matters set ourselves, we need to package also have a significant that are relevant to employees. Staff turnover ensure that we continue to effect on employees. attract, promote and retain – Holding regular employee forums to discuss any employee- Diversity information the best candidates. related matters. Without high performing – Having an appointed non-executive director (NED) who is and motivated staff responsible for employee-related matters. Chesnara would not be – Ensuring that we have relevant employee policies in place able to deliver against and that these are available to our employees. its strategic aims. – Having robust whistleblowing policies in place. Our corporate and social responsibility statement on pages 71 to 91 provides further information. Our business relies on Our main impact is from the We impact the planet and natural environment through the CO financed and 2 natural capital and the assets in which we and our business decisions that we and our policyholders make. operational emissions environment, both for policyholders invest and their Ensuring that sustainability is at the heart of our decision Energy consumption our operations and our carbon and wider impact, making is critical to ensuring that we consider the planet and investments. Changes in together with the emissions natural environment. ESG risk scores the natural environment created from our operations. to their portfolios For policyholders who choose where they wish to invest, we and the effect of global The impact of our investment provide access to a range of sustainability-focused funds and Value of assets warming can potentially decisions and the investment we continue to provide relevant material so that they can make invested within affect the way we operate choices made by our customers informed decisions. Our corporate and social responsibility our definition of our businesses, and are wide-ranging and will statement is set out on pages 71 to 91. positive solutions also the returns to continue to be a key focus area our customers and In line with our support for the United Nations’ Sustainable as we transition to a sustainable shareholders. We are Development Goals (UNSDGs) and our commitment to invest group and our net zero targets. committed to applying responsibly, our business units are working closely with their sustainability-based The main operating emissions respective fund managers to fully embed sustainability within decision making across category for us is scope 3 our own investment decision making criteria. the group. emissions from goods Chesnara’s business units are taking practical steps to and services purchased reduce our carbon footprint and minimise the impact that from suppliers. our operations have on the environment, as described on pages 76 to 91. Climate change risk is monitored as part of our risk identification and assessment processes (see pages 62 to 70 and 76 to 91). 34 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT SECTION 172 • SIGNIFICANT DECISIONS The principal process that the board uses to make shorter and longer-term decisions is the group business planning process. Key decisions also arise outside of the business planning process depending on how the business develops during the year and the challenges and opportunities that it faces. The table below lists the key decisions made by the board during 2023 and how the directors have considered the factors required by Section 172 in making these decisions. SIGNIFICANT DESCRIPTION OF DECISION AND IMPACT DECISION ON DIFFERENT STAKEHOLDER GROUPS ESTABLISHING Overview: The Group Sustainability Committee was formally approved by the board in early 2023 and the group’s sustainability THE GROUP strategy and commitments were published in our inaugural Annual Sustainability Report. Work on the execution of this strategy SUSTAINABILITY continued to progress in 2023, including implementing tools to enable us to baseline our financed and operational emissions, COMMITTEE as well as developing our Social Value and Positive Solutions Frameworks.This work has enabled us to calculate and report AND DEFINING (in the 2023 TCFD on pages 76 to 91) our initial interim financed emissions reduction targets, which the board has approved. THE GROUP’S SUSTAINABILITY Key considerations and decision: The group made the decision to implement the MSCI platform to calculate the group’s TARGETS financed emissions and Greenly for operational emissions. 2023 baseline figures for both operational and financed emissions are being calculated, driving the initial interim target for reducing scope 1 and 2 financed emissions for our listed equity and corporate debt investments, which we can control or influence by 50% by 2030. Determining the assets within the scope of our initial interim targets has involved assessing the availability of emissions data and calculation methodologies for different asset classes, together with determining the groups of assets over which we can exert influence or control. We have developed the group’s Social Value Framework, which provides the focus and structure for the activities that the group will undertake to actively provide value to our stakeholders, guided by the ten principles of the UN Global Compact. Our framework for positive solutions was developed in 2023 to which we have baselined our existing investments and developed plans to invest more in positive solutions in 2024. Primary beneficiaries: All stakeholders are impacted by Chesnara being a sustainable business, including: – Shareholders: Being a sustainable group helps to ensure our long-term success and therefore provides more certainty over long-term returns. – Regulators: Confirms our commitment to meet our regulatory obligations and comply with disclosure requirements. – Employees: Takes due account of the welfare of our colleagues and raises awareness of the relevance of sustainability in our day-to-day operations, providing opportunities to work in an organisation making positive contributions to society and the planet. – Customers: Provides customers with the confidence that we continue to do the right thing, alongside developing our sustainable product offerings for policyholders looking for sustainable investment opportunities, and improves the sustainability of investment returns where we are responsible for investment decisions. – The planet and natural environment: A just transition to being a net zero organisation, and one which directs capital to positive solutions, delivers positive outcomes for the planet and environment. Other stakeholder considerations: – Suppliers and outsourcers: Sustainability criteria forms part of our supplier selection process. – Asset managers: Our asset managers are fundamental to the transition to net zero for financed emissions. We will have to increase the level of active engagement and direct them to ensure that our targets are met. STRENGTHENING Overview: During 2023, three new divisional CEOs were appointed: Pauline Derkman joined as the new Scildon CEO, Jackie OF THE EXECUTIVE Ronson as the new UK CEO and Sara Lindberg as Movestic Livförsäkring AB CEO. All are members of the Group Senior Leadership TEAM AND Team (SLT) and bring great capabilities and experience which add to our confidence in our business units’ ability to deliver our GOVERNANCE strategic ambition. With regards to other changes, our Group Chief Actuary, Graham Head, left the business in September 2023. CHANGES It was announced in December 2023 that David Rimmington would stand down as Group Finance Director at the 2024 AGM, with Tom Howard joining from Aviva Investors early in Q2 as the new Group CFO. Mindful of non-executive director tenures, a number of other succession decisions were made that will be implemented over the course of 2024: – Eamonn Flanagan will stand down as Movestic Livförsäkring AB Audit & Risk Committee Chair and Movestic Fonder Chair in order to take on the role of Movestic Livförsäkring AB Board Chair, subject to regulatory approval, when David Brand retires from that role. – Marita Odelius, Non-Executive Director of Movestic Livförsäkring AB, to be appointed Movestic Livförsäkring AB Audit & Risk Committee Chair upon Eamonn Flanagan standing down. – Steve Murray to be appointed to Movestic Livförsäkring AB Audit & Risk Committee Chair, subject to regulatory approval. – David Rimmington to stand down as a Movestic Livförsäkring AB board director and member of the Movestic Livförsäkring AB Audit & Risk Committee when he stands down as Chesnara Group Finance Director. – Sara Lindberg to be appointed as a Movestic Livförsäkring AB board director subject to regulatory approval. Key considerations and decision: In reaching their decisions, the board considered the business case for each executive appointment or change and was satisfied with appointees’ experience and fit and considered that they would help to drive the group’s strategy and delivery.In the case of the CEOs, each process was driven by the local boards, with the Chesnara board confirming its support, mindful of diversity matters amongst others. In determining non-executive appointments, the board considered both Chesnara’s governance of the group as well as the levels of experience in local markets when making its decisions. Primary beneficiaries: The appointment of appropriately skilled and experienced board members and senior leaders is in the interest of all our stakeholders. Other stakeholder considerations: – Employees: the impact of changes in the employee structure was considered in the context of the group’s existing employees. CHESNARAANNUALREPORTANDACCOUNTS202335 STRATEGIC REPORT SECTION 172 • SIGNIFICANT DECISIONS SIGNIFICANT DESCRIPTION OF DECISION AND IMPACT DECISION ON DIFFERENT STAKEHOLDER GROUPS STAFF AND Overview: Over the course of the year, there has been a number of significant staff and remuneration related decisions, the REMUNERATION most notable of which are: inflationary increases for staff, mindful of the ongoing cost of living crisis; the invitation to UK staff DECISIONS of a 2023 issuance from the approved save as you earn share save scheme; adoption of a new Executive Director Remuneration Policy and updated short and long-term incentive schemes following approval by shareholders at the 2023 AGM; expanded participation in the LTIP to a small number of senior executives and key talent; approval of the terms of key new appointees; and the smooth transition of staff previously employed by Sanlam Life & Pensions UK either to our new strategic outsourcer SS&C or into Chesnara. There were a number of senior appointments made during the year as noted on the previous page. Key considerations and decision: Each decision was discussed by the board giving consideration as to the relevant merits of each item and whether the cost was appropriate given the current economic climate. For each of the decisions, the impact, the benefits and the position in the market and relative to competitors were considered (where appropriate). A balanced argument was put forward to the relevant board or committee for approval, which in some cases included opinions from a third-party advisor. Primary beneficiaries: – Employees: The primary stakeholder affected by this decision is the group workforce as these decisions directly affect their benefits packages. Other stakeholder considerations – Shareholder: Investment in staff provides a sustainable environment and workforce, which in turn is expected to have a positive impact on the business. Both in advance of the 2023 AGM and following shareholders’ votes on the 2022 Directors’ Remuneration Report, the Chair of the Remuneration Committee engaged with major shareholders and a number of changes and clarifications were made as a result. ACQUISITIONS Overview: The board is required to approve any acquisitions that the group enters into. In addition to this, the board reviews IN THE YEAR and approves any material acquisition offers. Key considerations and decision: During 2023, we delivered two acquisitions. The acquisition of the insurance portfolio of Conservatrix, a specialist provider of life insurance products in the Netherlands, was completed on 1 January 2023 having been originally announced in July 2022. The insurance portfolio has increased Waard’s number of policies under administration by over 50%, transforming Waard into a material closed-book consolidation business alongside Chesnara’s existing UK platform. On 16 May 2023, Chesnara announced the acquisition of the onshore individual protection line of business of Canada Life which was closed to new business in November 2022. The deal was initially executed by way of a reinsurance arrangement and will ultimately result in the transfer of approximately 47,000 policies to Countrywide Assured plc (CA). Primary beneficiary: † – Shareholder: The Conservatrix transaction resulted in a day 1 EcV gain of £21.7m and the Canada Life transaction resulted in a day 1 EcV gain of £6.7m. Other stakeholder considerations: – Regulators: The Conservatrix transaction required approval by the Dutch regulator, De Nederlandsche Bank (DNB), who needed to ensure that the transaction did not cause any prudential or conduct issues. All approvals were obtained during 2022, with completion taking place on 1 January 2023. – Customers: The customers of the entities being acquired will be interested in ensuring that their policies continue to be administered in line with expectations, and that they continue to be prudently managed. – Staff: The decision is of interest to the staff of our existing group given the integration plans underpinning the announcements, as well as the staff of the acquired companies. APPOINTMENT Overview: The UK division entered into a new long-term strategic partnership in May 2023 with Fin Tech market leader, OF SS&C SS&C Technologies. SS&C will service the front-to-back-office operations for the majority of the UK division. TECHNOLOGIES Key considerations and decision: There was a lengthy decision making process to find a strategic partner who could provide FOR UK OUTSOURCING stability and scalability to promote our growth ambition. We undertook a detailed selection process in order to select the best partner and one which was also able to align with our sustainability commitments. The board approved the plan to proceed with SS&C concluding that the partnership represents a landmark agreement for the division and provides surety over the future operating costs of the business over a minimum 10-year period. Primary beneficiaries: – Staff: The use of the platform should provide the UK operations team with efficiencies. – Shareholder: The partnership should enable 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 and continue to bring growth to shareholders. Other stakeholder considerations: – Customers: We performed a detailed analysis of the service offering from SS&C to ensure that customers would not be adversely affected by the change. † Alternative Performance Measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the Additional Information section of this Annual Report and Accounts. 36 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT SIGNIFICANT DESCRIPTION OF DECISION AND IMPACT DECISION ON DIFFERENT STAKEHOLDER GROUPS CASLP PART VII Overview: The high court approved the Part VII transfer of the policies of CASLP to Countrywide Assured plc on 21 December TRANSFER 2023, with the transfer being effective from 31 December 2023. Key considerations and decision: For the transfer to be approved, the court and regulatory approval process considered the interests of all policyholders, which were assessed and presented by an independent expert to be acceptable. Primary beneficiary: – Shareholders: The Part VII transfer should deliver operational and capital efficiencies for the division, increasing the Economic Value in the UK and dividend potential. – Employees: The operational efficiencies of combining two businesses should benefit and streamline the processes and controls performed by employees. – Customers: Customers of CA and CASLP will benefit from having their policies within an enlarged well-governed business that can be more efficiently run than two separate legal entities. Customers will expect that, as a minimum, their existing benefits will remain in place within the enlarged business. APPLICATION Overview: Every year the board is required to consider what level of dividends are appropriate for shareholders, whilst also OF CAPITAL ensuring that it continues to adhere to its own Capital Management Policy. Dividend proposals are subject to board approval, MANAGEMENT with proposed final dividends being included in a resolution voted for at the Annual General Meeting. AND DIVIDEND POLICIES Key considerations and decision: The directors’ report on page 128 provides information on the key considerations made by the board when approving dividends. The aim is to satisfy investor expectations by delivering an attractive dividend, with steady growth where possible. That said, this dividend cannot and will not be delivered at the expense of financial security, be it to solvency or liquidity. In the process of approving a dividend, the board is presented with a paper by management which considers the various aspects of the dividend decision, including cash generation, solvency, gearing, the group’s acquisition strategy and investor expectations. During 2023 the board approved the year end 2022 final dividend, amounting to 15.16p per share, and the interim 2023 dividend of 8.36p per share. Primary beneficiary: Dividend decisions are made primarily for the benefit of our shareholders. Other stakeholder considerations: – Banks: Our bankers are considered in terms of the impact of distributions on our liquidity and solvency position. – Regulators and customers: These stakeholders are considered in the context of ensuring that the solvency position of the group post dividend remains robust. MANAGEMENT Overview: The board actively manages the business’ performance, including seeking management actions in the year that may ACTIONS reduce cash-flow volatility. Key considerations and decision: In December 2023, the board renewed and slightly expanded the group FX hedge which was initially implemented in 2022. The board also approved a partial transfer of the risk of more extreme mass lapse events on the UK business through a reinsurance agreement with Swiss Re. Primary beneficiary: These management actions reduce the exposure of the group to these particular risks for which there is limited appetite and, as a consequence, allow capital to be released which supports our Dividend Policy for the benefit of our shareholders. Other stakeholder considerations: – Regulators: Feedback was obtained from the PRA in advance of the decision to take out the mass lapse reinsurance. No objection was made. Both of these actions manage capital to ensure we remain compliant with our capital requirements. – Customers: These stakeholders are considered in the context of ensuring that the solvency position of the group post dividend remains robust. Engagement with the board on the aforementioned S172 considerations is of critical importance. The board receives management information tailored to incorporate the KPIs referred to above where appropriate. They also receive specific papers or reports back from other board committees (e.g. RemCo.) to support their involvement in S172 related decisions. CHESNARAANNUALREPORTANDACCOUNTS202337 MAXIMISE VALUE FROM EXISTING BUSINESS STRATEGIC REPORT BUSINESS REVIEW UK The UK division consists of the operating company Countrywide Assured plc which now includes the insurance business of CASLP following the Part VII transfer on 31 December 2023. The business also reflects the impact of the Canada Life deal that was entered into in May 2023. The division manages c291,000 policies BACKGROUND INFORMATION INITIATIVES & PROGRESS IN 2023 – In May 2023 the division entered into a new long-term strategic partnership with Fin Tech market 01 CAPITAL & VALUE MANAGEMENT leader, SS&C Technologies. SS&C will service the front-to-back-office operations for the majority As a largely closed book, the division creates value of the UK division. This represents a landmark agreement for the division, and provides a modern through managing the following key value drivers: platform that delivers surety of future operating costs over the longer term; will improve the expenses; policy attrition; investment returns; and efficiency of the existing business; and establishes a solid platform to scale the business via reinsurance strategy. future acquisitions. In general, surplus regulatory capital emerges – This has initiated a programme of work to migrate the business operations of CASLP to the as the book runs off. The level of required capital SS&C target operating model. The first key milestone of transferring CASLP staff to SS&C is closely linked to the level of risk to which the was met during the year. division is exposed. Management’s risk-based – The planned Part VII insurance business transfer of CASLP into CA completed on decision making process seeks to continually 31 December 2023 and has resulted in the realisation of some immediate capital synergies. manage and monitor the balance of making value This also supports the delivery of future operational efficiencies. enhancing decisions whilst maintaining a risk – In May 2023 the division agreed to acquire Canada Life’s individual protection business of 47,000 profile in line with the board’s risk appetite. policies. This was initially executed via a reinsurance agreement, with the policies expected to At the heart of maintaining value is ensuring that transfer to CA through a Part VII insurance business transfer process following court approval. the division is governed well from a regulatory – CA has continued to optimise the risk/reward balance of its investment portfolio, having executed and customer perspective. a change in the assets backing the non-linked, non-volatility adjustment portfolio during the year. – In Q4, CA entered into a mass lapse reinsurance arrangement. This provides cover against the risk of a large outflow of policies and as a result reduces the amount of capital that is required to be held in a mass lapse scenario. – As a result of the Solvency II risk margin reforms that came into force on 31 December 2023 the risk margin has reduced by £13.2m. – The UK business paid total dividends of £56.0m to Chesnara plc in the year and is reporting a year end 2023 dividend of £35.0m to be paid later in 2024, with a closing post dividend solvency ratio of 149%. CUSTOMER OUTCOMES – An ongoing focus of the division is to ensure that it complies with the requirements of the FCA’s ‘Consumer Duty’. The business unit met the requirements in relation to its open business by the Delivering good customer outcomes is one of our regulatory deadline of 31 July 2023 and the closed-book operations are on track to comply with primary responsibilities. We strive to do this by the requirements by the later deadline of 31 July 2024. providing good customer service, competitive – Another important multi-year focus is to ensure compliance with the FCA’s ‘Operational fund performance and offering overall fair value Resilience’ regulations by 31 March 2025. This remains on track and has included supporting for money. We seek to offer additional support the PRA in its industry-wide data collection programme. to customers who may need it and provide easy to understand information about our products – The policies of CASLP were transferred to CA on 31 December 2023 following court approval on and the benefits provided. We are committed to 21 December 2023. As part of this process an independent expert for the transfer confirmed that meeting our regulatory responsibilities, including all policyholders could expect to receive the same benefits in their existing policies with the same remaining operationally resilient and maintaining level of security under the transfer. a strong solvency position. GOVERNANCE – In September Jackie Ronson joined Chesnara, succeeding Ken Hogg as UK CEO. As well as overseeing the day-to-day operations of the division, Jackie will apply her experience in M&A Maintaining effective governance and a and leading large scale transformation to deliver the UK’s business strategy. constructive relationship with regulators – During the course of the year the division successfully delivered the integration of the policies and underpins the successful delivery of the governance frameworks of CASLP with CA. This was in preparation for the Part VII transfer of division’s strategic plans. CASLP into CA at the end of the year, and puts the CA board in good stead for overseeing the Having robust governance processes provides enlarged business through a combined oversight structure going forward. management with a platform to deliver the other – After entering into the new strategic partnership with SS&C during the year, coupled with the aspects of the business strategy. As a result, new arrangement with Canada Life, the division has focused on ensuring that its governance a significant proportion of management’s time and oversight routines have been adapted to reflect these new arrangements. and attention continues to be focused on ensuring – CA has implemented IFRS 17 reporting into its overall Financial Reporting Framework, as required that both the existing governance processes, to support Chesnara’s year end 2023 IFRS 17 reporting. coupled with future developments, are delivered. – The division has supported the wider group’s sustainability programme over the course of the year and will continue to focus on local initiatives for 2024. 38 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT covering linked pension business, life insurance, endowments, annuities and some with-profit business. The division is largely closed to new business, but generates future value through a small amount of new business, investment returns on linked policies, increments to existing policies and periodic acquisitions. KPIsFUTUREPRIORITIES † Economic Value – UK – Continued migration of the majority of the existing and the acquired books of business to SS&C Reported value Cumulative dividends as strategic outsource partner. – Complete the final stages of the integration plans £m of CASLP into CA, including de-authorising and 2023 337.4 191.4 146.0 the subsequent dissolution of CASLP Limited. – Complete the work necessary to prepare for the 2022 299.3 209.3 90.0 transfer of the policies of Canada Life into CA. 2021 181.9 62.5 244.4 – Continue to focus on maintaining an efficient and cost-effective operating model. 2020 187.4 29.0 216.4 – Identify potential capital management actions, focusing on those that generate the appropriate 2019 204.6 balance of value and cash generation. † – Support Chesnara in identifying and delivering Cash generation – UK UK acquisitions. £m 2023 45.0 2022 40.8 2021 27.4 2020 29.5 Note: The closing EcV at 31 December 2023 includes a £6.7m 2019 33.6 gain arising on the Canada Life deal. Policyholder fund performance – UK – Continued focus on the operational resilience programme to ensure the regulatory deadline CA managed pension CWA balanced managed pension of March 2025 is achieved. S&P managed pension – Execute the board agreed plans and progress any Benchmark – ABI mixed inv 40%-85% shares Benchmark – ABI mixed inv 20%-40% actions needed to meet the requirements of the SLP managed pension Consumer Duty regulation by July 2024. – Continued focus on delivering good customer 7.5% 7.5% 8.2% 7.0% 6.7% 7.1% outcomes and maintaining strong service performance from all customer-facing suppliers and providers. ( 7.9% ) ( 7.9%)( 8.4% ) ( 9.8% ) ( ) ( 10.7% ) 9.7% 12 months ended 31 December 2023 12 months ended 31 December 2022 SOLVENCY RATIO CA: 149% – Continue embedding the new IFRS 17 financial reporting processes into business £m as usual routines. 183% – Ensure appropriate governance arrangements are in place as the division transitions the majority (35.0) Divisional solvency remains strong of its front-to-back operations to SS&C. 49.2 and stable with surplus generated in 149% – Continue to horizon scan for future the year increasing the pre-dividend regulatory changes. 135% 84.9 solvency ratio from 135% to 183%. – Continue engaging with our asset managers 49.9 on progress towards net zero and investing 35.7 in positive solutions. – Support the wider group-wide sustainability 31 Dec 22 Surplus 31 Dec 23 2023 31 Dec 23 programme to becoming a more sustainable surplus generation surplus dividend surplus group, including focusing on our operations, (pre-div) social purpose, and ensuring the group’s and division’s reporting needs are met. † Alternative Performance Measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the Additional Information section of this Annual Report and Accounts. CHESNARAANNUALREPORTANDACCOUNTS202339 ENHANCE VALUE MAXIMISE VALUE FROM EXISTING BUSINESS THROUGH PROFITABLE NEW BUSINESS STRATEGIC REPORT BUSINESS REVIEW SWEDEN Our Swedish division consists of Movestic, a life and pensions business which is open to new business. It offers personalised unit-linked pension and savings solutions through brokers together with custodian products via a number of private banks and is well-regarded within both communities. BACKGROUND INFORMATION INITIATIVES & PROGRESS IN 2023 – 2023 continued to see geopolitical uncertainty in many parts of the world, which drove rising 01 CAPITAL & VALUE MANAGEMENT interest and inflation rates, although the trend turned later in the year. The financial markets Movestic creates value predominantly by have been volatile, but overall positive, due to an upswing in US and wider tech markets; this generating growth in unit-linked Funds Under development was reflected in the favourable returns on policyholders’ investment assets. † Management (FuM), whilst ensuring a high-quality – Movestic continued to improve its offerings within both the unit-linked and custody account customer proposition and maintaining an efficient segments through a number of activities; for example, continuing to monitor developments and operating model. FuM growth is dependent upon ensuring products remain relevant. In addition, Movestic has continued its retention initiatives during the year, albeit high transfer activity is expected to remain a market feature due to new positive client cash flows and positive investment simplified processes and regulations that have come into force. performance. Capital surplus is a factor of both the – Over the year, Movestic has continued to develop its digital offering through extending its value and capital requirements and hence surplus digital processing; establishing new partnerships; and continuing efforts to streamline can also be optimised by effective management processes and increase the use of automation. New customer demands and a greater of capital. digitalisation on the market overall have also caused the division to intensify its efforts to create services that are easier and more efficient for customers and partners to use. The work with automation and digitalisation is also expected to add future synergies as we will be able to scale up the business. – Movestic’s solvency ratio remains robust despite the development of the symmetric adjustment following positive investment markets which requires additional capital to be held. The closing FuM balance of £4.4bn represents a full year increase of 18.5% when compared to 2022, driven by overall favourable market conditions. CUSTOMER OUTCOMES – Movestic has developed a new sustainability rating for funds on its platform, with the aim of providing an aggregated valuation of different sustainability ratings that are available on the Movestic provides personalised long-term savings, investment market (more information is available on the Movestic website). insurance policies and occupational pensions for – Work to automate processes and make them more efficient has taken place over the year. individuals and business owners. We believe that In addition, a new customer service case management system was implemented over 2023. recurring independent financial advice increases Both activities will help to ensure smoother administration and improved customer service. the likelihood of a solid and well-planned financial – Movestic continued to expand the custodian offering by establishing new partnerships. status, hence we are offering our products and – To help customers plan their retirement, Movestic has developed a unique digital service services through advisors and licensed brokers. where customers can: plan; start withdrawing; and change how they receive their occupational pension. In 2023, seven out of every ten of the company’s customers used this service to start withdrawing their pension. – A new digital medical underwriting tool and an improved digital investment tool have been launched, making it easier for customers to choose and exchange the funds in their portfolios. – The long-term trend with more satisfied customers is continuing as the company’s Customer Satisfaction Index rose for the third consecutive year. GOVERNANCE – IFRS 17 and IFRS 9 – the division has delivered its first full year end for 2023 under the new group accounting standards. Movestic operates to exacting regulatory standards – Sustainability has remained a key focus area with work progressing in a number of areas. and adopts a robust approach to risk management. A key example is work over the year to develop a solution to digitally provide customers with individual sustainability annual statements which is in accordance with new regulation that Maintaining strong governance is a critical platform came into force on 1 January 2023. Additionally, work has progressed in respect of the to delivering the various value-enhancing initiatives Corporate Sustainability Reporting Directive (CSRD) which is an EU adopted new directive on planned by the division. sustainability reporting. Movestic initiated an impact assessment in December 2023 and we are working to understand the likely effective date, given the complexities of the legislation. – Analysis of the Global Minimum Tax (GMT) regulatory framework is also underway, to determine how the new law affects the company’s tax situation. – Work has commenced to implement the new regulatory framework, Digital Operational Resilience Act (DORA), which is effective from January 2025. DORA is designed to improve the ability to withstand cyber threats and the risks associated with information security. As an ‘open’ business, Movestic not only adds – Sales volumes for the unit-linked business have developed positively over the year, 03 value from sales but, as it gains scale, it will representing a 15% rise on the prior year. The custodian sales volumes slowed down during become increasingly cash generative which will the year due to the less favourable financial market conditions, particularly a lack of local IPOs. fund further growth or contribute towards the – The division delivered a commercial new business profit of £2.8m, which is slightly below last year, in part due to salary increases below the inflation rate, which led to lower group’s attractive dividend. Movestic continues increment contributions. to adopt a profitable pricing strategy. – Movestic will continue to develop its pension and savings offering to increase competitiveness and build customer loyalty. – For the second year in a row, Movestic has been awarded ‘Unit-linked Insurance Company of the Year’ for 2023 by Söderberg & Partners. † Alternative Performance Measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the Additional Information section of this Annual Report and Accounts. 40 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT KPIs(ALLCOMPARATIVESHAVEBEENRESTATEDUSING2023EXCHANGERATES)FUTUREPRIORITIES † Economic Value – The Swedish life insurance industry is going through a major transformation. Recent regulatory and Reported value Cumulative dividends technology developments (e.g. AI) will create opportunities, but also lead to higher customer demand for accessibility, information, and personalised products £m and services. Movestic will keep working to increase the use of automation; streamline its processes and 2023 189.6 25.2 214.8 improve its administrative efficiency and control. 2022 193.8 14.0 207.8 – Continue to build solid and long-term sustainable value creation for customers and owners through a diversified 2021 232.8 11.0 243.8 business model with continued profitable growth of volumes and market shares in selected segments. 2020 213.9 5.9 219.8 – Remain focused on customer loyalty and providing attractive offerings to both retain customers and 2019 240.9 240.9 reach more volumes on the transfer market. – Provide a predictable and sustainable dividend to Chesnara. – Seek out opportunities to bring in additional scale through M&A, working collaboratively with the group. Broker assessment rating – Continued development of new digital self-service solutions and tools to support the brokers’ value Policyholder 2023 3.8 enhancing customer proposition, and to facilitate average smooth administrative processes making Movestic 2022 3.8 investment a partner that is easy to do business with. return – Further strengthen the relationship with brokers and 2021 3.6 partners through increased presence, both physical and digital. 2020 3.3 11.8% – Continue to capitalise on the new rules that came into 2019 3.5 effect in July 2022 which enhance the business’s ability to transfer policies onto its own platform where it is in the interest of customers to do so. SOLVENCY RATIO: 147% – Ensure new reporting processes are embedded into £m BAU operations to support IFRS 17 requirements. – Continue implementation of sustainability regulations. Solvency 162% (2.6)153% (7.8) 147% remains strong post a foreseeable 64.7 62.1 54.3 dividend of 31 Dec 22 Surplus 31 Dec 23 2023 31 Dec 23 £7.8m surplus generation surplus dividend surplus (pre-div) Occupational pension market share % New business profit – Launch new risk product offerings in the broker channel, including a new technical solution for £m administration. – Continue to strengthen distribution capacity within all 2023 4.4 2023 2.8 channels and work to launch new partner collaboration 2022 4.1 2022 3.2 within all lines of business. 2021 3.6 2021 3.9 2020 4.7 2020 1.5 2019 7.0 2019 6.3 CHESNARAANNUALREPORTANDACCOUNTS202341 ENHANCE VALUE MAXIMISE VALUE FROM EXISTING BUSINESS STRATEGIC REPORT BUSINESS REVIEW NETHERLANDS Our Dutch businesses deliver growth through our acquisitive closed-book business, Waard, which increased in size as a result of the Conservatrix acquisition at the start of the year, and our open-book business, Scildon, which seeks to write profitable term, investments and savings business. BACKGROUND INFORMATION INITIATIVES & PROGRESS IN 2023 01 THROUGH PROFITABLE NEW BUSINESS CAPITAL & VALUE MANAGEMENT – On 1 January 2023, Waard executed the acquisition of an insurance portfolio from Conservatrix, a specialist provider of life insurance products in the Netherlands that was declared bankrupt on Both Waard and Scildon have a common aim to 8 December 2020. The integration of both the portfolio and staff were successfully completed make capital available to the Chesnara group to in 2023. fund further acquisitions or to contribute to the – Scildon’s IT system improvement project has progressed well over the year, and cost efficiencies dividend and debt funding. Whilst their aims are have materialised in line with the business case. The project is expected to conclude in 2024. common, the dynamics by which the businesses add value differ: – Over the year, Waard combined all holdings (excluding unit-linked) to one custodian. This will both save costs and enable to us to better track our financed emissions and progress towards our net – Waard is in run-off and has the benefit that the zero target. capital requirements reduce in line with the attrition of the book. Waard periodically grows through – Both Waard and Scildon continue to have strong solvency positions at the end of 2023, inclusive delivering acquisitions. of the use of the volatility adjustment, with Scildon at 184% and Waard at 353%. – 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. CUSTOMER OUTCOMES – Scildon has continued to make improvements to its customer offering through new products and digitalisation options where possible. These improvements will also reduce the level of physical Great importance is placed on providing customers mail, making all communications with IFAs and customers digital. with high quality service and positive outcomes. – Scildon retained a high customer satisfaction rating and Net Promotor Score (NPS) in 2023. Whilst the ultimate priority is the end customer, – Through the acquisition of Conservatrix, Waard has safeguarded policyholder interests and in Scildon we also see the brokers who distribute provided certainty to staff. Processes were put in place to support the contact issues our products as being customers, and hence policyholders faced at the start of the year with many policyholders restarting their premiums developing processes to best support their needs in the second half of the year. is a key focus. – Waard has also progressed work on digitalising its customer portal to both make it easier for customers to access documents but also to reduce the level of printing required, in turn helping the group decarbonise. This is expected to be launched in 2024. GOVERNANCE – Work is progressing to embed IFRS 17 and IFRS 9 processes into normal finance activity, with significant strides being made during the year, with this set of results being the first audited set Waard and Scildon operate in a regulated of numbers under the new accounting standard. environment and comply with rules and regulations – Both business units have been progressing their sustainability activity with a significant both from a prudential and from a financial conduct programme of work expected over 2024. point of view. – Work has started on consideration of the Corporate Sustainability Reporting Directive (CSRD) which is an EU adopted new directive on sustainability reporting and we are working to understand the likely effective date, given the complexities of the legislation. Scildon brings a ‘new business’ dimension to the – Scildon continues to generate solid new business profits, with a commercial new business result 03 Dutch division. Scildon sells protection, individual of £5.4m for 2023 (pre-tax). The market remains tough with pressure on pricing, but we have savings, and group pensions contracts via a a solid base to drive further growth. broker-led distribution model. The aim is to deliver – Underpinning this, Scildon APE and policy count continue to increase, closing the year with more meaningful value growth from a realistic market than 236,000 policies. The market share for the Scildon term product over 2023 was 10.5% share. New business also helps the business (2022: 10.6%). maintain scale and hence contributes to unit – Scildon was awarded a 5-star rating for the second year in a row for its lifestyle product by cost management. independent trade body, Moneyview. 1 Annual Premium Equivalent (APE) – see glossary on page 278 for further information. † Alternative Performance Measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the Additional Information section of this Annual Report and Accounts. 42 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT KPIs(ALLCOMPARATIVESHAVEBEENRESTATEDUSING2023EXCHANGERATES)FUTUREPRIORITIES † Economic Value – The Netherlands Reported value – Effective management of the closed-book Cumulative dividends run-off in Waard to enable ongoing dividend £m payments to Chesnara. 2023 269.6 255.1 14.5 – Complete the IT improvement project and ensure the planned efficiencies are delivered. 2022 218.3 10.2 228.5 – Continue to focus on maintaining an efficient and cost-effective operating model. Identify potential 2021 213.4 5.0 218.4 capital management actions, focusing on those 2020 224.3 5.0 229.3 that generate the appropriate balance of value and cash generation. 2019 217.6 217.6 – Support Chesnara in identifying and delivering Dutch acquisitions. Client satisfaction rating – Regular engagement with customers to improve service quality and to enhance and 2023 8.3 develop existing processes, infrastructure, and customer experiences. 2022 8.3 – Launch the new digital portal in Waard. 2021 8.1 2020 7.8 (Source MWM research 2019 7.7 agency, Netherlands) SOLVENCY RATIO SCILDON: 184% SOLVENCY RATIO WAARD: 353% – Continue to work to fully embed IFRS 17. £m £m – Progress the implementation of the Corporate 377% Sustainability Reporting Directive (CSRD). 353% (6.9) 591% 12.7 188% 0.2184% 77.4 70.5 64.7 60.7 60.9 31 Dec 22 Surplus 31 Dec 23 31 Dec 22 Surplus 31 Dec 23 2023 31 Dec 23 surplus generation surplus surplus generation surplus dividend surplus Note: (pre-div) The 2022 closing solvency ratio for Waard includes additional capital held in respect of the purchase of Solvency is robust in both businesses, with post-dividend solvency ratios (inclusive Conservatrix, with the acquisition and business integration of the volatility adjustment) of 184% and 353% for Scildon and Waard respectively. completing in 2023. Term assurance market share % Scildon new business profit – Continue to deliver product innovation and cost management actions. £m – Consider alternative routes to market that do not Dec 10.5 2023 5.4 compromise our existing broker relationships, 2023 such as further product white labelling. Jun 12.1 2022 6.3 2023 – Scildon continues to look to offer sustainable Dec solutions for their unit-linked proposition. 10.6 2021 5.3 2022 Jun 11.6 2020 8.6 2022 2019 7.7 CHESNARAANNUALREPORTANDACCOUNTS202343 STRATEGIC REPORT BUSINESS REVIEW • ACQUIRE LIFE & PENSIONS BUSINESSES During 2023 we completed the acquisition of the insurance portfolio of Conservatrix in the Netherlands and entered into a deal in the UK with Canada Life to transfer its onshore protection business to the group. TRANSACTIONS IN 2023: CONSERVATRIX CANADA LIFE UK The acquisition of the insurance portfolio of Conservatrix, Chesnara announced the acquisition of the onshore individual a specialist provider of life insurance products in the protection line of business of Canada Life UK in May 2023. As a Netherlands, was completed on 1 January 2023 having result of the acquisition, approximately 47,000 life insurance and been originally announced in July 2022. The insurance critical illness policies will transfer to Chesnara’s UK subsidiary, portfolio has increased Waard’s number of policies under Countrywide Assured plc (CA). administration by over 50%, transforming Waard into Canada Life UK will reinsure the portfolio to CA, effective from a second material closed-book consolidation business 1 January 2023. The consideration as part of the reinsurance alongside Chesnara’s existing UK platform. agreement was £9 million, funded from internal group resources, The Conservatrix transaction increased the group’s EcV by and the transaction resulted in an immediate day 1 EcV gain of £6.7m. £21.7m on day 1 and provides further EcV accretion potential Customers’ policies are expected to formally transfer to CA after from future real world investment returns and the run-off of the completion of a court-approved Part VII transfer. This is following risk margin. The Conservatrix portfolio was integrated into the the successful completion in 2023 of the Part VII transfer of the Waard business over the course of the year, including allowing CASLP entity to CA. customers the option to restart their premiums on their policies. Territory EcV New Customer Risk Appetite Territory EcV New Customer Risk Appetite policies outcomes policies outcomes NL £21.7m 70,000 Stable future In line with UK £6.7m day 47,000 Part VII into In line with day 1 gain in a well existing group 1 gain CA, a well existing group capitalised capitalised business company ACQUISITION OUTLOOK – We continue to see a healthy flow of acquisition opportunities across the European insurance market. – Key drivers for owners to divest portfolios continue to remain relevant and create a strong pipeline. These include better uses of capital (e.g. return to investors or supporting other business lines), operational challenges (e.g. end of life systems), management distraction, regulatory challenges and wider business and strategic needs. – Our expectation is that sales of portfolios will continue and our strong expertise and knowledge, good regulatory relationships and the flexibility of our operating model means that Chesnara is very well placed to manage the additional complexity associated with these portfolio transfers and provide beneficial outcomes for all stakeholders. These transactions may not be suitable for all potential consolidators, in particular those who do not have existing regulatory licences. – We continue to have immediately available acquisition firepower of over £200m, noting we seek to hold cash reserves to cover costs for 12 months (dividend, coupon and working capital). We will continue to explore how we can increase our funding capability further, including consideration of partnerships as well as equity and debt to ensure we can compete for larger deals. – Our financing considerations, when looking at new deals, are: that we operate in our normal operating solvency range of 140-160%; we maintain our investment grade rating through managing our leverage ratio; we retain liquid resources to cover the dividend, coupon and working capital for approximately one year; and we continue to have the capacity to finance smaller transactions without extra fundraising. How we deliver our acquisition strategy – Identify potential deals through an effective network of own contacts, – We work cooperatively with regulators. advisors and industry associates, utilising both group and divisional – The financial benefits are viewed in the context of the impact the deal management expertise as appropriate. will have on the enlarged group’s risk profile. – We primarily focus on acquisitions in our existing territories, although – Transaction risk is reduced through stringent risk-based due diligence we will consider other territories should the opportunity arise and this procedures and the senior management team’s acquisition experience is supportive of our strategic objectives. and positive track record. – We assess deals by applying well established criteria which consider the – We fund deals with a combination of own resources, debt or equity impact on cash generation and Economic Value under best estimate and depending on the size and cash flows of each opportunity and stressed scenarios. 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. † Acquisitions are required to have a positive impact on the Economic Value per share in the medium term under best Value enhancement estimate and certain more adverse scenarios. Customer outcomes Acquisitions must ensure we protect, or ideally enhance, customer interests. Acquisitions should normally align with the group’s documented risk appetite. If a deal is deemed to sit outside our risk Risk appetite appetite the financial returns must be suitably compelling. 44 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT CAPITAL MANAGEMENT • SOLVENCY II Subject to ensuring other constraints are managed, surplus capital is a useful proxy measure for liquid resources available to fund items such as dividends, acquisitions or business investment. As such, Chesnara defines cash generation as the movement in surplus, above management buffers, during the period. GROUP SOLVENCY SOLVENCY SURPLUS MOVEMENT SOLVENCY POSITION pre intragroup dividends 46.4 8.8 (6.2) (36.1) 16.2 0.2 (19.1) 205% 45.1 (2.6) 351.0 197% 298.4 351 298 684 605 333 307 Divisional movement – £58.9m 31 Dec 2023 31 Dec 2022 Group UK Movestic Waard Scildon Chesnara/ Change Acquisition Exchange Dividends Group surplus consol adj in T2/T3 rates surplus 31 Dec 2022 restrictions 31 Dec 2023 The group has £351m of surplus over and above the capital requirements under Solvency II, compared to £298m at the end of 2022. Surplus The group solvency ratio has increased from 197% to 205%. Own Funds have risen by £115m (pre-dividends). The most material drivers are the acquisition of the insurance portfolio of Conservatrix Own Funds in Waard and the reinsurance of policies from Canada Life in CA, which contributed £32m of Own Funds on completion, coupled with the reduction in Tier 2 restrictions. The SCR has increased by £26m, owing mainly to a rise in equity risk (due to the rise in equity markets and symmetric adjustment) and SCR increases in market and life underwriting SCR from the 2023 acquisitions. Solvency II background – Solvency surplus is a measure of how much the value of the company (Own Funds) 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 Solvency II regime. – The capital requirement is also 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? WHAT IS CAPITAL REQUIREMENT? A valuation which reflects the net assets of the company and includes The Solvency Capital Requirement can be calculated using a ‘standard a value for future profits expected to arise from in-force policies. formula’ or ‘internal model’. Chesnara adopts the ‘standard formula’. The Own Funds valuation: A restriction is applied to reduce the There are three levels of capital requirement: aggregate value of Tier 2 and eligible Tier 3 assets down to 50% of the Minimum dividend paying requirement/risk appetite requirement: reported SCR. The board sets a minimum solvency level above the SCR which means Contract boundaries: Solvency II rules do not allow for the recognition a more prudent level is applied when making dividend decisions. of future cash flows on certain policies despite a high probability of receipt. Solvency Capital Requirement: Amount of capital required to withstand Risk margin: The Solvency II rules require a ‘risk margin’ liability which a 1 in 200 event. The SCR acts as an intervention point for supervisory is deemed to be above the realistic cost. action including cancellation or the deferral of distributions to investors. Restricted with-profit surpluses: Surpluses in the group’s with-profit Minimum Capital Requirement (MCR): The MCR is between 45% funds are not recognised in Solvency II Own Funds despite their and 25% of the SCR. At this point Chesnara would need to submit a commercial value. recovery plan which if not effective within three months may result in authorisation being withdrawn. † 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 How does the SCR change? characteristics and tend to be impacted by the same factors. Given the largest component of Chesnara’s SCR is market risk, changes in investment mix or changes in the overall value of our assets have the greatest Transitional measures, introduced as part of the long-term guarantee package impact on the SCR. For example, equity assets require more capital than low when Solvency II was introduced, are available to temporarily increase risk bonds. Also, positive investment growth in general creates an increase Own Funds. Chesnara does not take advantage of such measures, however in SCR. Book run-off will tend to reduce SCR, but this will be partially offset we do apply the volatility adjustment within our Dutch and UK divisions. by an increase as a result of new business. How do Own Funds change? Own Funds (and Economic Value) are sensitive to economic conditions. HMT reforms to Solvency II were laid before parliament on 8 December, In general, positive equity markets and increasing yields lead to OF growth and came into force on 31 December 2023. The reforms updated the risk and vice versa. Other factors that improve OF include writing profitable new margin calculation for CA. We continue to monitor any further proposed business, reducing the expense base and improvements to lapse rates. changes closely and future financial statements will report on the UK specific application of Solvency II as it diverges from the EU’s regime. We see no specific reason to expect the PRA to use their enhanced freedoms to take a route that systemically makes it harder to do business in the UK. EIOPA has proposed provisional reforms to Solvency II. These reforms † Alternative Performance Measure (APM) used to enhance understanding of financial need to be presented to member states and the European Parliament performance. Further information on APMs can be found in the Additional Information for approval. section of this Annual Report and Accounts. CHESNARAANNUALREPORTANDACCOUNTS202345 STRATEGIC REPORT CAPITAL MANAGEMENT • SOLVENCY II We are well capitalised at both a group and subsidiary level. We have applied the volatility adjustment in Scildon, Waard Leven and CA, but have not used any other elements of the long-term guarantee package within the group. The volatility adjustment is an optional measure that can be used in solvency calculations to reduce volatility arising from large movements in bond spreads. UK £m SWEDEN £m 147%162% 149% 31 44 135% 29 15 23 21 21 20 152 135 103 100 171169 117 104 31 Dec 2023 31 Dec 2022 31 Dec 2023 31 Dec 2022 Surplus: £29.4m above board’s Capital Management Policy. Surplus: £30.9m above board’s Capital Management Policy. Dividends: Solvency position is stated after £35.0m proposed dividend Dividends: Solvency position is stated after £7.8m (100 MSEK) proposed (2022: £56m). dividend (2022: £11.7m – 150 MSEK). Own Funds: Increased by £51.5m (pre-dividend), including the Canada Life Own Funds: Increased by £10.1m (pre-dividend) largely owing to positive day 1 gain, positive economic experience, Part VII synergies and a decrease economic movements, partially offset by operating strain, primarily arising in the risk margin due to the SII reforms. from adverse lapse experience. SCR: Increased by £2.3m primarily due a fall in lapse risk due to the mass SCR: Increased by £12.7m due to positive equity growth and moderate rise lapse reinsurance, offset by increases as a result of the Canada Life deal, in currency and lapse risks. Part VII synergies and a rise in equity risk capital. NETHERLANDS – WAARD GROUP £m NETHERLANDS – SCILDON £m 184%188% 6 9 353% 55 52 591% 61 134 129 98 60 78 73 69 10 28 5 13 31 Dec 2023 31 Dec 2022 31 Dec 2023 31 Dec 2022 Surplus: £60.7m above board’s Capital Management Policy. Surplus: £6.2m above board’s Capital Management Policy. Dividends: Solvency position stated after £6.9m proposed dividend Dividends: No foreseeable dividend is proposed (2022: £nil). (2022: £4.3m). Own Funds: Increased by £4.3m due to positive operating variances Own Funds: Increased by £28.3m (pre-dividend) largely due to the and new business profits. Conservatrix deal, coupled with some positive operating items. SCR: Increased by £4.1m, chiefly made up of an increase in mortality SCR: Increased by £14.7m, mainly due to the Conservatrix deal, which and catastrophe risks, offset by an increase in LACDT. has mostly impacted longevity, lapse and concentration risk. The graphs on this page present the divisional view of the solvency position which may KEY differ to the position of the individual insurance company(ies) within the consolidated Own Funds (Post Div) numbers. Note that year end 2023 figures have been restated using 31 December 2023 SCR exchange rates in order to aid comparison at a divisional level. Buffer Surplus 46 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT 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 diagram below provides some insight into the immediate impact of movements reduce the SCR, we also experience a corresponding reduction certain sensitivities that the group is exposed to, covering solvency surplus in base Own Funds and Own Funds relating to Tier 2 capital. The total surplus and Economic Value. As can be seen, EcV tends to take the ‘full force’ of is now more exposed to downside risks than before the Tier 2 debt but, adverse conditions immediately (where the impacts are calculated on the importantly, the Tier 2 debt itself has created more than sufficient additional cash flows for the life of our portfolios) whereas solvency is often protected headroom to accommodate this. in the short term and, to a certain extent, the longer term due to Whilst cash generation has not been shown in the diagrams below, the compensating impacts on required capital. impact of these sensitivities on the group’s solvency surplus has a direct Tier 2 debt has a material impact on the reported sensitivities because, read across to the immediate impact on cash generation. Each individual bar as capital requirements move, the amount of the Tier 2 debt able in the diagram illustrates the estimated impact range (£m) of the respective to be recognised in Own Funds also moves. For example, where FX sensitivities and whether that impact is positive (green) or negative (red). SII % SOLVENCY SURPLUS EcV Impact range £m (100)(80)(60)(40)(20)-20406080100(100)(80)(60)(40)(20)-20406080100 20% sterling appreciation 10.7% 20% sterling depreciation (16.1)% 25% equity fall 7.9% 25% equity rise (15.4)% 10% equity fall 3.4% 10% equity rise (5.5)% 1% interest rate rise 5.7% 1% interest rate fall (8.0)% 50 bps credit spread rise (5.1)% 25 bps swap rate fall (4.5)% 10% mass lapse 2.7% 1% infl ation (10.2)% 5% mortality increase (3.2)% INSIGHT 20% sterling appreciation: A material sterling appreciation reduces the 50 bps credit spread rise: A credit spread rise has an adverse impact on value of surplus in our overseas divisions and any overseas investments surplus and future cash generation, particularly in Scildon due to corporate in our UK entities, however this is partially mitigated by the group currency and non-local government bond holdings that form part of the asset portfolios hedge so the overall impact on solvency is reduced. backing non-linked insurance liabilities. The impact on the other divisions is less severe. 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 25 bps swap rate fall: This sensitivity measures the impact of a fall in the increase in SCR can be larger than Own Funds, resulting in an immediate swap discount curve with no change in the value of assets. The result is reduction in surplus, depending on the starting point of the symmetric that liability values increase in isolation. The most material impacts are adjustment. The converse applies to an equity fall sensitivity, although on CA and Scildon due to the size of the non-linked book. the impacts are not fully symmetrical due to management actions and tax. 10% mass lapse: In this sensitivity Own Funds fall as there are fewer The Tier 2 debt value also changes materially in these sensitivities. The policies on the books, thus less potential for future profits. This is largely change in symmetric adjustment can have a significant impact (25% equity offset by a fall in SCR, although the amount of eligible Tier 2 capital also fall: -£20.1m to the SCR, 25% equity rise: +£30.2m to SCR). The EcV impacts falls. The division most affected is Movestic as it has the largest are more intuitive as they are more directly linked to Own Funds impact. concentration of unit-linked business. CA and Movestic contribute the most due to their large amounts of unit-linked business, much of which is invested in equities. 1% inflation rise: This sensitivity measures a permanent increase in inflation in every future year (above existing valuation assumptions). Such a rise in Interest rate sensitivities: An interest rate fall has a more adverse effect inflation increases the amount of expected future expenses. This is capitalised on group Economic Value than an interest rate rise. Group solvency is less into the balance sheet and hits the solvency position immediately. exposed to rising interest rates as a rise in rates causes capital requirements to fall, increasing solvency. 5% mortality increase: This sensitivity has an adverse impact on surplus and cash generation, particularly for Scildon due to their term products. BASIS OF PREPARATION ON REPORTING Although it is not a precise exercise, the general aim is that the sensitivities modelled are deemed to be broadly similar (with the exception that the 10% equity movements are naturally more likely to arise) in terms of likelihood. Whilst sensitivities provide a useful guide, in practice, how our results react to changing conditions is complex and the exact level of impact can vary due to the interactions of events and starting position. † Alternative Performance Measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the Additional Information section of this Annual Report and Accounts. CHESNARAANNUALREPORTANDACCOUNTS202347 STRATEGIC REPORT FINANCIAL REVIEW Our key performance indicators provide a good indication of how the business has performed in delivering its three strategic objectives. These two pages provide some insight into what is driving the results for 2023. Further analysis can be found on pages 50 to 58. £32.5M 2022 £82.7m £50.1M 2022 £61.9m † † GROUP CASH GENERATION DIVISIONAL CASH GENERATION Further detail on p50 excluding the impact of acquisitions What is it? Highlights £m Cash generation is calculated as being the movement in Solvency II Own Funds over the internally required capital, excluding the impact of 15.350.1 (3.1) (17.6) Tier 2 debt. The internally required capital is determined with reference 45.0 (7.0) 32.5 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. UK Sweden Netherlands Netherlands Divisional Other group Total group – Waard – Scildon cash activities cash 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. – Group cash generation was £32.5m for the year (2022: £82.7m) and contains Cash generation can be a strong indicator of how we are performing a material adverse impact from the symmetric adjustment of £13.1m against our stated objective of ‘maximising value from existing (2022: +£28.2m), which is a key component of the year-on-year movement. business’. However, our cash generation is always managed in the – The divisional result, despite the negative impact of the symmetric adjustment, context of our stated value of maintaining strong solvency positions was again strong, with £50.1m reported for the year. The UK division again within the regulated entities of the group. underpinned divisional cash with £45.0m generated, while there was also a very positive contribution from Waard. Economic factors supported the value Risks growth in the UK, while cash generation in the Netherlands was driven by the The ability of the underlying regulated subsidiaries within the group operating profits, offsetting the loss in Sweden owing to the market driven rise to generate cash is affected by a number of our principal risks and in capital requirements. uncertainties as set out on pages 63 to 70. Whilst cash generation is a function of the regulatory surplus, as opposed to the IFRS surplus, – The central group result includes the adverse impact of some non-recurring it is impacted by similar drivers, and therefore factors such as yields development items (including M&A), central overheads and Tier 2 coupon on fixed interest securities and equity and property performance payments. The FX hedge had a positive cash impact of £2.5m, offsetting some contribute significantly to the level of cash generation within the group. of the adverse FX movements experienced on consolidation of divisional results. £1.8M 2022 £62.1m loss £10.3M 2022 £26.1m loss IFRS PRE-TAX PROFIT TOTAL COMPREHENSIVE INCOME Further detail on p57 What is it? Highlights £m 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. 89.4 Why is it important? (149.9) The IFRS results form the core of reporting and hence retain prominence as a key financial performance metric. We believe that, 16.9(8.4) 71.7 10.3 (11.0)6.7 1.8 for Chesnara, the IFRS results in isolation do not recognise the wider (5.1) financial performance of the business, hence the use of supplementary Net Net Fee, Other Financing Profit arising Profit Tax FX & Total Alternative Performance Measures (pages 274 and 275) to enhance insurance investment commission operating costs on business before tax Other comprehensive service result & other expenses combinations income understanding of financial performance. result operating & portfolio income acquisitions Risks IFRS 17 is effective from 1 January 2023 and has been applied in the – Profit before tax for the year of £1.8m includes a net insurance service loss financial statements in the Corporate Governance section. As a result, of £5.1m and an investment result of £71.7m (2022: £13.3m profit and £39.0m several accounting policies and significant judgements and estimates loss respectively). have changed and these changes are set out from page 54. IFRS 17 – The negative insurance service result has been driven primarily by adverse introduces a new concept of insurance revenue which aims to reflect experience and assumption changes on lines of business, termed ‘onerous the insurance contract services provided in each period in the income contracts’, for which the CSM has been extinguished, meaning such losses statement by establishing an explicit measure of future profit (the must be taken to the P&L rather than to the CSM. In 2022 this effect was Contractual Service Margin (CSM)) and provides a framework as to much more benign. how the CSM is recognised in a given period. The ‘investment result’ is presented separately from the ‘insurance result’ on the face of the – The positive investment result in the year is reflective of investment market income statement. Market volatility impacting the surplus assets recoveries with improved equity returns and falling yields being the main will result in volatility in investment result and the IFRS pre-tax contributors. The comparative period in 2022 was adversely impacted by profit/(loss). Foreign currency fluctuations will further affect total falling equity markets and rising yields. comprehensive income. † Alternative Performance Measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the additional information section of this Annual Report and Accounts. 48 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT Highlights £m £524.7M 2022 £511.7m 28.4 (10.8) † ECONOMIC VALUE (EcV) Further detail on p53 30.7 560.1(35.4) 511.7 524.7 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 EcV EcV Acquisitions Forex EcV Dividends EcV 31 Dec earnings 31 Dec 31 Dec business and hence is an important reference point by which to assess Chesnara’s value. A life 2022 before 2023 2023 and pensions group may typically be characterised as trading at a discount or premium to its EcV. acquisitions (pre-div) Analysis of EcV provides additional insight into the development of the business over time. – EcV increased 12% in 2023 prior to the impact The EcV development of the Chesnara group over time can be a strong indicator of how we have of dividend payments and FX losses (arising delivered to our strategic objectives, in particular the value created from acquiring life and pensions on consolidation). businesses and enhancing our value through writing profitable new business. It ignores the potential – Growth has been delivered through a range of areas, of new business to be written in the future (the franchise value of our Swedish and Dutch with strong new business profits, economic returns businesses) and the value of the company’s ability to acquire further businesses. and significant gains through the acquisitions delivered Risks in the year. While economic profits form a material The EcV of the group is affected by economic factors such as equity and property markets, yields part of the result, economic conditions have meant on fixed interest securities and bond spreads. In addition, the EcV position of the group can be it was still a relatively modest period for economic materially affected by exchange rate fluctuations. For example, a 20.0% weakening of the Swedish growth. The result also includes pleasing operating krona and euro against sterling would reduce the EcV of the group within a range of £59m-£69m, profits in the Dutch divisions, as well as the adverse based on the composition of the group’s EcV at 31 December 2023. impact of some exceptional non-recurring central costs. These factors combined give further reassurance of the robustness of the group and provide confidence of future growth under more beneficial economic conditions. Highlights £m £59.1M 2022 £ ( 84.7 ) m Total operating (7.7) † earnings EcV EARNINGS Further detail on p52 Economic 42.9 earnings What is it? Other (4.5) In recognition of the longer-term nature of the group’s insurance and investment contracts, supplementary information is presented that provides information on the EcV of our business. Acquisitions 28.4 The principal underlying components of the EcV earnings are: Total ECV 59.1 – The expected return from existing business (being the effect of the unwind of the rates used earnings to discount the value in-force); – Economic earnings were the largest component of – Value added by the writing of new business; the result, with strong contributions from the UK and – Variations in actual experience from that assumed in the opening valuation; Swedish divisions, predominantly through the positive impact of equity market growth on expected future – The impact of restating assumptions underlying the determination of expected cash flows; and fee income in our unit-linked policyholder funds. – The impact of acquisitions. The Dutch divisions reported smaller economic losses, with different economic factors being less beneficial Why is it important? and offsetting one another to a certain extent. A different perspective is provided in the performance of the group and on the valuation of the business. EcV earnings are an important KPI as they provide a longer-term measure of the value – The operating loss of £7.7m has been impacted by generated during a period. The EcV earnings of the group can be a strong indicator of how we a number of one-off items, including investing in our have delivered against all three of our core strategic objectives. This includes new business M&A activity and future growth of the group (see profits generated from writing profitable new business, EcV profit emergence from our existing page 52 for further detail). It is pleasing to report businesses, and the EcV impact of acquisitions. strong operating profits from the Dutch division, reflecting a marked improvement on prior years. Risks – Acquisitions in the year added £28.4m of growth, The EcV earnings of the group can be affected by a number of factors, including those highlighted with £21.7m on the Conservatrix portfolio in the within our principal risks and uncertainties and sensitivities analysis as set out on pages 63 to 70. Netherlands and a further £6.7m on the protection In addition to the factors that affect the IFRS pre-tax profit and cash generation of the group, the portfolio of Canada Life in the UK. 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 – The ‘Other’ category includes risk margin movement, view of the future cash flows arising from our business. tax impacts and the cost of Tier 2 coupon payments. CHESNARAANNUALREPORTANDACCOUNTS202349 STRATEGIC REPORT FINANCIAL REVIEW • 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. £32.5M 2022 £82.7m £50.1M 2022 £61.9m GROUP CASH GENERATION DIVISIONAL CASH GENERATION excluding the impact of acquisitions Cash generation in 2023 was impacted, at a divisional level, by adverse movement in the symmetric adjustment (£13.1m – 2022: +£28.2m) following equity market growth, while the group result also contains the impact of exceptional and non-recurring central costs. Cash is generated from increases in the group’s solvency surplus, which is represented by the excess of Own Funds held over management’s internal capital needs. These are based on regulatory capital requirements, with the inclusion of additional ‘management buffers’. Implications of our cash definition: Positives Challenges and limitations – Creates a strong and transparent alignment to a regulated framework. – In certain circumstances the cash reported may not be immediately distributable by a division to group or from group to shareholders. – Positive cash results can be approximated to increased dividend potential. – Brings the technical complexities of the SII framework into the cash results – Cash is a factor of both value and capital and hence management are e.g. symmetric adjustment, with-profit fund restrictions, model changes etc, focused on capital efficiency in addition to value growth and indeed the and hence the headline results do not always reflect the underlying interplay between the two. commercial or operational performance. 2023 £m Movement in Movement in Cash 2022 £m Own Funds management’s Forex generated/ Cash generated/ capital requirement impact (utilised) (utilised) UK 45.6 (0.6) – 45.0 40.8 Sweden 9.8 (14.9) (1.9) (7.0) 16.1 Netherlands – Waard Group 14.4 2.4 (1.5) 15.3 8.4 Netherlands – Scildon 4.3 (7. 2) (0.2) (3.1) (3.4) Divisional cash generation/(utilisation) 74.1 (20.4) (3.7) 50.1 61.9 Other group activities (27.1) 10.1 (0.6) (17.6) 20.8 Group cash generation/(utilisation) 47.1 (10.3) (4.3) 32.5 82.7 GROUP – Other group activities include consolidation adjustments as well as central costs and central SCR movements. – Central costs include Tier 2 debt coupon payments (c£10m) and uncovered central costs (c£14m), of which a large proportion relates to exceptional non-recurring development expenditure, such as IFRS 17, M&A activity and strengthening of the group governance resource. UK SWEDEN The UK division has continued to be the largest contributor to cash generation, Movestic has reported cash utilisation of £7.0m for 2023, as Own Funds with £45.0m reported in the year, delivered mainly through Own Funds growth was exceeded by a larger increase in capital requirements. On the growth. This has included the positive impact of investment market Own Funds side, growth was delivered primarily through the positive impact performance; the benefit of a reduction in the risk margin as a result of the of equity market movements, although this was offset by some negative first phase of UK SII reforms and some synergies as a result of the Part VII operating items, including the impact of ongoing challenges in outward policy transfer of CASLP into CA on 31 December 2023. The cash result also transfers. The equity market-driven growth in Own Funds has resulted in benefitted from a reduction in capital requirements during the year, which an increase in market-risk related capital requirements, including the impact included the positive impact of a new mass lapse reinsurance arrangement of the symmetric adjustment, which increased significantly since the start and the general run-off of the business, offsetting factors such as the need of the year. The divisional result also includes a foreign exchange loss to hold more capital as a result of equity market growth, including the on consolidation, owing to a slight weakening of the krona versus sterling symmetric adjustment. over the year. NETHERLANDS – WAARD NETHERLANDS – SCILDON Waard recorded pleasing cash generation of £15.3m in 2023, delivered largely Scildon has posted £3.1m of cash utilisation for the year. Own Funds growth through value growth. Strong operating profits benefitted from a reduction of £4.3m was driven by positive operating profits, offsetting economic losses. in future expenses, benefitting from the economies of scale arising from the Operating profits include the positive impacts of new business profits and addition of the Conservatrix portfolio. The result also contains a reduction in cost efficiencies, while the negative effect of falling interest rates was the capital requirements, supported by interest rate movements and the reduction main component of the economic loss on Own Funds. The negative cash in future expenses. Additionally, the divisional result bears the impact of result was underpinned by an increase in capital requirements, outweighing sterling appreciation versus the euro during 2023, leading to a small foreign the value growth. Rises in life risk and equity risk capital, driven by equity exchange loss on consolidation. growth and the consequential rise in the symmetric adjustment, offsetting the positive impact of lower interest rates. 50 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT FINANCIAL REVIEW • CASH GENERATION – ENHANCED ANALYSIS The format of the analysis draws out components of the cash generation results relating to technical complexities, modelling issues or exceptional corporate activity. The results excluding such items are deemed to better reflect the inherent commercial outcome (commercial cash generation). £53.0M 2022 £46.6m COMMERCIAL CASH GENERATION UK SWEDEN NETHERLANDS NETHERLANDS DIVISIONAL GROUP ADJ TOTAL WAARD SCILDON TOTAL Base cash generation 45.0 (7.0) 15.3 (3.1) 50.1 (17.6) 32.5 Symmetric adjustment 3.0 7.3 0.5 1.3 12.2 0.9 13.1 WP restriction look through 0.5 – – – 0.5 – 0.5 Temporary tax impacts on the SCR – – – 10.0 10.0 (3.2) 6.8 Commercial cash generation 48.5 0.3 15.8 8.2 72.8 (19.8) 53.0 Commercial cash generation of £53.0m was primarily supported by contributions of £48.5m from the UK business and £24.0 from the Netherlands. All overseas divisions have also generated cash, even though returns have been dampened by the depreciation of the euro and Swedish krona currencies against sterling. The FX hedge that was implemented in 2022, and renewed again in 2023, has offset some of these currency impacts, providing a total cash benefit of £2.5m over the year. UK The UK result primarily comes from investment market gains, influenced by equity gains and falling yields, alongside the beneficial impact of the implementation of the mass lapse reinsurance, the SII risk margin reforms and some synergies arising from the Part VII transfer of CASLP into CA on 31 December 2023. This offset some expense strengthening, which largely represents positive investment in the future and supports the growth of the division. The commercial cash outcome continues to illustrate that the UK remains at the heart of the cash generation model. SWEDEN The Swedish result, after removing a loss caused by the increase in the symmetric adjustment, was relatively neutral. The economic result is positive, principally due to equity market gains, offset by the depreciation of Swedish krona against sterling. The economic gains are offset by adverse lapse experience, fee and rebate income pressure and a new business strain. WAARD Waard's positive cash result is supported by the positive post-acquisition impact of integrating Conservatrix into the business, coupled with the impact of positive expense assumption changes, slightly offset by an expense operating variance. The result also benefits from economic impacts, albeit to a lesser extent, predominantly owing to falling yields. The capital that Chesnara plc injected to support Conservatrix liabilities has been recycled back into surplus. SCILDON Scildon’s commercial cash generation reflects a combination of positive economic impacts, largely owing to falling yields, alongside some negative factors including adverse changes in lapse and mortality assumptions. The commercial cash result, unlike base cash generation, benefits from a positive increase in the amount of risk capital that is shielded by tax. GROUP The central group result is driven by uncovered group level expenditure, resulting in a reduction in Own Funds. The central expenses include Tier 2 debt coupon payments and a range of development activity, such as M&A programmes, IFRS 17, as well as investment in the business to support the future growth of the group. These factors outweigh investment returns, owing to falling yields, and an overall £2.5m cash generation benefit from the FX hedge. CHESNARAANNUALREPORTANDACCOUNTS202351 STRATEGIC REPORT FINANCIAL REVIEW • EcV EARNINGS The EcV earnings of the group reflect the benefits of delivering our acquisition strategy, coupled with positive economic earnings arising in volatile markets. Total operating earnings: The operating loss for the year reflects a £59.1M 2022 £ ( 84.7 ) m significant reduction compared with last year, continuing the encouraging trend of improvement. A number of the negative components that are EcV EARNINGS non-recurring in nature represent positive investment in the future and support the growth of the group. Examples of key items in 2023 include: Analysis of the EcV result by earnings source: – Recurring central development overheads including those associated with the M&A strategy. Whilst the cost of this development investment is recognised, £m 31 Dec 2023 31 Dec 2022 EcV does not recognise the potential returns we expect from it. Expected movement in period 14.9 (1.3) – Non-recurring development expenditure such as IFRS 17. New business 4.4 8.0 – 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. Operating experience variances 0.8 (19.0) Acquisitions: M&A activity continued to be a source of growth and resulted Other operating assumption changes ( 27.8 ) (14.5) in £28.4m of immediate EcV earnings in 2023. The incremental value was † delivered by the Conservatrix insurance portfolio acquisition (1 January 2023) Total EcV operating earnings (7.7) (26.8) and also a UK protection portfolio reinsurance arrangement with Canada Life † Total EcV economic earnings 42.9 (109.1) (16 May 2023), under the Waard Group and CA respectively. Other non-operating variances (11.9 ) (2.6) Looking at the results by division: Risk margin movement 1.1 20.4 UK: The UK division reported EcV earnings of £31.4m (excluding acquisitions), Tax 6.3 12.0 with economic growth and the synergies from the Part VII of CASLP into CA offsetting an operating loss. The operating result was largely driven by Acquisitions 28.4 21.4 non-recurring activity, as outlined above, relating to the expansion of the division and investment in the business to facilitate future growth. This EcV earnings 59.1 (84.7) outweighed positive results on fee income (due to lower policy attrition) and other decrements. The economic gains of £23.1m arose primarily as a result of the impact of equity market growth in unit-linked funds, which increases Analysis of the EcV result by business segment: our projected future fee income. While the economic profit was relatively £m 31 Dec 2023 31 Dec 2022 subdued, it remains a significant improvement on the prior year. UK 31.4 (24.6) Sweden: Movestic posted earnings of £6.8m for 2023. The division benefitted from the impact that equity market growth had on its unit-linked Sweden 6.8 (37.1) funds, underpinning total economic earnings of £18.6m. This more than Netherlands 19.5 (29.4) outweighed an operating loss, due primarily to adverse transfer activity. Lower fee and commission income, owing to pricing pressures, and Group and group adjustments (27.0) (15.0) suppressed fund rebate income also contributed. Modest new business Acquisitions 28.4 21.4 profits (on an EcV basis) were £0.9m (2022: £1.8m), reflective of the continued competitive market conditions and margin pressures. EcV earnings 59.1 (84.7) Netherlands: The Dutch division has reported growth of £19.5m in the year, with positive operating profits exceeding smaller economic losses in both Total economic earnings: The economic result continues to be the largest businesses. The operating result in Scildon of £8.7m represents a significant component of the total EcV earnings, with a profit of £42.9m in the year. upturn versus the losses reported in the prior year and includes EcV new The result is in line with our reported sensitivities and is driven by the business profits of £1.7m. Economic losses of £3.3m were primarily the following key market movements: consequence of falling interest rates and flattening yield curves. Waard has Rising equity indices: reported EcV growth of £16.0m, also driven by operating profits. This included – FTSE All Share index increased by 3.7% (year ended 31 December 2022: the benefit of some changes in expense assumptions, some positive news decreased by 3.2%) in relation to policy lapses and the impact of reigniting premiums on paused policies within the Conservatrix portfolio. Despite positive bond returns – Swedish OMX all share index increased by 15.6% (year ended 31 December exceeding expectations, the economic loss (£1.3m) stemmed from a number 2022: decreased by 24.6%) of factors, primarily the negative impact of the fall in interest rates and – The Netherlands AEX all share index increased by 13.4% (year ended declining yields on the business’s future liabilities, with subdued equity 31 December 2022: decreased by 15.0%) performance also contributing. Credit spreads – mixed news: Group: This component contains a variety of group-related expenses and – UK AA corporate bond yields decreased to 0.71% (31 December 2022 1.04%) includes: non-maintenance related costs (such as acquisition activity); the – European AA credit spreads increased to 0.63% (31 December 2022: 0.29%) costs of the group’s IFRS 17 programme; and Tier 2 debt interest costs, offset by positive investment returns in the period. Decreasing yields: – 10-year UK gilt yields have decreased to 3.64% (31 December 2022: 3.82%) – 10-year euro swap yield have decreased to 2.49% (31 December 2022: 3.20%) The EcV results continue to illustrate how sensitive the results are to economic factors. While investment market growth has been positive compared to the prior year, it was still relatively muted versus previous periods of growth. As outlined in the past, we continue to be of the view that short-term volatility has limited commercial impact on the business and of more importance is the fact that, over the longer term, we expect EcV growth in the form of real world investment returns. 52 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT FINANCIAL REVIEW • EcV 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 businesses within the group. EcV is an important reference point by which to assess Chesnara’s intrinsic value. £524.7M 2022 £511.7m ECONOMIC VALUE (EcV) Value movement: 1 Jan 2023 to 31 Dec 2023 £m EcV to Solvency II £m 200.0(0.8)6.6 (23.5) 683.7 28.4 (10.8)560.1 (35.4) 30.7 511.7 524.7 524.7 (23.7) 0.4 EcV EcV Acquisitions Forex EcV Dividends EcV EcV Risk Contract Tier 2 RFF & DeferredDividends SII Own 31 Dec earnings 31 Dec 31 Dec 31 Dec margin boundaries debt Tier 2/3 tax asset Funds 2022 before 2023 2023 2023 restrictions adj 31 Dec acquisitions (pre-div) 2023 EcV earnings: EcV profits acquisitions of £30.7m have been delivered Our reported EcV is based on a Solvency II assessment of the value of the in 2023, supported by economic profits, with significant growth also business but adjusted for certain items where it is deemed that Solvency II delivered through acquisitions. Further detail can be found on page 52. does not reflect the commercial value of the business. The above waterfall shows the key difference between EcV and SII, with explanations for each Acquisitions: The group has delivered two deals during 2023; the item below. Conservatrix portfolio acquisition and the reinsurance arrangement with Canada Life. This has resulted in day 1 EcV gains of £21.7m and Risk margin: Solvency II rules applying to our European businesses require £6.7m respectively. 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. Foreign exchange: The closing EcV of the group reflects a foreign exchange We therefore reduce this margin for risk for EcV valuation purposes from loss in the period, which is a consequence of sterling appreciation against being based on a 6% (UK: 4%) cost of capital to a 3.25% cost of capital. both the Swedish krona and also the euro. On our UK business, the Solvency II reform risk tapering is also reversed. Dividends: Under EcV, dividends are recognised in the period in which they Contract boundaries: Solvency II rules do not allow for the recognition are paid. Dividends of £35.4m were paid during the year, representing the of future cash flows on certain in-force contracts, despite the high probability final dividend from 2022 and interim dividend for 2023. of receipt. We therefore make an adjustment to reflect the realistic value of the cash flows under EcV. EcV by segment at 31 Dec 2023 £m Ring-fenced fund restrictions: Solvency II rules require a restriction to be UK 191.4 placed on the value of surpluses that exist within certain ring-fenced funds. These restrictions are reversed for EcV valuation purposes as they are Sweden 189.6 deemed to be temporary in nature. Netherlands 255.1 Dividends: The proposed final dividend of £23.5m is recognised for SII regulatory reporting purposes. It is not recognised within EcV until it is Other group (111.4) actually paid. activities 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 The above chart shows that the EcV of the group remains diversified across this debt is recognised at fair value, while for EcV this remains at book value. its different geographical markets. Tier 3: Under Solvency II the eligibility of Tier 3 Own Funds is restricted in accordance with regulatory rules. For EcV the Tier 3 Own Funds are recognised at a deemed realistic value. † Alternative Performance Measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the Additional Information section of this Annual Report and Accounts. CHESNARAANNUALREPORTANDACCOUNTS202353 STRATEGIC REPORT FINANCIAL REVIEW • IFRS The group IFRS results are reported under IFRS 17 for the first time in the annual financial statements. The following pages provide an introduction to IFRS 17 and how it impacts Chesnara, together with the IFRS results for the year ended 31 December 2023 and comparative figures for 2022, which have been restated under IFRS 17. INTRODUCTION TO IFRS 17 What is IFRS 17? IFRS 17 is the new accounting standard for recognising, measuring and disclosing insurance contracts. This is effective for the first time in these financial statements and replaces the previous standard, IFRS 4. IFRS 17 has been implemented as if it had always been in place and so previous results have been restated. IFRS 17 has been introduced with the aim of allowing greater comparability of results between insurance companies and the wider market. How IFRS 17 is different to IFRS 4 IFRS 4 New business IFRS 17 Contractual profit CSM reflects stock of future profits, service margin released to P&L as the insurance (CSM) Premium services are provided; whereas IFRS 4 Premium Risk adjustment received/ recognises this on day one received assets held Insurance liabilities Present value using prudent of estimated Risk adjustment replaces existing assumptions future cash prudent margins and will be released flows to P&L if operating experience occurs in line with expectation How does IFRS 17 impact Chesnara? IFRS 17 ‘insurance contracts’ represents an accounting change that does not impact the fundamentals of the business. Specifically, the implementation of IFRS 17 does not impact the growth ambition, value or cash generation of the group. There are no changes to the solvency ratio, cash generation or Economic Value of the group. There are also no changes to the dividend expectations or strategy and capability for future M&A. IFRS 17 only applies to those policies of the group that are classified as ‘insurance contracts’, which equates to 42% of the group’s total policyholder liabilities at the end of December 2023. The remaining contracts are classified as investment business, which are valued under IFRS 9 ‘Financial Instruments’, which is also effective for the group for this period. Under IFRS 9, there is no impact to the results from how these liabilities have been previously valued under IAS 39. A key difference between the measurement of contracts under IFRS 9 and IFRS 17 is that investment contracts equate to unit value under IFRS 9 and their value therefore does not take into account future profit, whereas insurance contracts include the contractual service margin (CSM) and the risk adjustment that reflects the uncertainty around the amount and timing of the cash flows. Our split of insurance and investment liabilities Insurance liabilities Investment liabilities by division by division Insurance Investment liabilities liabilities 42% 58% UK Sweden Netherlands 54 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT 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 2. An insurer must recognise the expected losses business written over time. for loss-making business immediately. – This spread profit forms the CSM which can only be – An insurer cannot establish a ‘negative CSM’ recognised in the income statement as and when and defer loss recognition into the future. 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. How CSM will move over time Acquiring profitable insurance business will increase CSM New business CSM Release of profit Interest Assumption accredited and experience to CSM variations Post acquisition closing CSM Opening CSM Closing CSM CHESNARAANNUALREPORTANDACCOUNTS202355 STRATEGIC REPORT FINANCIAL REVIEW • IFRS BALANCE SHEET As at 31 December 2022 there is a £51m increase in IFRS net equity under IFRS 17 compared with the previously stated IFRS 4 position. Total net equity as at 31 December 2023 is £360m and we have a CSM, which represents unrecognised future insurance profits, of £167m (net of reinsurance). The adoption of IFRS 17 has affected our gearing ratio, and, in line with guidance from Fitch, we have added back the net of tax CSM to the equity denominator in the calculation. On this basis the gearing ratio as at 31 December 2023 is 29.2% which is significantly lower than the most recent ratio reported prior to IFRS 17 (31 December 2022: 37.6%). Some analysis has been provided below on the IFRS balance sheet of the group on an IFRS 17 basis: HOW IFRS 17 IMPACTS NET EQUITY AT DECEMBER 2022 INSIGHT £m 226 (31) Under IFRS 17, the restated shareholder net equity at 31 December (113) 2022 has increased by £51m compared with as previously reported under IFRS 4. The combined impact of remeasuring the future cash flows for 384 insurance and reinsurance contracts under IFRS 17 and revaluing 333(31) corresponding assets under IFRS 9 at that date has added £226m of growth. Offset against this is the recognition of liabilities for the Risk Adjustment (£31m) and the CSM (£113m), representing a store of future profits that will be released to the income statement as the associated future insurance services are provided. A consequence of applying IFRS 17 is that the group has also derecognised intangible assets and their associated tax balances in respect of insurance contracts (£31m). These assets previously represented the immediate recognition of future profits on insurance business, but under IFRS 17 profits are now deferred and reflected in the CSM. IFRS 4 Items Impact of IFRS Creation of risk Creation of IFRS 17 shareholder derecognised 17 & IFRS 9 adjustment CSM shareholder equity at (intangible remeasurement equity at Dec 2022 assets net of Dec 2022 deferred tax) HOW THE CSM HAS MOVED IN THE PERIOD INSIGHT £m The group has added £54m of CSM (future profits) in 2023. 6 (20) The increase is largely driven by the two deals in the period, with 57 (3) the Conservatrix portfolio acquisition adding £46m and the Canada 167 Life arrangement adding £11m. The movement in the period also includes: 9 11 3 4 – a £20m reduction which reflects the release to profit in the period as the insurance services are provided and – £9m of new business CSM, reflecting the future profits arising on profitable new business written in the period. Other smaller movements including the impact of foreign exchange, changes in assumptions and the ‘interest’ on unwinding the discounting that is embedded within the opening CSM valuation. CSM Interest New Acquisition Experience CSMFX CSM CSM values are shown net of reinsurance but gross of tax. When (net of accreted business & release (net of † reinsurance) assumption reinsurance) calculating the IFRS capital base a net of reinsurance and net of tax 1 Jan 2023 changes 31 Dec 2023 figure is used. The equivalent net of reinsurance and tax movement of CSM during 2023 is £42m. HOW DOES IFRS 17 COMPARE TO SOLVENCY II AND ECV? A lot of the principles and underlying technical decisions are consistent across EcV and IFRS, as they are based on common foundations; however, there is one fundamental difference in how investment contracts are valued. For investment contracts, expected future profits on existing policies are not recognised in the IFRS balance sheet, with profits being reported as they arise; this is in contrast to EcV, where they are fully recognised on the balance sheet, subject to contract boundaries. As such, at Chesnara, we believe that due to the hybrid nature of the business, EcV and Solvency II, alongside cash generation, continue to give a more holistic view of the financial dynamics of the group and are therefore the key metrics that management uses 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 Alternative Performance Measure (APM) used to enhance understanding of financial performance. will be revisiting their definitions of gearing for insurance groups as a result of IFRS 17, and in line with guidance Further information on APMs can be found in the from Fitch, we have added back the net of tax CSM to the equity denominator in the calculation. On this basis, Additional Information section of this Annual the gearing of the group as at 31 December 2023 was 29.2%. Report and Accounts. 56 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT FINANCIAL REVIEW • IFRS INCOME STATEMENT £1.8M 2022 £62.1m loss £10.3M 2022 £26.1m loss IFRS PRE-TAX PROFIT TOTAL COMPREHENSIVE INCOME Analysis of IFRS result between insurance service and investment results: 31 Dec 2023 31 Dec 2022 £m £m Net insurance service result (5.1) 13.3 Net investment result 71.7 (39.0) Fee, commission and other operating income 89.4 59.6 Other operating expenses (149.9) (100.8) Financing costs (11.0) (10.5) Profit arising on business combinations and portfolio acquisitions 6.7 15.4 Profit before income taxes 1.8 (62 .1) Income tax (charge)/credit 16.9 28.4 Profit for the period after tax 18.7 (33.7) Foreign exchange (loss)/gain (7.8 ) 6.9 Other comprehensive income (0.6) 0.7 Total comprehensive income 10.3 (26.1) † Movement in IFRS capital base Opening IFRS capital base 469.2 533.8 Movement in CSM (net of reinsurance and tax) 42.4 (5.4) Total comprehensive income 10.3 (26.1) Other adjustment made directly to net equity 0.9 1.2 Dividends (35.4) (34.3) Closing IFRS capital base 487.4 469.2 IFRSREPORTINGCATEGORYINSIGHT Net insurance service result The net insurance service result of £5.1m loss can be broken down into The net insurance service result comprises the revenue and expenses the following elements: from providing insurance services to policyholders and ceding insurance – Gains from the release of risk adjustment and CSM of £23.3m (2022: £19.8m). business to reinsurers and is in respect of current and past service only. These gains represent a healthy and consistent source of future profits for Assumption changes, that relate to future service, are therefore excluded the group. from the insurance result (as they adjust the CSM), unless the CSM – Losses of £28.4m (2022: £6.5m) caused by a combination of experience and for a given portfolio of contracts falls below zero; thereby in a ‘loss loss component impacts, where portfolios of contracts with no CSM have component’ position. Economic impacts are also excluded from the suffered adverse impacts that would otherwise be offset in the balance insurance service result. sheet if the CSM for the portfolio was positive. The key driver behind the experience and loss component impact in the year is adverse non-economic assumption changes (£25.1m loss). This should not be considered in isolation however as there are corresponding offsets in the net investment result due to the effect of locked in discount rates (£11.9m) and also to the CSM in the balance sheet (£9.2m) as for some portfolios the expense assumption changes created a positive impact to the CSM. Under IFRS 17 adverse impacts on portfolios in a loss component position cannot be offset with favourable impacts on other portfolios, thus creating an asymmetric effect where losses on some portfolios are recognised in the income statement but corresponding gains go to the CSM on the balance sheet. Movement in CSM During the period to 31 December 2023, the CSM has increased by £53.8m The movement in CSM is important to consider alongside the income to £166.5m. The key components of this increase are a £57.2m addition to statement. New CSM represents future profits that are expected to be the CSM from the group’s two acquisitions in the period and £9.4m of released to the income statement over time and whilst a lot of the costs additional CSM arising from new business. These amounts are offset by associated with generating this new CSM are recognised in the year, £19.8m released to the income statement. This remaining CSM will be the expected profit is deferred over the life of the products. earned over the coverage period of the policies to which it relates, and the expected earnings pattern is such that after 10 years more than 40% will remain to be earned. CHESNARAANNUALREPORTANDACCOUNTS202357 STRATEGIC REPORT FINANCIAL REVIEW • IFRS INCOME STATEMENT IFRS REPORTING CATEGORY INSIGHT Net investment result The positive investment result in the year is reflective of investment market The net investment result contains the investment return earned on all recoveries with improved equity returns and falling yields being the main assets together with the financial impacts of movements in insurance contributors. The comparative period in 2022 was adversely impacted by and investment contract liabilities. falling equity markets and rising yields. The effect of locked in discount rates has contributed £12.9m, largely offset by loss component increases in the insurance service result. Fee, commission and other operating income Fee, commission and other operating income shows an improvement on The most significant item in this line is the fee income that is charged to the 2022 comparative, but this is in part as a result of increased fee income policyholders in respect of the asset management services provided for in the form of yield tax deducted from policyholders in Movestic (£18m in investment contracts. There is no income in respect of insurance contracts 2023 compared to £8m prior year) as a result of improving economic factors, in this line, as this is all now reported in the insurance result. with a corresponding offset within other operating expenses. Increased returns from assets under management in respect of investment business in Sweden and the UK further contributed to the increase in fee income as did the fact that the current year includes a full twelve months of fee income generated by CASLP within the UK. Other operating expenses The expenses incurred in 2023 are higher than in 2022, with the main reasons Other operating expenses consist of costs relating to the management as follows: of the group’s investment business, non-attributable costs relating to the – In the UK, the AVIF for CASLP has been impaired by £21.0m due to a group’s insurance business and other certain one-off costs such as project combination of adverse persistency over 2023, coupled with a change in costs. Other items of note are the amortisation of intangible assets management’s view of assumed future investment returns. This is largely in respect of investment business and the payment of yield tax relating offset in the net result by a corresponding deferred tax credit of £14.9m. to policyholder investment funds in Movestic, for which there is – In Movestic, the expense in respect of the yield tax on policyholder funds a corresponding income item within the fee income line. has increased by £10.0m with the offset reported in fee, commission and other operating income as stated above. – Operating expenses have increased in the UK and Dutch divisions with the acquisition of CASLP (which only included eight months of post-acquisition results in 2022) and Conservatrix (which completed on 1 January 2023). Furthermore, transition project costs of £4.6m have been recognised in the UK which in due course will lead to lower operating costs in the future. – The parent company has also seen an increase in expenses, due to project related expenditure, investment in business development and strengthening of the central governance oversight team. 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 D5 of the financial statements. Profit arising on business combinations and portfolio acquisitions On 1 January 2023, Chesnara successfully completed the acquisition of the insurance portfolio of Conservatrix, a specialist provider of life insurance products in the Netherlands. This gave rise to a day 1 gain of £6.7m. Further details can be found in note I8 of the financial statements. Foreign exchange The IFRS result of the group reflects a foreign exchange loss in the period, a consequence of sterling appreciation, particularly against the euro. Other comprehensive income This represents the impact of movements in the valuation of land and buildings held in our Dutch division. Income tax In 2022, the large pre-tax losses generated deferred tax credits, particularly Income tax consists of both current and deferred taxes. in 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 investments, more than offset by the impact of the AVIF impairment (£15m). Additionally on 31 December 2023, the insurance business of CASLP Ltd was transferred to Countrywide Assured plc. Consequently, previously unrecognised losses of Countrywide Assured plc have been recognised as deferred tax assets at 31 December 2023. This has resulted in a £13m additional tax asset being recognised at the balance sheet date. 58 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT FINANCIAL MANAGEMENT The group’s Financial Management Framework is designed to provide security for all stakeholders, while meeting the expectations of policyholders, shareholders and regulators. The following diagram illustrates the aims, approach and outcomes from the Financial Management Framework: OBJECTIVES The group’s Financial Management Framework is designed to provide security for all stakeholders, while meeting the expectations of policyholders, shareholders and regulators. Accordingly we aim to: Maintain solvency Meet the dividend Optimise the Ensure there is Maintain the group in or above expectations of gearing ratio to sufficient liquidity as a going concern our normal shareholders ensure an efficient to meet obligations operating range capital base to policyholders, of 140-160% debt financiers and creditors HOW WE DELIVER TO OUR OBJECTIVES In order to meet our obligations we employ and undertake a number of methods. These are centred on: 1. Monitor and control 2. Longer-term 3. Responsible 4. Management risk and solvency projections investment actions management OUTCOMES Key outcomes from our financial management process, in terms of meeting our objectives, are set out below: 1. Solvency 2. Shareholder 3. Capital structure 4. Liquidity and 5. Maintain the returns policyholder group as a returns going concern † Group solvency 2021-2023 TSR: Gearing ratio Policyholders’ Group remains ratio: 205% 14.7% of 29.2% reasonable a going concern. (2022: 197%) (2020-2022: 9.6%) (2022: 30.3%) expectations (see page 60) maintained. 2023 dividend yield 8.7% Asset Liability Matching Framework (20 2 2: 8 .1%) operated effectively Based on average 2023 in the year. share price and full year 2023 dividend of 23.97p. Sufficient liquidity in the Chesnara holding company. Further detail on capital structure The group is funded by a combination of share capital, retained earnings and Acquisitions are funded through a combination of debt, equity and internal debt finance. The debt gearing was 29.2% at 31 December 2023 (30.3% cash resources. The ratios of these three funding methods vary on a at 31 December 2022). The level of debt that the board is prepared to take deal-by-deal basis and are driven by a number of factors including but not on is driven by the group’s Debt and Leverage Policy which incorporates limited to the size of the acquisition; current cash resources of the group; the board’s risk appetite in this area. Over time, the level of gearing within solvency levels, the current gearing ratio and the board’s risk tolerance limits the group will change, and is a function of the funding requirements for for additional debt; the expected cash generation profile and funding future acquisitions and the repayment of existing debt. During 2022, the requirements of the existing subsidiaries and potential acquisition; future company announced the successful pricing of its inaugural debt capital financial commitments; and regulatory rules. In addition to the above, in the markets issuance of £200m Tier 2 Subordinated Notes. past Movestic used a financial reinsurance arrangement to fund its new business operation. The net proceeds of the notes has been partially used for corporate purposes, including the funding of the CASLP acquisition in 2022 and the partial funding of the Conservatrix acquisition in the year. The balance is held as investments. † Alternative Performance Measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the Additional Information section of this Annual Report and Accounts. CHESNARAANNUALREPORTANDACCOUNTS202359 STRATEGIC REPORT FINANCIAL MANAGEMENT OUTCOMES FROM IMPLEMENTING OUR FINANCIAL MANAGEMENT OBJECTIVES 1. Maintain the group as a going concern timelines for assessing viability. The assessment for viability also considers After making appropriate enquiries, including consideration of the economic the same key financial metrics as for assessing going concern, being uncertainty in the wake of a high-inflation environment on the group’s solvency, cash, EcV and IFRS, both on base case and stressed scenarios. operations, financial position and prospects, the directors confirm that they 3. Viability statement are satisfied that the company and the group have adequate resources to Based on the results of the analysis above, the directors have a reasonable continue in business for the foreseeable future. Accordingly, they continue expectation that the company will be able to continue in operation and meet to adopt the going concern basis in the preparation of the financial its liabilities as they fall due over the three-year period of their assessment. statements. Although we produce business plans and other financial projections over In performing this work, the board has considered the current solvency and longer time horizons, the selection of three-year viability assessment cash position of the group and company, coupled with the group’s and recognises that the level of operating, regulatory and market certainty company’s projected solvency and cash position as highlighted in the most reduces towards the later years of the projection time frames. The three-year recent business plan and Own Risk and Solvency Assessment (ORSA) period also aligns with executive director LTIP performance time frames. process. These processes consider the financial projections of the group 4. Assessment of prospects and its subsidiaries on both a base case and a range of stressed scenarios, Our longer-term prospects are primarily considered through the conclusions covering projected solvency, liquidity, EcV and IFRS positions. In particular drawn from our annual business planning process, updated for key events these projections assess the cash generation of the life insurance divisions that may occur in-between business plans. and how these flow up into the Chesnara parent company balance sheet, with these cash flows being used to fund debt repayments, shareholder dividends The business plans include underlying operational deliverables, an and the Head Office function of the parent company. Further insight into the assessment of the business model and the financial consequences of immediate and longer-term impact of certain scenarios, covering solvency, following those plans. As part of this process, we also consider the principal cash generation and Economic Value, can be found on page 47 under the risks and uncertainties that the group faces (see pages 63 to 70) and how section headed ‘Capital Management Sensitivities’. The directors believe these might affect our prospects. these scenarios will encompass any potential future impact of the prevailing An assessment of our prospects has been shown below, updated for our economic uncertainty on the group, as Chesnara’s most material ongoing consideration of the economic uncertainty in the wake of a high-inflation exposure to both potential threats are any associated future investment environment. This has been structured around our three strategic objectives: market impacts. Underpinning the projections process outlined above are a number of assumptions. The key ones include: Value from in-force book: The group has c970k policies in force at – We do not assume that a future acquisition needs to take place to make 31 December 2023. These are generally long-term policies, and the this assessment. associated cash flows can, at an overall portfolio level, be reasonably well predicted on base case and stressed scenarios. The group is well capitalised – We make long-term investment return assumptions on equities and fixed at both a group and divisional level and we have high quality assets backing income securities. our insurance liabilities. During the year we have seen a flattening of yields – The base case scenario assumes exchange rates remain stable, and the and rising equity indices, which has generally been positive for the group. impact of adverse rate changes are assessed through scenario analysis. However, we are mindful that in uncertain economic times, this situation can – Levels of new business volumes and margins are assumed. reverse, leading to sustained depressed equity market values which adversely – The projections apply the most recent actuarial assumptions, such as impact fee income streams and therefore if markets fall then profitability mortality and morbidity, lapses and expenses. prospects reduce. Similarly, adverse movements in yields would adversely impact our prospects. Temporary market volatility is however a natural feature The group’s strong capital position and business model provides a good of investment markets and our financial model is well positioned to withstand degree of comfort that although the economic uncertainty in the wake of a difficult conditions without creating any permanent harm to the longer-term high-inflation environment has the potential to cause further significant global profitability prospects. economic disruption, the group and the company remain well capitalised and have sufficient liquidity. As such we can continue to remain confident Acquisition strategy: The outlook and prospects of continuing to deliver that the group will continue to be in existence in the foreseeable future. against this strategic objective are covered on page 44. We see no reason The information set out on pages 45 to 47 indicates a strong Solvency II to expect that the economic uncertainty in the wake of a high inflation position as at 31 December 2023 as measured at both the individual regulated environment will have a long-term impact on the availability of acquisition life company levels and at the group level. As well as being well-capitalised opportunities. Indeed, during the year we completed two acquisitions, one the group also has a healthy level of cash reserves to be able to meet its debt in the UK and one in the Netherlands. Waard continues to build a useful obligations as they fall due and does not rely on the renewal or extension of market position, including as a company who are able and willing to acquire bank facilities to continue trading. This position was further enhanced in early books that are often sub-scale for the vendor’s business model. Whilst we 2022, when the company announced the successful pricing of its inaugural maintain our ambition to complete larger deals, the prospects of a steady debt capital markets issuance of £200m Tier 2 Subordinated Notes, the flow of well-priced smaller acquisitions should not be underestimated. net proceeds of which have been used for corporate purposes, including The financial position of the group continues to support financing deals investments and acquisitions. The group’s subsidiaries rely on cash flows through the use of our own resources, by raising debt or equity funding. from the maturity or sale of fixed interest securities which match certain Value from new business: Chesnara is in a fortunate position in that its obligations to policyholders, which brings with it the risk of bond default. prospects do not fundamentally rely on the ability to sustain new business In order to manage this risk, we ensure that our bond portfolio is actively volumes. New business levels have contributed an increased, albeit monitored and well diversified. Other significant counterparty default risk relatively small, amount of extra value during the year despite the relates to our principal reinsurers. We monitor their financial position and prevailing economic uncertainty. are satisfied that any associated credit default risk is low. Our business fundamentals such as assets under management, policy 2. Assessment of viability volumes, new business market shares and expenses have all proven resilient The board assesses that being financially viable includes continuing to pay an to the impact of economic uncertainty. This, together with the positive attractive and sustainable level of dividends to investors and meeting all other assessment of our core strategic objectives and a line of sight to positive financial obligations, including debt repayments over the three-year business management actions over the planning period, leaves us well positioned planning time horizon. The board’s assessment of the viability of the group to deliver ongoing positive outcomes for all stakeholders. is performed in conjunction with its going concern assessment and considers both the time horizons required for going concern, and the slightly longer-term 60 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT 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 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. RISK MANAGEMENT SYSTEM REVIEW AND DEVELOPMENT RISK MANAGEMENT SYSTEM CLEAR ACCOUNTABILITIES AND RESPONSIBILITIES 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 all material risks faced by the group, which are regularly reviewed by the divisional and group senior leadership teams and Audit & Risk Committees. Our risk assessment processes have regard to the significance of risks, the likelihood of their occurrence and take account of the controls in place to manage them. The processes are designed to manage the risk profile within the board’s approved risk appetite. Group and divisional risk management processes are enhanced by stress and scenario testing, which evaluates the impact of certain adverse events occurring separately or in combination. The results, conclusions and any recommended actions are included within divisional and group ORSA reports to the relevant boards. There is a strong correlation between these adverse events and the risks identified in ’Principal risks and uncertainties’ (pages 63 to 70). The outcome of this testing provides context against which the group and divisions can assess whether any changes to risk appetite or to management processes are required. CHESNARAANNUALREPORTANDACCOUNTS202361 STRATEGIC REPORT RISK MANAGEMENT ∙ ROLE OF THE BOARD The Chesnara board is responsible for the adequacy of the design and implementation of the group’s risk management and internal control system and its consistent application across divisions. All significant decisions for the development of the group’s Risk Management System are the group board’s responsibility. Risk strategy and risk appetite CLIMATE CHANGE RISK WITHIN Chesnara group and its divisions have a defined risk strategy and supporting risk appetite framework to embed an effective Risk Management Framework, CHESNARA’S RISK FRAMEWORK with culture and processes at its heart, and to create a holistic, transparent Climate change is not recorded as a standalone principal risk. Instead, and focused approach to risk identification, assessment, management, the risks arising from climate change are integrated through existing monitoring and reporting. considerations and events within the framework. The information in the On the recommendation of the Audit & Risk Committee the Chesnara board following pages has been updated to reflect Chesnara’s latest views on approves a set of risk preferences which articulate, in simple terms, the desire the potential implications of climate change risk and wider developments to increase, maintain, or reduce the level of risk taking for each main category and activity in relation to environmental, social and governance (ESG). of risk. The risk position of the business is monitored against these Chesnara has embedded climate change risk within the group’s Risk preferences using risk tolerance limits, where appropriate, and they are taken Framework and included a detailed assessment alongside the group’s into account by the management teams across the group when taking ORSA, concluding that the group’s solvency position is not currently strategic or operational decisions. materially exposed to climate change risk. However, Chesnara is not Risk and Control Policies complacent about the wider risks arising from climate change and the Chesnara has a set of Risk and Control Policies that set out the key policies, broader sustainability agenda, including strategic, reputational and processes and controls to be applied. Senior management are responsible operational risks, some of which are material risks for the group. for the day-to-day implementation of the Risk and Control Board Policies. Subject to the materiality of changes, the Chesnara board approves the GEOPOLITICAL RISK review, updates and attestation of these policies at least annually. Geopolitical risk remains high, largely driven by the continuing wars in Risk identification Ukraine and more recently in the Middle East, with consequent impacts The group maintains a register of risks which are specific to its activity and for economic and financial stability as well as the potential to increase scans the horizon to identify potential risk events (e.g. political; economic; cyber risk. The risk information on the following pages includes specific technological; environmental, legislative & social). commentary where appropriate. On an annual basis the board approves, on the recommendation of the Audit In 2024, more than 40 countries, accounting for over 40 percent & Risk Committee, the materiality criteria to be applied in the risk scoring of the world, will hold national elections, making it the largest and in the determination of what is considered to be a principal risk. At least year for global democracy. The UK and European Union are also quarterly the principal and emerging risks are reported to the relevant boards, scheduled to hold elections for their respective parliaments. assessing their proximity, probability and potential impact. Own Risk and Solvency Assessment (ORSA) MACROECONOMIC VOLATILITY On an annual basis, or more frequently if required, the group produces The global economy remains volatile albeit with inflationary pressures a Group ORSA Report which aggregates the divisional ORSA findings reduced with 2022 and 2023 interest rate rises by central banks and supplements these with an assessment specific to group activities. seemingly effective at moving inflation back towards their long-term The group and divisional ORSA policies outline the key processes and targets. Uncertainty remains regarding the future path of interest rates contents of these reports. with many economists forecasting central bank rate cuts to boost The Chesnara board is responsible for approving the ORSA, including steering economic growth in the short term. in advance how the assessment is performed and challenging the results. Economic uncertainty remains a prominent emerging risk for the group, The primary objective of the ORSA is to support the company's strategic with inflation driven expense risk and future investment returns being decision making, by providing insights into the company’s risks profile over the affected key areas with greatest potential impact. the business planning horizon. Effective ORSA reporting supports the board, in its role of protecting the viability and reputation of the company, reviewing and challenging management's strategic decisions and recommendations. Risk Management System effectiveness The group and its divisions undertake a formal annual review of and attestation to the effectiveness of the Risk Management System. The assessment considers the extent to which the Risk Management System is embedded. The Chesnara board is responsible for monitoring the Risk Management System and its effectiveness across the group. The outcome of the annual review is reported to the group board which make decisions regarding its further development. 62 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT RISK MANAGEMENT ∙ PRINCIPAL RISKS AND UNCERTAINTIES The following tables outline the principal risks and uncertainties INVESTMENT AND LIQUIDITY RISK PR1 of the group and the controls in place to mitigate or manage their impact. It has been drawn together following regular REGULATORY CHANGE RISK PR2 assessment, performed by the Audit & Risk Committee, of the ACQUISITION RISK PR3 principal risks facing the group, including those that would threaten its business model, future performance, solvency or DEMOGRAPHIC EXPERIENCE RISK PR4 liquidity. The impacts are not quantified in the tables. However, EXPENSE RISK PR5 by virtue of the risks being defined as principal, the impacts are potentially significant. Those risks with potential for a material OPERATIONAL RISK PR6 financial impact are covered within the sensitivities (page 47). IT/DATA SECURITY & CYBER RISK PR7 NEW BUSINESS RISK PR8 REPUTATIONAL RISK PR9 MODEL RISK PR10 INVESTMENT AND LIQUIDITY RISK PR1 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 Market risk results from fluctuations in asset values, foreign exchange rates and interest rates and has the potential to affect the IMPACT group’s ability to fund its commitments to customers and other creditors, as well as pay a return to shareholders. Chesnara and each of its subsidiaries have obligations to make future payments, which are not always known with certainty in terms of timing or amounts, prior to the payment date. This includes primarily the payment of policyholder claims, reinsurance premiums, debt repayments and dividends. The uncertainty of timing and amounts to be paid gives rise to potential liquidity risk, should the funds not be available to make payment. Other liquidity issues could arise from counterparty failures/credit defaults, a large spike in the level of claims or other significant unexpected expenses. Worldwide developments in environmental, social and governance (ESG) responsibilities and reporting have the potential to influence market risk in particular, for example the risks arising from transition to a carbon neutral industry, with corresponding changes in consumer preferences and behaviour. KEY CONTROLS RECENT CHANGE/OUTLOOK – Regular monitoring of exposures and performance; With greater global emphasis being placed on environmental and social factors when selecting investment strategies, the group has an emerging exposure to ‘transition risk’ – Asset liability matching; arising from changing preference and influence of, in particular, institutional investors. – Maintaining a well-diversified asset portfolio; This has the potential to result in adverse investment returns on any assets that perform – Holding a significant amount of surplus in highly liquid poorly as a result of ‘ESG transition’. Chesnara has established a sustainability programme ‘Tier 1’ assets such as cash and gilts; to embed Chesnara’s sustainability strategy. – Utilising a range of investment funds and managers Ongoing global conflict, including more recently in the Middle East brings additional to avoid significant concentrations of risk; economic uncertainty and volatility to financial markets. This creates additional risk – Having an established Investment Governance Framework of poor mid-term performance on shareholder and policyholder assets. to provide review and oversight of external fund managers; – Regular liquidity forecasts; – Considering the cost/benefit of hedging when appropriate; – Actively optimising the risk/return trade-off between yield on fixed interest assets compared with the associated balance sheet volatility and potential for defaults or downgrades; and – Giving due regular consideration (and discussing appropriate strategies with fund managers) to longer-term global changes that may affect investment markets, such as climate change. CHESNARAANNUALREPORTANDACCOUNTS202363 STRATEGIC REPORT RISK MANAGEMENT ∙ PRINCIPAL RISKS AND UNCERTAINTIES REGULATORY CHANGE RISK PR2 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 Chesnara currently operates in three main regulatory domains and is therefore exposed to potential for inconsistent application IMPACT 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 operational resilience, climate change, Consumer Duty and IFRS 17 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. KEY CONTROLS RECENT CHANGES/OUTLOOK Chesnara seeks to limit any potential impacts of regulatory change on the The UK Treasury and EIOPA have both been undertaking a review business by: of SII rules implementation. In the UK this has resulted in a reduction in the SII risk margin and similar is expected for the – Having processes in place for monitoring changes, to enable timely actions overseas entities from the EIOPA review. There is also potential for to be taken, as appropriate; divergence of regulatory approaches amongst European regulators – Maintaining strong open relationships with all regulators, and proactively with potential implications for Chesnara’s capital, regulatory discussing their initiatives to encourage a proportional approach; supervision and structure. – Being a member of the ABI and equivalent overseas organisations and utilising The group is subject to evolving regimes governing the recovery, other means of joint industry representation; resolution or restructuring of insurance companies. As part of the – Performing internal reviews of compliance with regulations; and global regulatory response to the risk that systemically important – Utilising external specialist advice and assurance, when appropriate. financial institutions could fail, banks, and more recently insurance companies, have been the focus of new recovery and resolution Regulatory risk is monitored and scenario tests are performed to understand planning requirements developed by regulators and policy makers the potential impacts of adverse political, regulatory or legal changes, along nationally and internationally. More recently, the PRA has been with consideration of actions that may be taken to minimise the impact, consulting on new proposed regulation requiring UK insurers to should they arise. perform Solvent Exit Analysis and maintain this analysis annually. Such analysis aims to provide confidence that firms would identify solvency issues in a timely manner and have credible plans in place to resolve the business, should it get into financial difficulties. The new accounting standard, IFRS 17, became effective from 1 January 2023. Chesnara has progressed the development of processes and reporting which became operational during 2023 and successfully delivered the half-year and full-year reporting in line with IFRS 17 standards. In July 2022, the FCA published final rules for a new Consumer Duty and response to feedback to CP21/36 – A New Consumer Duty. The first key regulatory deadline of 31 July 2023 required implementation for new business, whilst all products including closed books must be compliant by 31 July 2024. Our UK business established a Consumer Duty project to deliver all requirements across its businesses. Regulatory requirements for products open to new business were successfully implemented in line with the regulatory deadline of 31 July 2023. The project continues to work on requirements for closed-book products in the lead up to the regulatory implementation deadline of 31 July 2024. 64 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT ACQUISITION RISK PR3 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 The acquisition element of Chesnara’s growth strategy is dependent on the availability of attractive future acquisition opportunities. IMPACT 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. KEY CONTROLS RECENT CHANGES/OUTLOOK Chesnara’s financial strength, strong relationships and reputation as a ‘safe hands There remains a positive pipeline of activity in relation to acquisitions acquirer’ via regular contact with regulators, banks and target companies enables with the group also looking at whether further M&A is possible in the company to adopt a patient and risk-based approach to assessing acquisition Sweden. Chesnara completed acquisitions in the Netherlands and opportunities. Operating in multi-territories provides some diversification against in the UK during 2023, whilst maintaining the established disciplines the risk of changing market circumstances in one of the territories. Consideration within the Acquisition Policy. of additional territories within Western Europe remains on the agenda, if the The successful Tier 2 debt raise in 2022, in addition to diversifying circumstances of entry meet Chesnara’s stated criteria. the group’s capital structure, has provided additional flexibility in terms Chesnara seeks to limit any potential unexpected adverse impacts of funding Chesnara’s future growth strategy. of acquisitions by: – Applying a structured board approved risk-based Acquisition Policy including CRO involvement in the due diligence process and deal refinement processes; – Having a management team with significant and proven experience in mergers and acquisitions; and – Adopting an appropriate risk appetite and pricing approach. DEMOGRAPHIC EXPERIENCE RISK PR4 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 In the event that demographic experience (rates of mortality, morbidity, persistency etc.) varies from the assumptions underlying IMPACT 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). CHESNARAANNUALREPORTANDACCOUNTS202365 STRATEGIC REPORT RISK MANAGEMENT ∙ PRINCIPAL RISKS AND UNCERTAINTIES DEMOGRAPHIC EXPERIENCE RISK (CONTINUED) PR4 KEY CONTROLS RECENT CHANGE/OUTLOOK Chesnara performs close monitoring of persistency levels across all groups of Cost of living pressures could give rise to higher surrenders and lapses business to support best estimate assumptions and identify trends. There is also should customers face personal finance pressures and not be able to partial risk diversification in that the group has a portfolio of annuity contracts afford premiums or need to access savings. Currently there has been where the benefits cease on death. no evidence of material changes in behaviours. Chesnara continues to monitor closely and respond appropriately. Chesnara seeks to limit the impacts of adverse demographic experience by: Any prolonged stagnation of the property market could reduce – Aiming to deliver good customer service and fair customer outcomes; protection business sales compared to plan, particularly in – Having effective underwriting techniques and reinsurance programmes, the Netherlands. including the application of ‘mass lapse reinsurance’, where appropriate; The introduction of new legislation in 2022 made it easier for – Carrying out regular investigations, and industry analysis, to support best customers to transfer insurance policies in Sweden, and this resulted estimate assumptions and identify trends; in an increase in transfers out. However, during 2023 transfer levels – Active investment management to ensure competitive policyholder investment stabilised, albeit at a higher rate than pre COVID-19 levels, this risk funds; and continues to be actively monitored. – Maintaining good relationships with brokers, which is independently measured via yearly external surveys that considers brokers’ attitudes towards different insurers. EXPENSE RISK PR5 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 The group is exposed to expenses being higher than expected as a result of one-off increases in the underlying cost of performing IMPACT 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. Similarly, 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. KEY CONTROLS RECENT CHANGE/OUTLOOK For all subsidiaries, the group maintains a regime of budgetary control. Chesnara has an ongoing expense management programme and various strategic projects aimed at controlling expenses. Acquisitions – Movestic and Scildon assume growth through new business such that also present opportunities for unit cost reduction and the UK business the general unit cost trend is positive; announced a long-term strategic partnership with Fin Tech market – The Waard Group pursues a low cost-base strategy using a designated leader SS&C Technologies (SS&C) in May 2023, to provide policy service company. The cost base is supported by service income from administration services to Chesnara’s UK division. third party customers; Through its exposures to investments in real asset classes, both – Countrywide Assured pursues a strategy of outsourcing functions with direct and indirect, Chesnara has an indirect hedge against the charging structures such that the policy administration cost is more aligned effects of inflation and will consider more direct inflation hedging to the book’s run-off profile; and options should circumstances determine that to be appropriate. – With an increased current level of operational and strategic change within the business, a policy of strict Project Budget Accounting discipline is being The cost of living and energy crisis has driven increases in material upheld by the group for all material projects. supplier costs. Whilst inflation started to fall towards the end of 2023, wage inflation remains high, directly impacting the group’s internal costs. Consideration is being continually given to balance the desire to grow the business and ensuring we have the capabilities and capacity to support that growth whilst continuing to keep tight cost control and also seeking opportunities to exploit efficiencies/synergies. 66 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT OPERATIONAL RISK PR6 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 The group and its subsidiaries are exposed to operational risks which arise through daily activities and running of the business. IMPACT 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. KEY CONTROLS RECENT CHANGE/OUTLOOK The group perceives operational risk as an inherent part of the day-to-day running of the Operational resilience remains a key focus for the business business and understands that it can’t be completely eliminated. However, the company’s and high on the regulatory agenda following the regulatory objective is to always control or mitigate operational risks, and to minimise the exposure changes published by the BoE, PRA and FCA. Chesnara when it’s possible to do so in a convenient and cost-effective way. continues to progress activity under the UK operational resilience project. The next key regulatory deadline is Chesnara seeks to reduce the impact and likelihood of operational risk by: 31 March 2025; the deadline by which all firms should have – Monitoring of key performance indicators and comprehensive management sound, effective, and comprehensive strategies, processes, information flows; and systems that enable them to address risks to their ability – Effective governance of outsourced service providers, in line with SS2/21 Outsourcing to remain within their impact tolerance for each important and Third Party Risk Management, including a regular financial assessment. Appropriate business service (IBS) in the event of a severe but plausible contractual terms contain various remedies dependent on the adverse circumstances disruption. To support this the project is currently in the which may arise. process of running a schedule of real life severe but plausible scenario testing. Each division continues to carry out – Regular testing of business continuity plans; assurance activities through local business continuity – Regular staff training and development; programmes to ensure robust plans are in place to limit – Employee performance management frameworks; business disruption in a range of severe but plausible events. – Promoting the sharing of knowledge and expertise; and The Digital Operational Resilience Act (DORA) entered – Complementing internal expertise with established relationships with external into force January 2023 and will apply from January 2025. specialist partners. It aims at strengthening the IT security of financial entities such as banks, insurance companies and investment firms and making sure that the financial sector in Europe is able to stay resilient in the event of a severe operational disruption. Additionally, in the UK the PRA published a consultation paper on Operational Resilience of Critical Third Parties to the UK financial sector looking to deliver similar outcomes. IT/DATA SECURITY & CYBER RISK PR7 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 Cyber risk is a growing risk affecting all companies, particularly those who are custodians of customer data. The most pertinent IMPACT 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 and ransomware 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. CHESNARAANNUALREPORTANDACCOUNTS202367 STRATEGIC REPORT RISK MANAGEMENT ∙ PRINCIPAL RISKS AND UNCERTAINTIES IT/DATA SECURITY & CYBER RISK (CONTINUED) PR7 KEY CONTROLS RECENT CHANGE/OUTLOOK Chesnara seeks to limit the exposure and potential impacts from IT/data Chesnara continues to invest in the incremental strengthening security failures or cyber-crime by: of its cyber risk resilience and response options. – Embedding the Information Security Policy in all key operations and No reports of material data breaches. development processes; Geopolitical unrest heightens the risk of cyber-crime campaigns – Seeking ongoing specialist external advice, modifications to IT infrastructure particularly originating from state sponsored attacks. and updates as appropriate; – Delivering regular staff training and attestation to the Information During 2023 the group has continued to test and seek assurance Security Policy; of the resilience to cyber risks, this has included: – Regular employee phishing tests and awareness sessions; – Completion of a ‘desktop’ ransomware scenario test; – Ensuring that the board maintains appropriate information technology – Regular phishing testing and training campaigns; and security knowledge; – Board training and awareness; – Conducting penetration and vulnerability testing, including third party – Group-wide cyber risk reviews; and service providers; – Ongoing penetration testing and vulnerability management. – Executive committee and board level responsibility for the risk, including Chesnara has implemented a new group-wide Cyber Response dedicated IT security committees with executive membership; Framework to guide Chesnara and its business units in preparing – Having established Chesnara and supplier disaster recovery and business and responding effectively to a cyber-attack on any of the IT systems, continuity plans which are regularly monitored and tested; infrastructure or data within the group. The framework provides – Ensuring Chesnara’s outsourced IT service provider maintains relevant high-level guidance and decision making considerations at all stages information security standard accreditation (ISO27001); and of the cyber response process. It also sets out the minimum expected – Monitoring network and system security including firewall protection, cyber response standards for every step of the incident response antivirus and software updates. process and provides clear communication, escalation and delegations for all incident materiality levels. – Chesnara has cyber insurance in place which covers all of the UK operations including head office. Elsewhere in the group, where cyber insurance is not in place, we are able to access support and resources (e.g. forensic analysis) through existing contracts with third parties. WE HAVE MOBILISED A GROUP-WIDE In addition, a designated steering group provides oversight of the IT estate SUSTAINABILITY PROJECT PROGRAMME and Information Security environment including: IN RELATION TO THE BROADER – Changes and developments to the IT estate; SUSTAINABILITY AGENDA MAKING – Performance and security monitoring; COMMITMENTS TO: – Oversight of Information Security incident management; – BECOME A NET ZERO EMITTER – Information Security awareness and training; – INVEST IN POSITIVE SOLUTIONS – Development of business continuity plans and testing; and – PROVIDE INCLUSIVITY FOR ALL – Overseeing compliance with the Information Security Policy. STAKEHOLDERS NEW BUSINESS RISK PR8 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 If new business performance is significantly lower than the projected value, this will typically lead to reduced value growth in the IMPACT medium to long term. A sustained low level performance may lead to insufficient new business profits to justify remaining open to new business. 68 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT NEW BUSINESS RISK PR8 KEY CONTROLS RECENT CHANGE/OUTLOOK Chesnara seeks to limit any potential unexpected adverse impacts Increased expenses and price pressure remains a risk for the ongoing to new business by: viability of writing profitable new business across the group and the Swedish transfer market remains active following regulatory changes – Monitoring quarterly new business profit performance; which give greater transfer freedom. – Investing in brand and marketing; Market share is currently being maintained in the Netherlands – Maintaining good relationships with brokers; with activity to look at some broader wealth products. – Offering attractive products that suit customer needs; In Sweden action is being taken to diversify distribution partners – Monitoring market position and competitor pricing, adjusting as appropriate; whilst expanding product offering across unit-linked, custodian – Maintaining appropriate customer service levels and experience; and and life & health markets. – Monitoring market and pricing movements. And for the first time there is a contribution from the UK, primarily through the onshore bond wrapper acquired as part of the Sanlam Life & Pensions UK deal which remains open to new business. REPUTATIONAL RISK PR9 DESCRIPTION Poor or inconsistent reputation with customers, advisors, 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 The group is exposed to the risk that litigation, employee misconduct, operational failures, the outcome of regulatory IMPACT 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. KEY CONTROLS RECENT CHANGE/OUTLOOK Chesnara seeks to limit any potential reputational damage by: Given the global focus on climate change as well as the significant momentum in the finance industry, the group is exposed to strategic – Regulatory publication reviews and analysis; and reputational risks arising from its action or inaction in response – Timely response to regulatory requests; to climate change as well the regulatory and reputational risks arising – Open and honest communications; from its public disclosures on the matter. Chesnara supports the UN – HR policies and procedures; Sustainable Development Goals (SDGs), including Climate Action. We have set our long-term net zero targets, initial interim targets for – Fit & Proper procedures; 2030 and short-term actions including baselining our financial emissions – Operational and IT data security frameworks; and beginning work to create our transition plan to be a net zero group. – Product governance and remediation frameworks; Chesnara has mobilised a group-wide sustainability project programme – Appropriate due diligence and oversight of outsourcers and third parties; and in relation to the broader sustainability agenda making commitments to: – Proactive stakeholder engagement with inclusivity for all stakeholders. – Become a net zero emitter – Invest in positive solutions – Provide inclusivity for all stakeholders. The FCA published final rules for a new Consumer Duty and response to feedback to CP21/36 – A New Consumer Duty in July 2022. The Consumer Duty regulations set higher and clearer standards of consumer protection across financial services and require firms to act to deliver good outcomes for customers. The first key regulatory deadline of 31 July 2023 required implementation for new business, whilst all products including closed books must be compliant by 31 July 2024. The UK established a Consumer Duty project to deliver all requirements across its businesses. Regulatory requirements for products open to new business were successfully implemented in line with the regulatory deadline of 31 July 2023. The project will continue to work on requirements for closed-book products in the lead up to the regulatory deadline of 31 July 2024. CHESNARAANNUALREPORTANDACCOUNTS202369 STRATEGIC REPORT RISK MANAGEMENT ∙ PRINCIPAL RISKS AND UNCERTAINTIES MODEL RISK PR10 DESCRIPTION Adverse consequences from decisions based on incorrect or misused model outputs, or fines or reputational impacts from disclosure of materially incorrect or misleading information. RISK APPETITE The group aims to minimise its exposure to this risk, to the extent possible, but acknowledges that it may need to accept some risk as a result of carrying out business. POTENTIAL Chesnara and each of its subsidiaries apply statistical, economic and financial techniques and assumptions to process input data IMPACT into quantitative estimates. Inaccurate model results may lead to unexpected losses arising from inaccurate data, assumptions, judgements, programming errors, technical errors, and misinterpretation of outputs. Potential risk impacts of inaccurate model results include: – Poor decisions, for example regarding business strategy, operational decisions, investment choices, dividend payments or acquisitions; – Potentially overestimating the value of acquisitions resulting in over payment; – Mis-statement of financial performance or solvency, resulting in misleading key shareholders or fines; and – Provision of inaccurate information to the board on business performance resulting in poorly informed or delayed decisions. KEY CONTROLS RECENT CHANGE/OUTLOOK – Robust model Governance Framework and independent standards Model risk management is becoming an increased area of focus of of ‘do-check-review’; the regulators, particularly in the UK banking industry, with PS6/23 and SS1/23 becoming effective for banks and building societies on – Independent model validation and Internal audit review; 17 May 2024, and an expectation that further guidance will follow – Monitoring and reporting of Risk Appetite Limits; for insurers. – Documented processes and policies; IFRS 17 remains in the early stages of being in-force and, therefore, – Model version control and user access restrictions; further embedding and continued focus on validation of the more – External audit; recently developed models is needed. – Robust due diligence processes on acquisitions including external support The group is in the final stages of embedding a new aggregation model on model development/review; and (Tagetik) that provides greater access control for group consolidation – Intra-group financial reporting planning, monitoring and delivery management. on both IFRS and SII bases. Many insurers, including Chesnara, are exploring the use of artificial intelligence, including the risks and opportunities arising. While this increases the opportunity to benefit from expense synergies, it also has the potential to introduce additional model risk. Conversely though, there are also opportunities to reduce model risk by applying machine learning techniques to validation and sense checking of results. As part of the group’s operational resilience programme, Chesnara is undertaking a review of the operational resilience of its financial reporting and modelling processes. This includes developing process maps and resilience scenario testing of the processes, and is expected to improve efficiency and model risk mitigation. 70 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT CORPORATE AND SOCIAL RESPONSIBILITY We are committed to transitioning to become a sustainable group and manage our business for the long-term benefit of all stakeholders, including our customers, shareholders, employees, regulators, suppliers and partners, local communities, and the planet. TRANSITIONING TO A SUSTAINABLE GROUP We have a clear corporate and social purpose. As a business, we help protect our customers and their families from the economic impact of an early death through life assurance protection, and help support them during retirement through pension and investment savings. We believe that stakeholder value creation is best delivered through the embedded consideration of environmental, social and governance issues. In this regard, among our key considerations are the following strategic aims: – Genuine care for our customers, helping them create financial security now and for the future; – Investments focusing on long-term sustainability and strong financial solvency for the company; – Assessing and managing our impact on the planet and natural environment, including managing climate-related and wider sustainability-related risks; and – Maintaining a long-term sustainable working environment for our staff, suppliers and partners and local communities. Our Annual Sustainability Report (www.chesnara.co.uk/sustainability) provides detail on the work we are doing to become a sustainable Chesnara, including setting out our sustainability vision and targets. We want sustainability at the heart of decision making at all levels across the business and are basing our work on the mantra of ‘Do no harm. Do good. Act now for later’. Our commitments are: 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 have been developed with consideration of the UN Sustainable Development Goals. These 17 goals are an urgent call to action to promote peace and prosperity for people and the planet, now and into the future. We’ll focus our activities on those goals where we feel we can have the greatest impact; however, we will support all of the goals wherever possible. Find out more at globalgoals.org CHESNARAANNUALREPORTANDACCOUNTS202371 CORPORATE AND SOCIAL RESPONSIBILITY EMBEDDING SUSTAINABILITY Embedding sustainability into decision making at all levels across the group is a fundamental part of what we are working to achieve. This is vitally important as sustainability needs to be part of every strategic conversation. Our Annual Sustainability Report (ASR) gives more detail on what we are going to do to achieve this. As described on pages 62 and 96 to 102, a key part of this work includes the annual review of the effectiveness of our Risk Management System and the system of governance so as to ensure that we can achieve our business objectives and safeguard the interests of our stakeholders. The overall conclusion from the review conducted in 2022 was that Chesnara has a stable and well understood risk profile, controlled by an effective and embedded system of governance. We believe that sustainability is not solely for our board and leadership teams, and we have taken and will continue to take steps to educate, involve and support our workforce and other stakeholders, including our suppliers, in the delivery of our sustainability strategy. Each of our businesses have also incorporated sustainability into their Investment Policy, Investment Committee Terms of Reference and investment decision making. We are expanding this to capture all policies across the business to ensure that sustainability is a key consideration. The sustainable management of our Funds Under Management is a critical component of our sustainability journey. In all three of our territories, we work with fund managers that are committed to the UN SDGs and the UN’s Principles of Responsible Investment (UNPRI). Both Chesnara and Movestic Livförsäkring are signatories to the UNPRI. As well as this, we are signatories to the UN Global Compact and submit an annual Communication on Progress report setting out specific actions taken with regard to the four designated categories covering human rights, labour, environment and anti-corruption. Our TCFD report on pages 76 to 91 describes our assessment of climate change risks and opportunities under four pillars – Governance; Strategy; Risk Management; and Metric and Targets. Further regulatory and disclosure requirements around sustainability are forthcoming and we will take measures to ensure that we give full and appropriate disclosure of our progress as these standards are issued. 72 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT OUR CUSTOMERS Customer care Relevant policies and procedures are reviewed on a regular basis so as to Customer care is core to our business. All of our divisions are committed to ensure that they meet appropriate standards. Any hazards or material risks good customer treatment and outcomes and to helping provide our customers are removed or reduced to minimise or, where possible, exclude the with financial security on their individual journeys. We are taking action across possibility of accident or injury to employees or visitors. the group to continue to identify any enhancements which will improve our Equal opportunities and diversity customers’ experience. A key part of this is ensuring that we offer products Chesnara always aims to attract, promote and retain the best candidates that are suitable for our customers’ needs. suitable for the roles within all its operations. Our approach is to be Our products and services open, entrepreneurial, transparent and inclusive in how we select and We offer and manage life and health insurance and pension products for our manage our employees. customers to help them meet their financial goals. We achieve this by paying We are committed to providing equal opportunities in employment and attention to and understanding the customer’s point of view, by regularly will continue to treat all applicants and employees fairly regardless of race, asking for feedback and by investigating any complaints thoroughly and age, gender, marital status, ethnic origin, religious beliefs, sexual orientation promptly. Lessons learned from our interactions with customers are used or disability. Chesnara has policies in place to ensure that no employee to train and develop our staff, make our processes more efficient and to suffers discrimination, harassment or intimidation and to effectively address take further steps to ensure our policyholders are treated fairly. Our aim any issues that do come to light. is to consistently exceed industry service standards. Reuniting customers with their policies 1 2023 2022 We appreciate that customers can lose touch with their policies due to business acquisitions, house moves, name changes and the passage of time, Year end headcount Male Female Male Female so we actively try to trace and recontact customers wherever possible. Directors of the group 5 3 5 3 Digitalisation Group senior leaders 4 4 8 2 Advancements in technology and data usage are having a significant impact on how business is conducted, and the way regular communication is taking Executive management total 9 7 13 5 place. We have continued to invest in digital technology and applications so that we can meet the expectations of our business partners and customers, Executive management whilst maintaining the traditional contact methods for customers that are 56.3 43.8 72.2 27.8 gender split % more comfortable using that option. Employees of the group 175 175 196 205 Regulatory compliance We maintain an open and constructive relationship with the regulators in 2 the jurisdictions we operate in. Understanding and implementing regulatory Total 184 182 209 210 requirements is a key part of management responsibility, including the timely and accurate submission of information requested by the regulator. None of Total gender split % 50.3 49.7 49.9 50.1 the business entities were subject to any regulatory intervention during 2023 and no penalties were imposed. Notes: 1. We have reviewed the classification of gender hierarchy levels in 2023 to define executive management and add further structure. The 2022 data has therefore been restated to be consistent with 2023. OUR COLLEAGUES 2. The number of staff reported in the table above is based on the number of employees employed at the year end. This differs to the employee note, which is calculated based Health, safety and welfare at work on average FTEs during the course of the year. As a responsible business, at Chesnara, we place primary importance on the health, safety and welfare of our employees. We operate a hybrid working model across all of our geographies, taking into account individual Gender diversity forms an important part of Chesnara’s selection and circumstances where necessary so that appropriate support can be provided. appointment process at group level. In the UK, we continue to partner with the Business Health Group to In 2023, we have enhanced our gender disclosure workings to include both provide lifestyle coaching for employees to discuss challenges that they additional job hierarchy levels and to ensure our categories of gender were face. Proactively discussing these challenges and providing potential tools fully inclusive for all staff. This included ‘non-binary’, ‘other’ and ‘prefer not to address them helps to support our people. The management teams and to say’ as further categories of gender. employees in our overseas divisions also continue to take steps to guide We define executive management as: non-executive and executive directors, and support colleagues. group senior leaders and business unit CEOs. Each of our business units ensures that the health and welfare of our staff The executive management data presented in the table is based on collected is supported by employment contract provisions, including access to health data. Other employees of the group are based on observational data, which insurance for all employees and encouragement and support for flexible we are aware is not the optimal scenario. We are working on collecting working, amongst other benefits such as life cover, occupational pension and this data more formally from our group where possible and enhancing the parental leave. All staff are made aware of these benefits through contracts of granularity of our data, noting there are limitations on what we can reasonably employment, policies and staff briefings. They are also reminded of their duty collect from our staff, and in particular in differing jurisdictions. The Corporate to act responsibly and do everything possible to prevent injury to themselves Governance Report contains further analysis of diversity on our board and and others. Management teams across the group monitor the level of sick wider executive management. leave and absence and, where necessary, they take appropriate action to address any issues identified. CHESNARAANNUALREPORTANDACCOUNTS202373 STRATEGIC REPORT CORPORATE AND SOCIAL RESPONSIBILITY Employees with a disability Our operations in Sweden and the Netherlands make similar use of Employee Chesnara endeavours to provide employment for people with a disability Forums, staff surveys, formal and informal employee engagement both at wherever the requirements of the business allow and if applications for the individual, team and whole company level. In the Scildon business, this employment are received from suitable applicants. Where an existing is formalised through the operation of a Works Council and, in Sweden, staff member of staff becomes disabled, every reasonable effort is made representation is via a Working Environment Committee and a trade union. to achieve continuity of employment by making reasonable adjustments Chesnara’s aim is to continue to grow via acquisition of life assurance to give the staff member as much access to any training, promotion businesses and our due diligence plan incorporates an assessment opportunities and employee benefits that would otherwise be available of all relevant workforce matters which are reported to the board to to any non-disabled employee. assist its deliberations on any potential acquisition opportunities. Staff training and development Whistleblowing Our employees are a key asset of the Chesnara business and we invest in our We are committed to having a culture where all individuals are encouraged to staff through individual and group training and development plans. All staff are speak up about any concerns they may have within our business. Each of the encouraged and supported to acquire relevant knowledge and build their skills Chesnara business units has a Whistleblowing Policy which complies with and competence. Financial support is provided to staff who wish to achieve local regulatory requirements and is reviewed on an annual basis. We have recognised qualifications that are appropriate for specific roles and the needs stringent internal procedures for reporting misconduct and have explicit of the business. requirements against retaliation and safeguarding of reporter identities. Fair pay In the UK, the Audit & Risk Committee Chair is appointed as a Whistleblowing We believe that all our employees deserve fair and just remuneration Champion, whose responsibilities are aligned to the prescribed requirements appropriate for the roles they hold and the work they perform. In our UK set out in the PRA’s Senior Managers Certification Regime. The policy is division, our employees and service contractors meet the Real Living Wage shared with all new joiners and whenever it is updated it is provided to all pay level set by the Living Wage Foundation and based on a calculation existing employees. Similar arrangements are in place within our overseas of the cost of living and what employees and their families need to live. divisions with the policies being available in employees’ local languages. All UK employees, subject to a minimum service requirement, also have Confirmation was also received that each outsource service provider (OSP) access to our SAYE scheme, improving employee engagement with has a Whistleblowing Policy in place which is provided to all employees. company performance and directly linking a proportion of employee benefits to our performance. At the end of 2022, the Remuneration Committee consulted with employees OUR SUPPLIERS AND BUSINESS PARTNERS on the alignment of directors’ pay with UK employees ahead of the 2023 At Chesnara, we believe in developing mutually respectful and sustainable year. The same engagement has since taken place in late 2023 for the relationships with our suppliers and business partners. Our preference is to 2024 calendar year. Details of our staff pay and benefits, and in relation establish long-term relationships where they remain commercially competitive to executive pay, are set out in the Corporate Governance section as part and operationally viable. This is achieved through a structured due diligence of our Remuneration Report. process before selection, followed by clear agreement of the business Employee engagement objectives, consistent implementation of regulatory requirements and relevant Across our businesses, we provide high quality jobs with competitive policies, and effective attention to resolving issues fully. We require our remuneration along with requisite training and good working conditions. suppliers and business partners to apply high standards of ethical conduct Regular contact with employees and keeping them updated on business in all their dealings with us and their other stakeholders. strategy, priorities and achievements is a key part of management We are conscious that through our outsourcing arrangements we indirectly responsibility at Chesnara. Frequent employee engagement has become utilise the services of a much larger workforce and we seek to ensure even more important over the last few years given the shift to more remote that our suppliers are similarly adopting appropriate arrangements for working. Each of our businesses have a multi-channel approach for effective proper engagement with their own workforces. employee communication such as regular updates from the CEO, monthly team and departmental meetings, company briefings, discussions via Over 2024, we plan to further engage with our suppliers and business Employee Forums, and the use of employee surveys to highlight issues partners to understand their carbon footprint and sustainability commitments. and drive any necessary change. This will enable us to evaluate our supply chain emissions and work with them to help decarbonise their operations. As the Workforce Engagement NED appointed by the Chesnara board, Carol Hagh’s liaison with the CEOs, HR teams and Employee Forum representatives has been invaluable in terms of independent engagement with staff and also for the ongoing assessment of our culture and embedding ACROSS OUR BUSINESSES, WE PROVIDE of our values across our UK, Swedish and Dutch divisions. Within the UK HIGH QUALITY JOBS WITH COMPETITIVE division, the Employee Forum has continued to meet on a monthly basis. REMUNERATION ALONG WITH REQUISITE This forum comprises staff members who represent each functional area, TRAINING AND GOOD WORKING CONDITIONS. rotated from time to time, for the purposes of discussing any matters of concern or areas of interest for the staff and management. 74 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT We have zero tolerance to financial crime, including money laundering HUMAN RIGHTS and bribery and corruption. Our Internal Control Framework includes the Human Rights and the Modern Slavery Act 2015 maintenance and review of a Gifts & Hospitality Register, the disallowance Human rights belong to all human beings regardless of nationality, gender, of any political contributions or inducements and careful consideration of race, age, religion, language, physical or mental ability or any other political, any charitable donations. These controls act as a monitoring and prevention economic or social status. Such rights are protected by the rule of law through system. Policies are made available to all staff and they are required to attest legal mechanisms designed to prevent abuse by those in positions of power. that they have read and understood their importance and application. There Modern slavery is just one such form of human rights abuse. In addition were no instances of money laundering or bribery or corruption in the period. to the freedom of expression, human rights includes: – the right to life; TAXATION – prohibition on torture; – the right to a fair trial; and We strive to ensure that we pay our fair share of tax across the group and that we do so in a transparent manner. We adopt a responsible and open – the right to fair and just working conditions. approach to taxation and, consequently, pay the appropriate taxes due Chesnara has zero-tolerance to the abuse of human rights and modern throughout the group, details of which are set out in the respective slavery and is committed to acting ethically and with integrity in all of Annual Report and Accounts for each of our operating entities. its business dealings and relationships. We seek to avoid causing or contributing to adverse human rights impacts by operating and enforcing effective systems and controls to ensure human rights abuse and modern OUR COMMUNITIES slavery are not taking place anywhere in the group or its supply chains. Chesnara’s management and staff support local community initiatives The Modern Slavery Act (2015) requires a commercial organisation over to the extent deemed appropriate given our financial responsibilities as a certain size to publish a slavery and human trafficking statement for a public limited company. During 2023, across the group, we donated each financial year. £36k to various charitable causes (2022: £65k). The Modern Slavery Act does not apply to our European divisions, We have continued to support our long-term local charitable partnerships but instead they adhere to the European Convention on Human Rights including: the Living Wage Foundation who are supporting initiatives to (ECHR) treaty which is similarly designed to protect people’s human increase the number of employers that are paying the Real Living Wage rights and basic freedoms. in the UK; Safenet in the UK, which provides domestic abuse services and refuge to those that need it and Sherpa in the Netherlands, which helps In the UK, our Human Rights & Modern Anti-Slavery Policy is made available people with physical and learning disabilities to function as independently as to our entire workforce and is also available at www.chesnara.co.uk/ possible. We operate policies across the group to enable employees to take sustainability/modern-anti-slavery-statement two days’ paid leave each year to volunteer for charitable organisations. There have not been any breaches of human rights or the Modern Slavery Act during the reporting period. THE PLANET We know that we have a commitment to do all we can to protect the ANTI-BRIBERY AND CORRUPTION planet and all of its inhabitants. Our work to tackle the climate and nature In addition to other financial control policies, Chesnara has group-wide emergencies, including our net zero targets, is detailed in our Annual Anti-Money Laundering and Anti-Bribery & Corruption policies in place which Sustainability Report. are reviewed at least annually. Their scope includes all directors, employees and third-parties operating on behalf of the group. WE ARE WORKING TO EMBED SUSTAINABILITY INTO OUR BUSINESS, GUIDED BY OUR PRINCIPLES OF: DO NO HARM. DO GOOD. ACT NOW FOR LATER. CHESNARAANNUALREPORTANDACCOUNTS202375 STRATEGIC REPORT CORPORATE AND SOCIAL RESPONSIBILITY ∙ CLIMATE-RELATED FINANCIAL DISCLOSURES CONTEXT Disclosure requirements on the impact of climate change were introduced by the Financial Conduct Authority (FCA) for premium listed companies with effect from 1 January 2021. This is our third report in support of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD). With effect from 1 January 2023, the group is also required to comply with the new mandatory Climate-Related Financial Disclosure (CFD) requirements set out by the Department for Business, Energy & Industrial Strategy, with this being the first year we are reporting on the additional requirements. COMPLIANCE STATEMENT All disclosures in respect of the ‘TCFD Recommendations and Recommended disclosures’ and CFD requirements are on pages 76 to 91 with additional information such as illustrations and case studies included in the Annual Sustainability Report which is cross referenced where applicable throughout this section. Chesnara plc has complied with the CFD by including climate-related financial disclosures consistent with the requirements under sections 414CA and 414CB of the Companies Act 2006. Chesnara has also complied with the requirements of LR 9.8.6R by including climate-related financial disclosures consistent with 10/11 of the TCFD recommended disclosures except for the following matter: AREA REQUIREMENT EXPLANATION Strategy (b) Organisations that have made GHG Having set our long-term net zero targets at the start of 2023, we have now Describe the impact of climate- emissions reduction commitments, baselined our position to enable us to commence work on our transition related risks and opportunities operate in jurisdictions that have plans. During 2023, guidance on the format and content of transition plans on the organisation’s businesses, made such commitments, or was issued by the Transition Plan Taskforce and we will work to incorporate strategy, and financial planning. have agreed to meet investor that guidance into our own plans as they are developed during 2024 expectations regarding GHG and 2025. emissions reductions should A key part of our plan will be engaging with our asset managers to work describe their plans for transitioning towards our decarbonisation target for financed emissions as well as to a low-carbon economy. our wider supply chain to understand their own decarbonisation plans in respect of operational emissions. GROUP SUSTAINABILITY REPORT Alongside the financial statements, the group has published its 2023 Annual Sustainability Report (www.chesnara.co.uk/sustainability) and provides further detail on a number of items noted in this report which are referenced as appropriate. WHAT HAS HAPPENED DURING 2023? Held our Group Sustainability Baselined our Held group-wide director Increasing engagement Summit to bring leaders across operational and training to continue with asset managers the business together to financed emissions. the process to embed and our value chain to understand the importance sustainability into understand their own of sustainability for the future decision making. decarbonisation plans. of the group. Appointed Greenly Appointed MSCI to assist Commenced the process Ongoing engagement to assist us with us with the baseline and of integrating sustainability with landlord to the enhancement future calculations of considerations into our implement carbon of our operational our financed emissions. suite of policies. reduction opportunities emissions available including calculations and waste management and net zero plans. LED lighting upgrades to the UK office. 76 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT GOVERNANCE The Chesnara board sets the values and culture of how the business divisions operate and the group invests time and resources to ensure that the governance structures in place remain appropriate for the evolving business and regulatory landscape. Further information on the group’s governance is provided in the Corporate Governance section. a) Board oversight of climate-related risks and opportunities The chart below sets out the group reporting structure and sets out how the board has oversight of climate-related matters. CHESNARA GROUP BOARD Meets at least quarterly The board defines the group's strategic aims, ensures that the necessary resources are in place and sets the targets to review management performance. Chesnara has sustainability, covering environmental, social and governance, as a regular agenda item across the group. GROUP AUDIT & RISK NOMINATION & GOVERNANCE GROUP REMUNERATION COMMITTEE (GA&RC) COMMITTEE COMMITTEE Meets at least quarterly Meets quarterly Meets quarterly The GA&RC focuses on corporate The Nominations & Governance The role of the Remuneration governance requirements and Committee plays a key role in ensuring Committee is to ensure that the developments related to environmental that the board’s composition and Remuneration Policy promotes, and social obligations, including the balance are appropriate and that encourages and drives long-term monitoring of climate-related risk members have the necessary skills, growth of shareholder value of which exposures across the group and how knowledge and experience to discharge climate change plays a key role. In 2023, such risks are treated. The GA&RC advise their duties effectively with regards a 15/25% weighting of the group CEO the board as appropriate. to climate change. and CFO annual bonuses were linked to sustainability actions. 1 GROUP SUSTAINABILITY COMMITTEE (GSC) Meets at least quarterly The GSC interacts with the board and the committees below in the following ways: with the board on the sustainability strategy and embedding it into the overall group strategy; with the GA&RC on ESG risks and external disclosures, including TCFD; with the Nomination & Governance Committee on matters regarding composition and sustainability-related skills, knowledge and experience; with the Remuneration Committee on trends in which management are and should be incentivised on ESG factors; with the GIC on investment-related matters, including the transition plan to net zero; and with the SLT and divisional executive committees to facilitate all of the above. GROUP CEO SENIOR LEADERSHIP TEAM (SLT) GROUP INVESTMENT COMMITTEE (GIC) Meets monthly Meets twice a quarter The SLT is in place to challenge and support the Group CEO The GIC is in place to challenge and support the Group CEO and the leadership team. It is accountable for the review and and the leadership team. The GIC Terms of Reference sign-off of the quarterly risk report, including any material specifically include consideration of ESG factors, including variations in the impact of climate change upon the group, overseeing the asset managers’ approach to ESG and as well as monitoring risk appetite compliance. It is also climate change related matters. responsible for oversight of the sustainability programme. 1 The GSC is not a board committee but operates across the group, interfacing with the board and works with its board committees and group executive committees. The business units, with their own local governance structures and boards, feed into the group governance structure via quarterly divisional MI packs, quarterly business reviews and risk reporting, and annual local business plans (note this list is not exhaustive). Board Board committee Group Sustainability Committee Group executive committee CHESNARAANNUALREPORTANDACCOUNTS202377 STRATEGIC REPORT CORPORATE AND SOCIAL RESPONSIBILITY ∙ CLIMATE-RELATED FINANCIAL DISCLOSURES b) Management’s role in assessing and managing climate-related Group Sustainability Summit risks and opportunities In June 2023, we gathered leaders and key personnel How climate-related risks and opportunities are identified from across the group at London Zoo for a two-day and considered summit focused on sustainability. We had sessions from The divisions are responsible for identifying climate-related risks and teams across the group focusing on our sustainability opportunities which are then consolidated at a group level by the Group Head progress to date and vision and commitments for the of Sustainability and the Group Chief Risk Officer & Chief Actuary. The risks future. We also had external talks and training sessions and opportunities are reassessed regularly so that if a material risk was to arise, we would add it in to ensure that it is evaluated according to the from Accenture, A Future Worth Living In, Schroders framework and evolving climate-related matters. and KPMG, as well as London Zoo themselves. These sessions were on a range of topics, including financed Who is assigned responsibility? Management responsibility for matters related to climate change are assigned emissions, the importance of data and the reporting to the Group Chief Executive Officer (Group CEO) at group level and the horizon, and were designed to educate and inform our respective CEOs at business unit level. All divisions and business units are leaders on the importance of sustainability for Chesnara responsible to the relevant divisional Chief Executive who has dual reporting as a business and society as a whole. Training is a key lines to the divisional board and the Group CEO. Sustainability forms part of responsibility of the GSC and needs across the business the executive management short-term incentive bonus scheme, and the ratio allocated to sustainability will continue to be assessed on an ongoing basis. will be assessed throughout the year, including the development of a training and engagement programme How management and board members are informed of and monitor to be delivered to all employees. climate-related issues – Group board: has sustainability, including climate change, as a regular agenda topic for discussion. During 2023, this specifically considered the group climate change risk assessment (through the GA&RC), and the overall vision and approach of the group in regards to sustainability and group-wide climate change-related scenario analysis in the ORSA. Sustainability training was delivered to executive and non-executive directors across the group during the year. – Group Sustainability Committee: chaired by Jane Dale, the group’s Senior Independent Non-Executive Director, its membership consists of the executive management across the group and its divisions. This committee is the key focal point for the review of climate-related risks and opportunities and links in with the other group governance committees. The GSC annual agenda planner determines which topics are covered at each meeting and those meetings, together with the GIC and SLT, will determine the items to be escalated to the board. The interactions of the GSC with the different committees and the board are detailed on the previous page. – Senior Leadership Team: regularly discuss climate-related issues and how they factor into business planning, strategy and risk management. – Group Investment Committee: working with the GSC, the GIC will focus on the just transition of the group’s asset portfolio in line with its net zero targets. The GIC and GSC will also work together to identify potential areas of impact investing. – Sustainability workstream working groups: established alongside WE ARE READY TO PLAY OUR PART the GSC, these groups consist of the key sustainability leaders across all divisions in the business, for investments, operations and reporting and TO ENSURE WHAT WE DO AND progress is reported directly into the GSC. HOW WE DO IT IS SUSTAINABLE. – Acquisitions: as part of the due diligence process for potential acquisitions, STEVE MURRAY, GROUP CEO, CHESNARA we assess the target company’s approach to climate-related risks and consider the emissions of their operations and underlying assets. 78 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT STRATEGY Sustainability, including the group’s approach to climate risk and decarbonisation, is a fundamental part of our strategy. Changes in the environment and the effects of global warming could potentially affect how we achieve our strategic objectives either through the way we operate our businesses or through the returns to our customers and shareholders. We are committed to applying sustainability-informed investment and operational decision making across the group. We continue to frame our strategy and objectives in line with the UN SDGs, including 13. Climate Action. Having set our long-term net zero targets at the start of 2023, we have now baselined our position to enable us to commence work on our transition plans. During 2023, guidance on the format and content of transition plans was issued by the Transition Plan Taskforce and we expect to finalise our initial transition plans as part of our interim reporting in 2025. As part of our work during 2023, we have determined our initial interim targets. – For our operational emissions, we are committed to decarbonising emissions – Our 50% reduction target is for the scope 1 and 2 emissions of our listed within our control by 2028. We have also identified the higher value categories equity and corporate fixed income assets which we are able to influence of emissions which are not directly within our control, such as those arising or control. We will also be working with partners and customers for those from our supply chain, and we will work with our partners to encourage them assets where we have less control or influence, for example those where to decarbonise their own operations. policyholders self-select their own investments. We remain strongly committed to net zero by 2050 for all our financed emissions and so our – For our financed emissions, we have followed the Institutional Investors targets will expand over time to include all asset classes. Group on Climate Change’s (IIGCC) Net Zero Investment Framework (NZIF) and considered the Intergovernmental Panel on Climate Change (IPCC) We know that there are a number of headwinds largely out of our control Special Report on Global Warming of 1.5°C (SR1.5), which states that in which will affect our ability to meet this interim target, such as policyholder mitigation pathways with no or limited overshoot of 1.5°C, global net carbon choices and asset manager progress and so as our transition plans are emissions need to decline by between 41% and 58% from 2010 levels by developed and refined and baseline data is further understood, we may 2030, reaching net zero around 2050. To set our targets, we’ve used the IPCC naturally look to refine our targets at a later date to better reflect the position scenario with no or limited overshoot for target setting. This is what the Paris of the group. Aligned Investment Initiative recommends and it’s the scenario that Paris Aligned Asset Owner initiative members and asset managers most commonly use. Based on this, we have set an interim emissions reduction target of 50% by 2030. a) Describe the climate-related risks and opportunities the organisation has identified over the short, medium and long term What are the building blocks that underpin our climate-related risks and opportunities, covering materiality, time horizon and type of risk: TIME HORIZON MATERIALITY TYPES OF RISK – Short term: up to 12 months – in line with Our definition of ‘high’ materiality is as follows: – Physical risks: Arise due to the direct impact budget setting process of events such as heatwaves, flood, wildfire, – EcV: >£20m storms, increased weather variability, and rising – Medium term: 2 to 5 years – in line with our – Cash generation: >£3.5m mean temperatures and sea levels. business planning and ORSA projection period – Reputational: national publicised reputational – Transition risks: Emerge from the process – Longer term: 6+ years – post business event and stakeholders withdrawing services of change towards a low carbon economy such plan horizon – Regulatory: action involving penalty imposition as: climate-related developments in policy and During the setting of the time horizon profile, and/or requirement for remediation leading to regulation; technological change (e.g. electric we considered the useful life of the group’s a restriction of activity vehicles); a shift in consumer sentiment and assets and believe our definition take this into – Other: high safety issue social attitudes; and climate-related litigation account. The average duration of the wider against firms that fail to mitigate, adapt or group’s assets is between 5-10 years, but the The materiality levels of the group are approved disclose climate-related financial risks. group is acquisitive and writing new business by board annually as part of the Principal Risk so the risk assessment needs to consider Definition report and consider a number of a longer time horizon also. The short-term factors that are broader than purely financial period of 12 months aligns with the risk basis indicators. Whilst this is largely risk focused, that underpins SII, and the medium term we have chosen to apply this materiality range is aligned to our business planning period. to opportunities as well. This is deemed to be an appropriate limit and is predicated on the group risk assessment thresholds that are discussed and approved by board annually. We believe this is a reasonable disclosure level and would enable a user to appropriately assess our exposure to climate-related issues. CHESNARAANNUALREPORTANDACCOUNTS202379 STRATEGIC REPORT CORPORATE AND SOCIAL RESPONSIBILITY ∙ CLIMATE-RELATED FINANCIAL DISCLOSURES b) Describe the impact of climate-related risks on the organisation’s businesses, strategy, and financial planning In total, we have identified a number of climate-related risks, and of those, six fall into the ‘high’ or ‘very high’ materiality category. For the material risks, more detail is provided below considering the likely time horizon in which we expect the risk to manifest and how the risk feeds into the financial planning process and strategy decisions of the group. Where possible we have also quantified the possible financial impact of the risk. As part of our ongoing assessment of the group’s climate-related risks and the continuing evolution of the global climate impact, we have determined that some of the risks now have a higher likelihood when compared to last year’s assessment. This is largely a reflection of the evidence of climate change seen during 2023. We now have six material risks, being the two reported as material in 2022 and four further risks around data limitations, suppliers, reputation and litigation which are described in detail below. It is a critical part of our process to reassess the impact of potential risks annually so we can manage and mitigate the risks appropriately. RISK 1 Inflationary impacts from global climate policy failure, including Time horizon: longer term 6+ years on energy prices. This is a principal risk captured under expense risk Potential impact (linking to financial statements) How is the risk being managed, mitigated and addressed? Primarily financial impacts of inflation on the expense base but also potentially Active consideration of inflation sensitivities and hedging operational risks arising from a high inflationary environment, impacts on the resilience options. Working to mitigate the impacts of climate change and of the supply chain, or from energy shortages in transition. transition to a low or zero carbon economy, including through our supply chain, will help to ensure there is less volatility and A 1% increase (based on HY 2023 results) in inflation is estimated to reduce SII inflationary pressures on such things as energy prices. absolute surplus by £24m and EcV by £20m. On an IFRS basis, we would expect this scenario to increase administrative expenses and insurance reserves. How does the risk impact strategy? How does the risk input into financial planning? Affects all pillars of the strategy, i.e. impact on existing business value but also Best estimate of short and long-term inflation assumptions on pricing capability on new business and acquisitions. included in the financial projections, with suitable sensitivities considered. Strategically, inflationary impacts are considered as part of deal assessments and project business cases. Targets and associated KPIs to manage the risk Our net zero operational and financed emissions targets and their associated KPIs listed on page 86 will be those that we use to report and monitor progress against in order to manage this risk. 2 Data limitations, including insufficient resource or ability to understand Time horizon: medium term 2-5 years the data, hinder the ability to properly understand asset exposures or transition risks. This is a principal risk captured under investment and liquidity risk Potential impact (linking to financial statements) How is the risk being managed, mitigated and addressed? Inability to execute the board's chosen strategy for climate change effectively or Chesnara has engaged MSCI to provide group-wide ESG data surprise transitional risks occurring where exposures were not understood. This could analysis on our asset portfolio. We are working with our also lead to financial losses on our assets, potentially reducing EcV and solvency asset managers to understand their own plans and pathways. disclosed in the financial statements. How does the risk impact strategy? How does the risk input into financial planning? This could have a wide range of implications. For example: it could lead to reputational Sensitivities are performed on results in order to assess the damage; poor decision making; accidental transition risk; accidental greenwashing risk; impact of negative exposures and factor this into decision stranded assets; and regulatory risk. making and strategic plans. Targets and associated KPIs to manage the risk The % coverage of our asset pool look through data which is shown in our financed emissions data. We will work towards what our target is once we get more performance data in 2024. 1 Chesnara is an acquisitive group, with M&A being one of its three strategic pillars, and therefore continually considers opportunities as they become available. Deal financing would be completely dependent on the size and nature of the transaction but may include the necessity to raise additional external financing either through debt or equity. A failure to appropriately address climate change risks may impact on our ability to raise this finance and in turn adversely affect the growth of the group. 80 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT RISK 3 Risk that a major supplier or partner doesn’t align with our climate Time horizon: medium term 2-5 years commitments and so we have to potentially choose to move away from them (operational impact) or risk our commitments not being achieved (reputation). This is a principal risk captured under operational and reputational risk Potential impact (linking to financial statements) How is the risk being managed, mitigated and addressed? Decision to make between significant operational change from having to move away Early engagement with key suppliers and partners to ensure that from a key partner or put our climate commitments at risk. they have climate commitments and working to align them with our own, including through the Greenly portal. Supply chain disruption could lead to an increase in operational costs through the use of more expensive suppliers as well as an impact on customers resistant to change, Factoring an assessment of climate commitments into the negatively impacting expenses and the value of the business. selection of prospective partners. How does the risk impact strategy? How does the risk input into financial planning? Climate considerations and alignment of strategies have to be factored into partner Risk is monitored, managed and will be addressed as it arises. selection and engagement processes. Financial plans will be amended as appropriate depending on where we believe the key risk areas are. Targets and associated KPIs to manage the risk In 2024, we will work towards the development of a target for the % of suppliers engaged with the Greenly supplier platform. 4 Reputation risk associated with not achieving our targets/commitments. Time horizon: medium term 2-5 years in respect of our 2028 operational target of net zero and longer-term 6+ years This is a principal risk captured under reputational risk in respect of our financed emissions net zero target Potential impact (linking to financial statements) How is the risk being managed, mitigated and addressed? Failure to meet our commitments and targets or provide inadequate disclosure around Providing clear and honest disclosure on our targets and progress against them could lead to a reduced investment universe for the group. commitments and where there are areas of challenge and This may reduce the liquidity of our shares and impact the market capitalisation uncertainty for those targets. of the group. Committing time and resources to complete transition plans during 2024 and 2025. How does the risk impact strategy? How does the risk input into financial planning? Sustainability is a fundamental building block of our strategy and therefore factoring Working towards our commitments and targets is a requirement in our targets and commitments is part of our business planning process. of our business planning process at group and divisional level. We do also address the fact that our commitments on climate and sustainability have to be proportionate for the Chesnara business. Targets and associated KPIs to manage the risk Our net zero operational and financed emissions targets and their associated KPIs listed on page 86 will be those that we use to report and monitor progress against in order to manage this risk. 5 Reputation risk through inability to raise finance to support Time horizon: medium term 2-5 years 1 acquisition strategy. This is a principal risk captured under reputational risk Potential impact (linking to financial statements) How is the risk being managed, mitigated and addressed? Potentially a fundamental hit to the business model plus reputational impacts. Proactive consideration of sustainability disclosures, engagement with ratings agencies to ensure scoring is reflective Also, potential solvency or share price risk if parties remove existing funding. of what we are doing and being very open and transparent with A loss of customers and funding through damaged reputation would negatively impact key investors. EcV included in the financial statements. How does the risk impact strategy? How does the risk input into financial planning? Direct consequences for execution of the acquisition strategy. Risk is monitored, managed and will be addressed as required. For any acquisitions, financing solutions are considered and the risks of those are factored into the relevant decisions. Targets and associated KPIs to manage the risk Our external ESG rating scores which are publicly available on various rating agency’s websites. CHESNARAANNUALREPORTANDACCOUNTS202381 STRATEGIC REPORT CORPORATE AND SOCIAL RESPONSIBILITY ∙ CLIMATE-RELATED FINANCIAL DISCLOSURES RISK 6 Litigation risk through either not publishing enough information or including Time horizon: medium term 2-5 years too much and making unsubstantiated claims leading to ’greenwashing’ This is a principal risk captured under reputational risk Potential impact (linking to financial statements) How is the risk being managed, mitigated and addressed? Litigation may lead to potential fines and payouts needing to be recognised as liabilities Providing clear and honest disclosure on our work and areas on the balance sheet. of challenge and uncertainty. Proactive consideration of what we are reporting in our sustainability disclosures and remaining Also, likely to have a negative impact on cash generation and cause reputational sceptical as to whether our disclosures represent a form damage to the business. of greenwashing. Detailed consideration will also be factored into upcoming regulatory requirements which require an impact materiality to our stakeholders. How does the risk impact strategy? How does the risk input into financial planning? Likely negative impact on the value of the existing business and acquiring Risk is monitored, managed and will be addressed as required. new business. Targets and associated KPIs to manage the risk Number of complaints and threatened litigation regarding sustainability matters. We assess climate risk as part of our annual ORSA process. There are a number of risks that are not featured in the previous tables that one may consider to be identified as material for an insurer. Climate scenario stress testing performed for the group (detailed in the Resilience section) concluded that climate effects on morbidity or mortality do not give rise to a ‘high’ material impact. We will continue to assess our approach to climate risk modelling as part of our annual ORSA process. Finally, we have concluded that financial losses from asset shareholdings is also not a ‘high’ material risk given this is also likely to present an offsetting reduction in financial liabilities. We have also considered climate-related physical climate risks; however, as we lease the majority of our office buildings and most of our staff would be able to work from home if workplaces were affected, we do not believe physical risks present a material impact to the operations of the group. We will continue to assess our understanding and application of climate-risk modelling through qualitative and quantitative assessments. OPPORTUNITIES b) Describe the impact of climate-related opportunities on the organisation’s businesses, strategy, and financial planning Using the same approach as for the risks we have identified climate-related opportunities for the group. The table below focuses on those that are deemed to be material as per the definition of materiality referenced earlier in the report. In 2023, we performed further analysis on the climate-related opportunities relevant to the group and concluded on a more in-depth list compared to 2022 which focused on limited division-specific opportunities. This has led to the opportunities disclosed in the 2022 accounts (offering alternative fund choices to customers in Sweden and ‘Easy B’ investment choices which offer a sustainable return in the Netherlands) no longer deemed to be material opportunities for the group. OPPORTUNITY 1 Investments: earn enhanced returns on aligned and climate resilient assets Time horizon: longer term 6+ years Potential impact (linking to financial statements) How is the opportunity being managed and implemented? Increase in key metrics: cash generation and EcV. We are working with our asset managers to understand their transition to net zero. We have also developed a Positive Solutions Impact Investment Framework, including investing in climate solutions. How does the opportunity impact strategy? How does the opportunity input into financial planning? Helps to enhance value through increased investment returns to support the growth Factored into financial planning and strategy by assessment of the group. Also, it encourages management to consider asset allocation and use of the potential market for the product and the associated costs. of resources for different asset types. Targets/KPIs to manage the opportunity In 2024, we will work to have a KPI for the value of assets invested within our definition of positive solutions. 82 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT OPPORTUNITY 2 Financing: attract a wider pool of debt and equity investors Time horizon: medium term 2-5 years Potential impact (linking to financial statements) How is the opportunity being managed and implemented? Positive share price movements through access to increased options We are ensuring sustainability is a high priority by making a and potential lower borrowing costs. number of operational changes and reporting enhancements. We are publicly disclosing our targets, commitments and progress against the plans and are engaging with external stakeholders to provide details. How does the opportunity impact strategy? How does the opportunity input into financial planning? Aligns with existing strategy in order to support the growth of the business. Incorporated into financial planning by considering the financial impact of varying borrowing costs on the results. Targets/KPIs to manage the opportunity Our net zero operational and financed emissions targets and their associated KPIs listed on page 86 will be those that we use to report and monitor progress against to manage this opportunity. Our external ESG rating scores which are publicly available on various rating agency’s websites. 3 Financing: reduced capital costs Time horizon: medium term 2-5 years Potential impact (linking to financial statements) How is the opportunity being managed and implemented? Lower borrowing costs. As above. How does the opportunity impact strategy? How does the opportunity input into financial planning? Helps to maximise the value of the business by minimising liabilities and capital costs. Incorporated into financial planning by considering the financial impact of varying costs of capital on the results. Targets/KPIs to manage the opportunity As above. Further information on these is detailed in the Annual Sustainability Report (www.chesnara.co.uk/sustainability). c) Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios As part of our 2023 ORSA process, we have considered and modelled three scenarios in respect of climate change risk, covering a 2° and 4° stress. This considered three scenarios: a) sudden transition, b) long-term orderly transition and c) policy failure. The first two achieve a temperature rise below 2° and the latter a rise in excess of 4° by 2100. To model the impact, we have taken each of the asset classes and applied suitable stresses to the equity values dependent on how the change in temperature is expected to affect the portfolio. Please refer to the earlier table with regards to how material climate-related risks affect strategy and business planning. Chesnara’s 2023 ORSA scenarios are based on the PRA’s 2019 UK Insurance stress test scenarios. We acknowledge that these scenarios have their limitations and focus solely on the impact of climate change on the solvency of the business and so we are continuing to assess how we can develop our testing of climate change risk, including supplementing any testing with qualitative assessments, to ensure that we are considering and communicating the wider potential impacts of climate change. Whilst the PRA’s 2019 scenarios do contain a number of approximations and limitations, as all climate scenario modelling does due to the inherent uncertainty, they are prescriptive in nature and easier to apply than some of the more complex climate change risk models, and they also benefit from being more transparent and easier to understand. Full details of the derivation of those scenarios, and their limitations, is set out in the PRA’s specification guide available publicly on the Bank of England’s website (Life Insurance Stress Test 2019 – Scenario Specification, Guidelines and Instructions (www.bankofengland.co.uk)). The shocks are calibrated by the PRA to represent the 1-in-100 Value-at-Risk under the three climatic scenarios and are expressed as instantaneous impacts on the portfolios. Further detail of the scenarios is included in the table below: Ref Scenario Key assumptions a 2°, sudden The impact materialises over the medium-term business planning horizon that results in achieving a maximum temperature transition increase of 2°C (relative to pre-industrial levels) by 2100 but only following a disorderly transition. In this scenario, transition risk is maximised. b 2°, long orderly The scenario is broadly in line with the Paris Agreement. This involves a maximum temperature increase of 2°C by 2100 transition (relative to pre-industrial levels) with the economy transitioning to be greenhouse gas-neutral in the next three decades by 2050. c 4°, policy failure A scenario with failed future improvements in climate policy, reaching a temperature increase in excess of 4°C (relative to pre-industrial levels) by 2100 assuming no transition and a continuation of current policy trends. Physical climate change is high under this scenario, with climate impacts for these emissions reflecting the riskier (high) end of current estimates. The scenarios outlined above were derived from IPCC reports, which are commonly used when assessing climate change. Time horizon: While the tests are calibrated to longer horizon climate scenarios, we have applied all of the tests as though the transition effects are immediate, with instantaneous stress test impacts and also projected over 5 years. We expect the longer term (post 5 years) effects to be immaterial. Results: Based on our climate modelling as detailed above, the climate change test results show a low impact on the solvency of all business units and at group level, with the group solvency ratio impacted by no more than 5% at any point over the short to medium term. A key factor leading to this result is a relatively low  CHESNARAANNUALREPORTANDACCOUNTS202383 STRATEGIC REPORT CORPORATE AND SOCIAL RESPONSIBILITY ∙ CLIMATE-RELATED FINANCIAL DISCLOSURES exposure to carbon intensive industries. While the results of this assessment of the financial risks arising from climate change are clearly comforting, Chesnara is not complacent about the wider risks arising from climate change and the broader sustainability agenda, including strategic, reputational and operational risks. It is for this reason Chesnara has a group-wide sustainability programme with board level representation on the Group Sustainability Committee. The programme has a detailed risk assessment of the broader risks arising from climate change and will continue to update this and educate internal and external stakeholders as the programme progresses. From a strategy and financial planning perspective, whilst the solvency risk has been concluded to be not material, it is still considered to be a material financial risk factor to be considered as part of key decision making processes and we, as a group, have made commitments to transition to net zero to influence and affect the factors that we can change and are taking responsibility for this. These commitments feed into the financial plans largely through the associated costs, and strategic decisions are made considering these commitments also. At a group level the 2023 assessment results support the following conclusions: a) Chesnara has a stable and well understood risk profile, controlled by an effective system of governance that is well embedded across the business units. b) Chesnara is a resilient group in terms of its current solvency level and can comfortably withstand all the stress and scenario tests that were applied in 2023. c) The three-year group projections evidence long-term viability, a well-diversified business, stable solvency ratios, and a steady source of emerging surplus. RISK MANAGEMENT Risk and solvency management are at the heart of Chesnara’s robust Governance Framework. a) Describe the organisation’s processes for identifying and assessing climate-related risks and b) Describe the organisation’s processes for managing climate-related risks PROCESSES FOR IDENTIFYING, ASSESSING AND MANAGING CLIMATE-RELATED RISKS A high-level summary of Chesnara’s Risk Management Framework is below: Chesnara’s Risk Management The Risk Management The Group Risk Management Framework The group’s risk appetite reflects Policy which sets out the System supports the is designed to embed effective risk control the Chesnara board’s view on the framework of principles identification, assessment systems with a holistic and transparent approach amount of risk the group is willing and practices, policies and and reporting of risks. to risk identification, assessment, management, to take and sets boundaries strategies for the group’s monitoring and reporting. The definition and to determine when there is too Risk Management System. scope of each principal risk category is based much or too little risk. on a set of strategic and operating principles/ tolerance limits. In addition, Chesnara’s Investment Policy contains investment criteria and transition risks of changing energy costs would not be material which are monitored by the Investment Committee. and therefore not disclosed within the TCFD report as material risks. Chesnara has developed an Environmental, Social and Governance (ESG) The Group Chief Risk Officer is responsible for maintaining the overall Policy Statement for the group, in which it recognises the importance of Risk Management Framework. The CEOs for each business unit understanding climate change risk in its operations and its investments are required to ensure that the framework is fully integrated into the and continued monitoring of associated risks. business model and decision making processes. Each of our divisions is required to apply the Risk Management Policy and operate within Chesnara believes its businesses that hold investments (insurance the limits set by the risk appetite. Each business unit is responsible companies and investment companies) should consider sustainability for identifying risks which might create, enhance, accelerate, prevent, and implications for climate change in their investment policies. hinder, degrade or delay the achievement of the group’s objectives, It expects each company to consider the implications of these for together with the sources of risks, areas of impact, events, and their its business and investments and document its position. Chesnara’s causes and potential consequences. These risks are recorded in the businesses have adopted, either directly or via their respective fund risk register and evaluated based on the likelihood of occurrence and managers, the six UN Principles of Responsible Investment with the severity of impact. Depending upon the nature and impact of the risk, aim to continue to invest responsibly with sustainability considerations the risk is either accepted, avoided, managed or transferred. Climate- in mind and to provide a choice of sustainable funds to customers, e.g. related risks and opportunities are identified and evaluated according green investments which aim to solve climate issues, or which primarily to this framework by the respective management teams in our focus on companies that invest in improving health. The group is also business units. exposed to strategic and reputational risks (PR9 – Reputational risk) arising from its action or inaction in response to climate change. Management teams keep up to date through the monitoring and assessment of emerging risks, reviewed by the executive teams The 2023 Group ORSA process (and previous ORSAs) assessed, on a quarterly basis. on both a qualitative and quantitative basis, climate change risks. This included a group-wide consistent climate change scenario that Given that we consider climate change to be a cross-cutting risk, that assessed the impact of the 2019 PRA climate change stress test. manifests through other existing risk types, climate-related risks and This test includes three scenarios: sudden transition, long-term orderly opportunities are identified, assessed and managed in a similar manner transition and climate policy failure, and considers both the transitional to other known and emerging risks. Primarily for Chesnara, climate and physical risks within these. The results and insights from the change risk will arise through other financial risks e.g. equity risk, credit ORSA are taken account of by the board for the purpose of capital risk etc (PR1 – Investment and Liquidity risk) and also regulatory risk management and business planning, noting that, as a life insurance given the level of ongoing change. With regards to the sector specific company, Chesnara’s operations are not generally exposed to physical guidance, we believe the impact of: physical risks from changing risks, so proportionality has been applied. Physical and transition risks frequencies and intensities of weather-related perils; transition risks for our assets under management continue to be assessed by our asset resulting from a reduction in insurable interest due to a decline in value managers and their assessment of climate value-at-risk. 84 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT c) Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organisation’s overall risk management INTEGRATION OF PROCESSES FOR IDENTIFYING, ASSESSING AND MANAGING CLIMATE-RELATED RISKS An integral part of Chesnara’s governance and Risk Management Chesnara’s approach to assessing financial risk is to identify and assess Framework is compliance with the Prudential Solvency II Regulations factors that could potentially threaten the continued successful delivery to perform the ORSA on an annual basis. The Chesnara board is of the anticipated stakeholder outcomes over a three-year time horizon, responsible for the overall design of the ORSA process including its including risks to the business model and strategy. The Chesnara board annual review. Climate-related risks are considered within the ORSA requires the management teams to ensure a good understanding of process and the impact of material risks upon the solvency and the solvency position at any point in time. In Q2 2023 a series of stress resilience of the business is documented. The views of the Actuarial and scenario tests were selected for the ORSA with the requirement Function Holder and any recommendations or prior feedback from the to follow the testing principles set out in the Group Risk Management regulator are considered when conducting the assessment at business System Policy. As well as current known risks, the stresses and unit level. Conclusions drawn from the risk and solvency assessment scenarios took account of forward looking and emerging risks. are reported to the respective regulators by each of our businesses These selected stresses and scenarios along with the rationale were every year. reviewed and approved by the Chesnara board. The tests conducted Each business unit provides a forward-looking perspective on risks covered changes in equity asset values, yields and credit spreads, that are emerging quarterly to its own Audit & Risk Committee, the fluctuations in currency rates, expense inflation, any material impact Chesnara Audit & Risk Committee and monthly to the SLT. A summary of physical and transition risk due to climate change, and operational of principal risks and emerging risks is also provided quarterly to the resilience. Performance against the business plans as well as known Chesnara board. From a climate change perspective this involves and emerging risks and opportunities are discussed at quarterly considering the content of relevant publications and guidance, in business review meetings at entity and group level. Climate-related relation to the Chesnara risk landscape, such as the reports published risk impacts and opportunities are considered at these meetings. by the IPCC on the physical climate change risks to the environment. Similarly, our management teams evaluate the possible effects of transition risk by keeping abreast of relevant policy and legal developments, technological advancements, changes in market risk due to demand shifts and any legal and reputational risk exposure. Amongst other matters, business performance and risk management are discussed at the Senior Leadership Team monthly meeting. More detail on Chesnara’s Risk Management Framework is set out in this section of the Annual Report and Accounts. CHESNARA BELIEVES ITS BUSINESSES THAT HOLD INVESTMENTS (INSURANCE COMPANIES AND INVESTMENT COMPANIES) SHOULD CONSIDER SUSTAINABILITY AND IMPLICATIONS FOR CLIMATE CHANGE IN THEIR INVESTMENT POLICIES. METRICS AND TARGETS The Metrics and Targets section also addresses the requirements within the Streamlined Energy & Carbon Reporting (SECR) framework including reporting on energy usage, GHG emissions, methodology used to make the calculations, intensity ratios and a description of the efforts taken to improve the company’s energy efficiency during the financial year. c) Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets To support the understanding of the above, net zero is defined to be when a company first reduces all its GHG emissions as much as possible, and only then offsets the remaining residual emissions. In 2023 our board signed off the group’s long-term sustainability targets and these have been supplemented with relevant initial interim targets, including: 1. Net zero financed scope 3 emissions by 2050, with an initial interim target of a 50% reduction by 2030 for in-scope assets determined in line with the IIGCC’s Net Zero Investment Framework (Financed emissions). Details of the challenges around this target are provided in our Annual Sustainability Report. 2. Net zero scope 1, 2 and 3 (other/non financed) by 2028 (Operational emissions) for those emissions of which we are in control through the deployment of reasonable resources. On the following page, is a table to show the level of control we consider we have for the different GHG categories noting we do not have full control of all emissions in any of the scope categories, for example, we consider that emissions relating to commuting and homeworking are not within our control as these are decided by the employees and, therefore, we can look to provide initiatives to encourage reduced emissions, such as our electric vehicle car scheme in the UK, but cannot mandate change. CHESNARAANNUALREPORTANDACCOUNTS202385 STRATEGIC REPORT CORPORATE AND SOCIAL RESPONSIBILITY ∙ CLIMATE-RELATED FINANCIAL DISCLOSURES LOW LEVEL OF CONTROL MEDIUM LEVEL OF CONTROL 3.1 Purchased goods and services 1 Direct emissions from onsite fuel combustion 3.3 Fuel and energy related activities 2 Direct emissions from the company’s vehicles and purchased electricity for own use 3.7 Employee commuting and homeworking 3.2 Capital goods 3.8 Upstream leased assets 3.4 Upstream transport and distribution 3.5 Waste generated in operations 3.6 Business travel We remain committed to being net zero for all of our operational emissions in the longer term and, alongside those that we deem to have control of, we will target higher value items, where in some instances we have low levels of control such as the emissions generated by our suppliers from purchased goods and services. Our 2028 target is therefore primarily scope 3 emissions arising from the operations of our offices. Emissions We have agreed our baseline figures for both financed and operational we have less emissions and defined our initial interim targets for financed emissions to control over support these long-term targets. We have selected 2023 as the baseline year for our emissions targets. We note that 2019 has been commonly used amongst our peers; however, we did not readily have the data available for 2019. The challenge of using 2023 as a baseline rather than 2019 is that any actions that we and organisations in our investment universe or supply chain have taken in that period will be reflected in the starting position. Emissions This therefore makes reduction targets more challenging in the short term. we can High level analysis of the national GHG emissions reductions for our locations control over the period from 2019 to 2023 show there was an average fall of approximately 10%. As our work progresses, we will assess the impact of this on our targets. We do have 2022 data also available but due to the emissions largely being based on the previous year’s reporting, we felt that 2028 due to the ongoing impact of the COVID-19 pandemic and the national lockdowns during 2021, the use of 2022 as a baseline would be less relevant. We will continue to assess our baselines and our targets throughout 2024 as we commence our work on our group transition plans. Not drawn to scale – for illustrative purposes only. COMMITMENT BASELINE KPIs 1 Long-term target Our 2023 scope 1 and scope 2 Total carbon financed emissions Net zero scope 3 financed emissions (absolute value) by 2050. financed emissions baseline is (absolute emissions) 533,073tCO e. 2 Interim target (2030) Carbon financed emissions 50% reduction by 2030 from our 2023 baseline figures in the Scope 3 total financed emissions (absolute emissions normalised scope 1 and 2 emissions for our listed equity and corporate fixed is 4,345,991tCO e. by $M invested) 2 income investments which we are able to influence or control. More detail on our financed emission Weighted Average Carbon Intensity metrics is on page 88. (WACI) 2 Interim target (2028) Our 2023 operational baseline Operational emissions, Net zero (absolute value) operational emissions by 2028 for is 4,961tCO e with detailed split more specifically: 2 those where we are in control of the emissions using reasonable on each GHG emission category 1. Total (absolute); resources. For those that are not deemed to fall into this found on page 89. 2. Intensity measure by FTE; and definition, we still commit to achieving net zero on an absolute value, but these are more dependent on systematic, societal 3. Those in our control (absolute). and infrastructure changes and therefore the timescales are yet to be determined. 86 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT Now that we have baselined our operational and financed emissions for 2023, We will report annually on our progress against this commitment, detailing the detailed performance data against the targets and KPIs to be provided for level of investments, the source and the division responsible. These activities 2024 reporting. will be monitored by the GSC and reported annually to the board. Performance against these targets will be reported throughout the year to Carbon offsetting the GSC and the board and externally each year in our Annual Sustainability Whilst our primary focus remains on reducing the carbon emissions Report. The control framework for the preparation of these results is still associated with our operations and investments, we recognise the important, being developed but, over the course of 2023, we engaged with two external yet complex role offsetting will play in the global transition to net zero. providers to facilitate the calculation of both our operational emissions and Therefore, in the interim, we continue to support high-quality carbon our financed emissions (Greenly and MSCI respectively). In addition to this, offsetting projects. In 2023, we have decided to offset 100% of the there are a number of layers of internal review. The targets will be periodically operational emissions, excluding scope 3.1 purchased goods and services, refreshed and updated each year to reflect any material changes and ensure of 926 tonnes by supporting several verified projects in alternative energy continued relevance. Any subsequent changes made to the baseline or scope and increasing water safety, as well as planting 926 trees in the UK. of our targets themselves will be clearly explained in our annual reporting. These are high quality carbon reduction projects that comply with international verification standards and are amongst the Carbon Footprint As well as the above targets and commitments, we will continue to commit Limited’s offset projections portfolio, details of which can be found at to assessing and investing in positive solutions, by intentionally directing www.carbonfootprint.com capital into activities that deliver or enable the achievement of the UN SDGs. a) Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process Within the material climate-related risks and opportunities tables detailed in the Strategy section of the report, for each risk and opportunity we have disclosed the relevant KPI/metric(s) to which they relate. We have not yet defined all of our metrics to manage the material climate-related risks and opportunities and the development of these will feature as part of the work in 2024 on the group’s transition plans. The full list of metrics we have developed so far are: OPPORTUNITIES RISKS Our net zero targets and their associated KPIs detailed in the table on the Our net zero targets and their associated KPIs detailed in the table on the previous page. previous page. Our external ESG rating scores and feedback which are publicly available Our external ESG rating scores and feedback which are publicly available on various rating agency’s websites. on various rating agency’s websites. The value of assets invested within our definition of positive solutions % of suppliers engaged on the Greenly supplier platform (in 2024). (in 2024). We will monitor these metrics as part of our performance data to ensure both risks and opportunities are being effectively managed and implemented retrospectively. Energy usage Energy consumption in the group is reported on an actual basis where the records are kept in the business (scope 2 – office use and scope 3.6 – business travel) with employee survey responses used to accurately obtain information for homeworking and commuting data. These have then been converted to emission measures using standard conversion factors based on Greenly’s assumptions and calculation engine which is in line with the GHG protocol methodology. Our energy consumption over the last two years is shown in the following table: UK & Offshore Global (exc UK & Offshore) Total 2023: Energy consumption (KwH '000) 382 1,301 1,684 1 2022: Energy consumption (KwH '000) 430 909 1,338 Note: 1. 2022 energy consumption has been restated in line with the enhanced data collected through a group-wide employee questionnaire on commuting and homeworking. Chesnara’s Environmental Policy encourages all employees to take reasonable steps to reduce waste, and to re-use and recycle office materials, and the document reiterates our commitment to becoming a sustainable group. In addition to this, we use a mixture of renewable energy across the business, including a 100% renewable energy contract in the Preston office. With regard to the sector specific guidance requiring insurance companies to provide aggregated risk exposure to weather-related catastrophes of their property business by relevant jurisdiction; the extent to which their insurance underwriting activities are aligned with a well below 2°C scenario; and also indicate which insurance underwriting activities are included – this has been considered and the impact is either immaterial or not applicable to the business, and therefore, no disclosure has been made. CHESNARAANNUALREPORTANDACCOUNTS202387 STRATEGIC REPORT CORPORATE AND SOCIAL RESPONSIBILITY ∙ CLIMATE-RELATED FINANCIAL DISCLOSURES b) Disclose scope 1, scope 2 and, if appropriate, scope 3 greenhouse gas (GHG) emissions, and the related risks All our employees mainly operate from offices or from home under a hybrid working model, which came into the place following the offices being closed during the height of the COVID-19 pandemic. To increase energy efficiency, management in each of our business units takes practical steps to minimise the effect of our operations on the environment and our workforce is encouraged to conserve energy, avoid unnecessary travel, use video conferencing, and minimise waste. Furthermore, we use environmentally friendly certified paper, unwanted equipment is recycled or donated, and staff refreshments are purchased from sustainable sources. The majority of company cars are now also electric/hybrid. Whilst a number of these actions are a continuation from the previous year, there have also been steps taken in 2023 such as lighting upgrades and improved waste management in the UK. There are five (2022: six) company-leased vehicles in total across the group which are used primarily for commuting and not business-related activities; this is in addition to nine company-owned vehicles. Of the total fourteen, one has a diesel engine, seven are hybrid and six are fully electric vehicles. The data shown in the subsequent tables for financed (scope 3.15) and operational emissions covers all group owned entities. We note that under the SECR framework, disclosure of scope 3 emissions is voluntary; however, we have chosen to account for these additional emissions generated from the group’s value chain and product portfolios to advance the group’s decarbonisation and reduction strategies as well as further manage the GHG-related risks and opportunities. FINANCED EMISSIONS (Tonnes of CO ) 2 2023 baseline Scope 1 and 2 Scope 3 Total financed carbon emissions (absolute emissions) 533,073 4,345,991 Financed carbon emissions (normalised by $m invested) 38.7 315.4 % coverage 58% 56% 2023 Weighted Average Carbon Intensity (WACI) Corporate constituents Sovereign constituents (tonnes CO e/USD M sales) (tonnes CO e/USD M 2 2 GBP nominal) Scope 1 and 2 Scope 3 GHG Intensity Chesnara group 71.8 653.7 206.5 % coverage 62.1% 59.2% 10.7% Total financed emissions and financed emissions are calculated based on corporate bonds and listed equity for which we have the required data. The results are extrapolated to estimate the emissions for the portfolio (including sovereign debt and assets for which we do not have the required data). This assumes that the sovereign assets and the investments for which data isn’t currently available have the same emissions profiles as those included in the data coverage percentage. As data availability increases for those investments not currently included, any variances in their emissions profiles will result in a difference to the total financed emissions and financed emissions totals. Currently not included within the calculations for the portfolio are structured notes, collateralised securities, cash and deposits, mortgages and loans, and property. WHILST OUR PRIMARY FOCUS REMAINS ON REDUCING THE CARBON EMISSIONS ASSOCIATED WITH OUR OPERATIONS AND INVESTMENTS, WE RECOGNISE THE IMPORTANT, YET COMPLEX ROLE OFFSETTING WILL PLAY IN THE GLOBAL TRANSITION TO NET ZERO. THEREFORE, IN THE INTERIM, WE CONTINUE TO SUPPORT HIGH-QUALITY CARBON OFFSETTING PROJECTS. 88 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT OPERATIONAL EMISSIONS (Tonnes of CO ) 2 1 2023 baseline 2022 (restated ) UK & Global Total UK & Global Total Offshore (excl UK & Offshore (excl UK & Offshore) Offshore) Scope 1 Combustion of fuel and operation of facilities 18 65 83 15 59 74 Electricity, heat, steam and cooling purchased for own use 10 87 97 15 64 79 (location based) Scope 2 Scopes 1 and 2 (internal emissions) 28 152 180 30 123 153 Purchased goods and services 1,906 2,129 4,035 1,080 1,524 2,604 Capital goods 28 69 97 21 91 112 Fuel- and energy-related activities not included in scope 1 9 45 54 10 34 44 or scope 2 Upstream transportation and distribution 9 215 224 3 195 198 Scope 3 Waste generated in operations 24 8 32 12 22 34 Emissions from business travel 52 131 183 35 70 105 Emissions from commuting 26 83 109 27 67 94 Upstream leased assets 8 40 48 0 52 52 Total scope 1, 2 and 3 emissions 2,090 2,871 4,961 1,216 2,178 3,394 Carbon offset (184) (742) (926) (550) (550) (1,150) Total net emissions 1,906 2,129 4,035 666 1,628 2,244 Company's chosen intensity measurement: Tonnes of CO e per FTE 19.2982 10.3692 12.8660 8.8116 7.8 628 8.1981 2 2 Tonnes of CO per FTE (less scope 3.1 emissions) 1.6990 2.6595 2.3909 0.9855 2.3610 1.9082 2 Notes: 1. During the year, we refined our calculations and used new methodology to include further scope 3 emission categories and therefore have restated the 2022 numbers. 2. The group FTE number used in this measurement is disclosed in note I1 of the Annual Report and Accounts. The increase in the FTE intensity measurement in 2023 is primarily due to the increase of emissions from purchased goods and services driven from two acquisitions and increased project spend in the year. The UK and Offshore ratio has increased significantly as UK FTE employees reduced mid-way through 2023 when the majority of CASLP employees transferred to SS&C. The head office is also located in the UK where related emissions are mostly group related rather than being UK specific, distorting the ratio. 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Additional terms and conditions required by MSCI’s Suppliers with respect to its Materials are provided in the expanders below. If Customer receives Materials from a Supplier not listed below via MSCI Products, additional terms and conditions related to such Materials may apply. CHESNARAANNUALREPORTANDACCOUNTS202389 STRATEGIC REPORT CORPORATE AND SOCIAL RESPONSIBILITY ∙ CLIMATE-RELATED FINANCIAL DISCLOSURES OUR ACTIVITY OVER 2023 We have now finalised our baseline for both operational and financed emissions. For operational emissions, this meant enhancing the data we have previously used and for financed emissions, this meant calculating our emissions for the first time. Operational emissions During 2023, we engaged Greenly to use their platform to baseline our Greenly has detailed methodology for each category and we can interrogate operational emissions which has enhanced our data collection and coverage the group’s accounting data to generate the results. Greenly have integrated of our operational impact. Using Greenly has granted us access to a wide thousands of emission factors from government publications and Life Cycle range of climate and carbon accounting expertise and underlying processes Assessment (LCA) dashboards as reliable sources of data. No further data and to support our calculations. These data enhancements, together with assumptions have been included for the calculation of non-financed emissions including purchased goods and services in our calculations, have resulted outside of the use of the Greenly platform. For further information on Greenly, in a significant increase in our reported operational emissions compared and its methodology please visit www.greenly.earth/en-gb to those disclosed in the 2022 financial statements. Below is the summary of the key drivers for the changes to the 2022 reported operational emissions, as a result of the enhanced data and calculations: Buildings Scope 3.1 purchased Additional scope 3 Business travel Commuting goods and services categories Additional considerations Analysis of accounting To make the restated for the group’s offices such This new category New scope 3 categories data identified further emissions more accurate, as whether they have car reflects the group’s share disclosed including business travel we distributed an parks and air-conditioning. of emissions generated emissions generated from expenditure for areas such employee questionnaire by our suppliers which waste, IT equipment, as hotels, parking and across the group in order has been calculated based postage and fuel and conferences/workshops to obtain accurate data on our expenditure with energy related upstream not previously considered. on commuting and them in the year. emissions not in scope homeworking habits. 1 & 2. Financed emissions At the end of September 2023, we appointed MSCI as our ESG and climate data provider. This appointment has been essential in the facilitation of the calculation of our financed emissions (scope 3.15) 2023 baseline. We also held MSCI training sessions with group-wide user representation, to improve knowledge on the emissions and the platform itself. For more information on the MSCI methodology, please visit: www.msci.com As expected, financed emissions, which are detailed on page 88, are the biggest contributor to the group’s emissions. The 2023 baseline gives us a starting position for our decarbonisation journey and enables us to measure progress and we look forward to reporting on this. We will use three metrics to do this: 1 2 3 Total financed carbon Financed carbon emissions Weighted Average Carbon emissions (absolute emissions) (absolute tCO e emissions Intensity (WACI) tCO e/$M 2 2 tCO e normalised by $M invested) revenue 2 This shows our absolute greenhouse gas This enables us to compare the emissions This enables us to understand our emissions (GHG) and allows us to of different portfolios. This shows the exposure to carbon intensive companies establish the emissions baseline of our total carbon financed emissions of a within our portfolio. portfolio by measuring financed emissions. portfolio normalised by the market value of the portfolio. We hope that this combination of metrics will show the relative and absolute performance of our decarbonisation activities. Data and assumptions Inherent within the calculations are a number of assumptions, such as using a blended average of energy usage for office emissions when we actually have 100% renewable energy sources in some of the group’s offices. We note that quantifying scope 3 emissions is challenging given data and methodology limitations. Much of the information needed to calculate carbon emission factors is dependent on supplier data which is not always readily available and therefore means carbon conversion factors are based on other similar companies. 90 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 STRATEGIC REPORT 2022 to 2023 baseline operational emissions Intensity measurements Overall, 2023 operational emissions have increased compared to 2022 by Our operational emission intensity measurements are ratios of operational 1,566tCO e, with 91% (1,431tCO e) of the increase attributed to purchased emissions against the number of FTE staff, calculated as: 2 2 goods and services emissions (scope 3.1). The emissions have moved – Operational emissions per FTE = total non-financed emissions (scope 1, 2 broadly in line with our spend in the year following increased project spend & 3.1-3.8 tCO e)/number of average FTE staff in the year. 2 and the inclusion of expenditure from two new acquisitions. During 2024, – Operational emissions (less scope 3.1 emissions) per FTE = non-financed we plan to further engage with our suppliers in order to improve the accuracy emissions as defined above (less scope 3.1 emissions)/number of average of this emission factor by calculating emissions using supplier specific FTE staff in the year. emission factors to help to mitigate the limitations of the current supplier spend methodology. We believe these are appropriate measures, given a large proportion of the GHG emission categories are employee related including commuting, An explanation of movement categories has been provided below: business travel and waste. As supplier purchases (scope 3.1) are not directly – Scope 1 emissions (+8.9tCO e) – There has been an increase in office 2 correlated with the number of employees we have also chosen to disclose heating emissions in 2023, primarily from the Hilversum office (Scildon) the FTE ratio without these emissions to reduce the impact of increased which has had significantly more users of the building in 2023. spend on goods and services. – Scope 2 emissions (+18.7tCO e) – Electricity emissions have increased 2 We have also determined appropriate intensity measures for financed in the year from more usage in the Stockholm and Hilversum offices, offset emissions (scope 3.15), as explained in detail on page 88, being: by a reduction in usage for the UK offices. – Carbon financed emissions = absolute scope 1 & 2 financed emissions – Purchased goods and services (+1,453tCO e) – Purchased goods and 2 tCO e (and scope 3 separately)/$M invested; services have increased by 1,453tCO e in the year due to increased supplier 2 2 spend, largely as a result of acquisitions. During 2024, we will continue – Total financed carbon emissions = absolute scope 1 & 2 (and scope 3 to work with our suppliers to further understand their emissions and separately) financed tCO e emissions; and 2 sustainability commitments so we can evaluate our supply chain emissions – Weighted Average Carbon Intensity (WACI): = absolute scope 1, 2 and 3 and improve the accuracy of this category. financed emissions/$M revenue. – Business travel (+78.9tCO e) – Travel activity increased in 2023 in order to 2 meet business needs for the enlarged group. We will consider our approach to sustainable travel in 2024. – Employee commuting (+14.1tCO e) – Employee commuting has increased 2 in 2023, as although the FTE staff number has fallen overall, employee numbers in certain business units have increased which have higher than average emissions per employee. – Other (+15.2tCO e) – Other scope 3 emission categories have increased 2 overall, primarily from an increase in postage emissions offset by a reduction in purchases of capital goods, waste and leased assets. Non-Financial and Sustainability Information Statement This section of the Annual Report and Accounts constitutes Chesnara’s Non-Financial and Sustainability Information Statement, produced to comply with sections 414CA and 414CB of the Companies Act 2006. The following table sets out where, within our Annual Report and Accounts, we provide further details on the matters required to be disclosed under the section listed above. In particular, it covers the impact we have on the environment, our employees, social matters, human rights, anti-corruption and anti-bribery matters, policies pursued and the outcome of those policies, and principal risks that may arise from the company’s operations and how we manage those risks, to the extent necessary for understanding of the company’s development, performance and position and the impact of its activity. Reporting requirement Section(s) and page(s) Anti-corruption and anti-bribery Corporate and social responsibility (p75) Business model Our strategy, business and culture & values (p24-25) Employees Corporate and social responsibility (p73-74), S172 (p34) Environmental matters Corporate and social responsibility (p71-91), S172 statement (p34) Non-financial key performance indicators S172 key stakeholders (p32-34), business reviews (p38-43) Principal risks Risk management – principal risks and uncertainties (p64-70) Respect for human rights Corporate and social responsibility (p75) Social matters Corporate and social responsibility (p73-75) Climate-Related Financial Disclosures (CFD) Corporate and social responsibility (p76-91) The Strategic Report was approved by the board on 27 March 2024 and signed on its behalf by: Luke Savage Steve Murray Chair Chief Executive Officer CHESNARAANNUALREPORTANDACCOUNTS202391 CORPORATE GOVERNANCE CORPORATE GOVERNANCE Malmo, Scania, Sweden 92 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 CORPORATE GOVERNANCE 94 Board profile and board of directors 96 Governance overview by the Chair 98 Corporate Governance Report 103 Nomination & Governance Committee Report 105 Directors’ Remuneration Report 120 Audit & Risk Committee Report 128 Directors’ Report 131 Directors’ Responsibilities Statement CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 93 CORPORATE GOVERNANCE BOARD PROFILE AND BOARD OF DIRECTORS The role for the Chesnara board of directors is to establish the purpose, values and strategy of the group and provide leadership to maintain high standards of corporate governance and behaviour throughout all levels of the organisation. The diversity of skills, knowledge and experience of our board members ensures that we continue to deliver against our strategic objectives. The board knowledge, skills and experience summary on page 95 indicates the core competencies that have been identified as being key to the board discharging its responsibilities and shows the collective score of the current board. The biographies below show the specific areas of specialism each board member provides, with each letter correlating to the competency matrix detailed as part of the knowledge, skills and experience summary on page 95. Where a board member has a competency in blue, this indicates a primary specialism. A light grey colour indicates that this competency is a secondary specialism for that board member. THE BOARD LUKE SAVAGE DAVID RIMMINGTON CHAIR GROUP FINANCE DIRECTOR Non-Executive Chair of the board, Luke is responsible for the Appointment to the board: Appointed as Group Finance Director leadership of the board, setting the agenda and ensuring the with effect from May 2013. board’s effectiveness in all aspects of its role. Career, skills and experience: David trained as a chartered Appointment to the board: Appointed to Chesnara plc board and accountant with KPMG, has over 20 years’ experience in financial as Chair in February 2020. management within the life assurance and banking sectors and has delivered a number of major acquisitions and business integrations. Committee membership: Nomination & Governance (Chair to Prior to joining Chesnara plc in 2011 as Associate Finance Director, 31 December 2021) and a member of the Remuneration Committee David held a number of financial management positions within (from February 2020). Attends the Audit & Risk Committee the Royal London Group including six years as Head of Group by invitation. Management Reporting. Current directorships/business interests: Current directorships/business interests: – Numis Corporation plc, Chair – Countrywide Assured Services Ltd Skills and experience: ABCDEFGHIJLM – Movestic Livförsäkring AB Skills and experience: A B C E DFIJLM G H STEVE MURRAY GROUP CHIEF EXECUTIVE OFFICER JANE DALE SENIOR INDEPENDENT NON-EXECUTIVE DIRECTOR Appointment to the board: Appointed as a director of Chesnara AND CHAIR OF THE AUDIT & RISK COMMITTEE on 2 August 2021 and as Group CEO on 19 October 2021. Career, skills and experience: Steve joined Chesnara from Royal Appointment to the board: Appointed to the Chesnara plc London where, as part of their Group Executive Committee, he was board in May 2016 and as Chair of the Audit & Risk Committee Chief Commercial Officer with group-wide accountability for M&A in December 2016. Appointed as the board’s Senior Independent and Strategy, Transformation and Analytics & Insight, as well as Non-Executive Director in October 2018. accountability for its legacy business and the take to market activity Committee membership: Audit & Risk (Chair) and Nomination across the UK insurance and savings business. He was also a & Governance. director of Royal London Asset Management. Prior to that he spent 15 years at Standard Life across a variety of roles, seeing it through Current directorships/business interests: demutualisation and IPO before leading Group M&A and strategy. – Countrywide Assured plc, Chair of the Audit & Risk Committee He then worked in Standard Life’s UK & European insurance – CASLP Ltd, Chair of the Audit & Risk Committee business initially as CEO of 1825 financial planning before becoming – Covea Insurance plc and Covea Life Limited, NED and Chair MD Commercial & Strategy. After leading the first phase of the of the Audit Committee separation of the UK & European insurance business to Phoenix, – Novia Financial plc, NED and Chair of the Audit Committee; and he was appointed as Deputy Head of the Private Market division in Novia Financial Holdings Limited, NED Aberdeen Standard Investments. Steve started his career with EY. – Brown & Brown (Europe) Holdco Limited, and Brown & Brown (Europe) Limited, NED and Chair of the Risk & Compliance Current directorships/business interests: Committee and Chair of the Remuneration Committee. – Countrywide Assured Services Ltd – CASFS Ltd Skills and experience: A B C D E F G H I J K M – Countrywide Assured Life Holdings Limited – Movestic Livförsäkring AB – Scildon NV Supervisory Board – Waard Group Supervisory Board – Cattanach – a private charity (Chair) Skills and experience: A BCDEFJKLM G H I 94 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 CORPORATE GOVERNANCE BOARD KNOWLEDGE, SKILLS AND EXPERIENCE SUMMARY KEY KNOWLEDGE/SKILL/EXPERIENCE SUMMARY A Chesnara company knowledge • • • • • • • • B Industry knowledge – UK • • • • • • • C Industry knowledge – Sweden/Netherlands • • • • • • • • D Governance – actuarial • • • • • • • • E Governance – financial • • • • • • • • F Audit and risk management • • • • • • • • G Investment management • • • • • • H M&A and business development • • • • • • • • I Commercial management • • • • • • • • J Operational change management • • • • • • • • K Customer operational/management • • • • • • L Information technology • • • • • • M Environmental, social and governance (ESG) • • • • • • • Annual assessment confirms that our board continues to hold significant experience in the insurance sector and also have a range of specialisms which ensure all aspects of our competency profile are well covered. KARIN BERGSTEIN EAMONN FLANAGAN INDEPENDENT NON-EXECUTIVE DIRECTOR INDEPENDENT NON-EXECUTIVE DIRECTOR AND CHAIR OF THE REMUNERATION COMMITTEE Appointment to the board: Appointed to the Chesnara plc board on 14 February 2022. Appointment to the board: Appointed to the Chesnara plc board in July 2020 and as Chair of the Remuneration Committee Committee membership: Nomination & Governance and Audit in January 2022. & Risk. Committee membership: Audit & Risk and Remuneration (Chair). Current directorships/business interests: – Movestic Livförsäkring AB, NED Current directorships/business interests: – Van Lanschot Kempen N.V., NED – Movestic Livförsäkring AB, NED and Chair of the Audit & – Bank Nederlandse Gemeenten N.V., NED Risk Committee – University Medical Center Groningen, NED – Movestic Fonder AB, Chair – Bergstein Advies B.V., General Manager – AJ Bell, NED – Foundation for Continuity of NN Group, NED – Randall & Quilter Investment Holdings Ltd (Bermuda), NED – Foundation for Preference Shares Wereldhaven, NED Skills and experience: ABCDEFGHIJKLM Skills and experience: ACDEFHIJKLM CAROL HAGH MARK HESKETH INDEPENDENT NON-EXECUTIVE DIRECTOR INDEPENDENT NON-EXECUTIVE DIRECTOR AND CHAIR AND DESIGNATED WORKFORCE NED OF THE NOMINATION & GOVERNANCE COMMITTEE Appointment to the board: Appointed to the Chesnara plc Appointment to the board: Appointed to the Chesnara plc board on 14 February 2022. board in December 2018 and as Chair of the Nomination & Governance Committee in January 2022. Committee membership: Nomination & Governance and Remuneration. Committee membership: Nomination & Governance (Chair) and Audit & Risk. Current directorships/business interests: – Countrywide Assured plc, NED Current directorships/business interests: – CASLP Ltd, NED – Countrywide Assured plc, NED – Old Game New Rules Ltd, Director and Founder – CASLP Ltd, NED – Direct Line Insurance Group plc, NED (with effect from 1 April 2024) – Bethany Christian Trust, Treasurer and NED – Bethany Enterprises Ltd, NED Skills and experience: ABCDEFHIJKLM Skills and experience: ABCDEFGHIJK CHESNARAANNUALREPORTANDACCOUNTS202395 CORPORATE GOVERNANCE GOVERNANCE OVERVIEW BY THE CHAIR OUR ROBUST GOVERNANCE FRAMEWORK ENABLES US TO EFFECTIVELY MANAGE RISKS AND OPPORTUNITIES, AS WELL AS TAKE APPROPRIATE STEPS TO ADDRESS RELEVANT ENVIRONMENTAL AND SOCIAL ISSUES IN A PROPORTIONATE MANNER. LUKE SAVAGE, CHAIR Dear Shareholder On behalf of the Chesnara board, I am pleased to present our Corporate Governance Report for the year ended 31 December 2023. Chesnara’s Corporate Governance Framework underpins the delivery of sustainable value to our customers and shareholders through effective deployment of our staff and technology, and constructive engagement with our suppliers, partners and regulators. The board drives the group’s culture and values by assigning clear roles and responsibilities and setting high expectations of business performance and ethical conduct. Our robust Governance Framework enables us to effectively manage risks and opportunities, as well as to take appropriate steps to deliver our sustainability agenda. This section of the Annual Report and Accounts sets out our governance policies and practices and includes details of how the company has applied the principles and complied with the provisions of the UK Corporate Governance Code 2018 (the ‘Code’) during 2023. The board recognises that sustainability and stewardship is central to a company’s ability to operate responsibly. The board is also mindful of the critical importance of the interests of its employees, customers and suppliers for the purposes of delivering sustainable performance, whilst engaging constructively with regulators and shareholders to understand and meet their expectations. Details of how we have engaged with key stakeholders and performed our duties under s172 of the Companies Act 2023 are set out on pages 30 to 37 within the Strategic Report. The board agenda appropriately balances governance, strategy, financial performance and emerging matters in order to promote the success of the company. Each member significantly contributes to board discussions and devotes sufficient time to the board and the effective operation of its committees. There were a number of additional meetings required over the course of 2023 and I am grateful to my fellow board members for making themselves available as and when required. As announced in December, David Rimmington will not seek re-election at the company’s Annual General Meeting (AGM) in May 2024 and will step down as Group Finance Director and as a director WE ASSIGN CLEAR of the company at the conclusion of that meeting. I would like to thank David for everything he has achieved over the years as Group Finance Director. During his tenure, the group has consistently ROLES AND increased dividends paid to shareholders whilst maintaining the strength of the balance sheet. David leaves with our best wishes and I now look forward to welcoming Tom Howard as Chief Financial RESPONSIBILITIES Officer and Executive Director of the company (subject to regulatory approval and appointment at our AGM). Tom is a highly experienced CFO with over 25 years of industry experience and brings with him AND SET HIGH European actuarial and financial reporting capabilities and a strong track record of leadership in finance, M&A, capital management and business transformation, which I am confident will help to deliver the EXPECTATIONS company’s strategy. OF BUSINESS No NED chairs the board as well as a board committee nor does any NED chair more than one Chesnara plc board committee. The principles and policies that support the Governance Framework outlined in the PERFORMANCE AND group Corporate Governance & Responsibilities Map are designed to encourage high standards of ethical and business conduct and consideration of matters such as diversity. Each of the businesses within the ETHICAL CONDUCT. group has continued to make further progress in ensuring that the governance arrangements remain effective, whilst also integrating environmental and social factors within their risk assessment system. This report summarises the steps the board and its committees have taken to fulfil their governance responsibilities. Luke Savage Chair 27 March 2024 96 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 CORPORATE GOVERNANCE CHESNARA BOARD COMPOSITION Current balance Board tenure of executive and non-executive directors 1 2 2 6 5 Non-executive Executive Chair 2–6 years Over 6 years Current gender Current ethnic diversity of diversity of the board the board 1 3 5 7 Male Female White Ethnic minority CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 97 CORPORATE GOVERNANCE CORPORATE GOVERNANCE REPORT The group’s Governance Framework has continued to operate effectively in 2023, allowing the company to respond to the needs of its stakeholders and the evolving market conditions in which it operates. Compliance with the Code The board The company has complied throughout the year with all of the relevant At 31 December 2023, the board comprised of a non-executive Chair, five other provisions of the Code. The UK Corporate Governance Code is available at non-executive directors and two executive directors. www.frc.org.uk. The table below provides an overview of the company’s Biographical details of current directors are given on pages 94 and 95 and a compliance with each of the five sections of the Code. board profile, which assesses the core competencies required to meet the group’s strategic objectives, is provided on page 95. The board, which plans Code Question to meet at least seven times over the course of 2024, has a schedule of section matters reserved for its consideration and approval. These matters include: – corporate strategy and business plan; Board Details of how the opportunities and risks to the future – major acquisitions, investments and capital expenditure; leadership & success of the business have been considered and – financial reporting and controls; company addressed and the sustainability of the company’s – Dividend Policy; purpose business model are set out in the Strategic Report (pages 24 to 91). – capital structure; Details of stakeholder engagement (including – board and board committee composition and appointments; engagement with major shareholders) and details – appointments to the board and board committee membership; of how stakeholders’ interests are considered in board – appointment or removal of the Company Secretary; and discussions and decision making are set out on pages – of the Remuneration Policy for board directors and senior executives. 32 to 37 of the Strategic Report. To support effective escalation from the company’s major regulated subsidiary Details of how our board monitors culture through boards, members of the company’s board also serve on key subsidiary boards our Workforce Engagement NED and details of our and committees across Chesnara’s business divisions. Specifically: Whistleblowing Policy are set out on page 74 of the (i) three directors of the company were also directors of Countrywide Assured plc Strategic Report. and of CASLP Ltd during the year, those being Jane Dale, Mark Hesketh and Details of how potential conflicts of interest are Carol Hagh; managed are included on page 100 of this Corporate (ii) four directors of the company, being Karin Bergstein, Luke Savage, Mark Governance Report. Hesketh and Steve Murray, were also directors of Chesnara Holdings BV, which is in liquidation as of 15 January 2024; Division of The division of responsibilities on the board and details responsibilities of directors’ independence is set out on page 99 of this (iii) four directors of the company, being Karin Bergstein, Eamonn Flanagan, Steve Murray and David Rimmington, were also directors of Movestic Livförsäkring Corporate Governance Report. AB throughout 2023; and Time commitments of the board and 2023 board and (iv) Steve Murray was also a director of the Scildon and Waard supervisory boards committee meeting attendance is set out on page 101 throughout the year. of this Corporate Governance Report. Under local legislation or regulation for all divisions of the group, the directors Composition, The composition and skills, experience and knowledge have responsibility for maintenance and projections of solvency and for succession and of the board is detailed on page 95 of this Corporate assessment of capital requirements, based on risk assessments, and for evaluation Governance Report. establishing the level of long-term business provisions, including the adoption of appropriate assumptions. The Prudential Regulation Authority is the group Details of the annual evaluation of the performance supervisor and maintains oversight of all divisions of the group through the of the board, its committees, the chair and individual college of supervisors. directors are set out on page 100 of this Corporate Governance Report. The responsibilities that the board has delegated to the respective executive management teams of the UK, Dutch and Swedish businesses include: the The composition, roles and responsibilities and activities implementation of the strategies and policies of the group as determined by of the Nomination & Governance Committee are set the board; monitoring of operational and financial results against plans and out on pages 103 and 104 of the Nomination & budget; prioritising the allocation of capital, technical and human resources Governance Committee Report. and developing and managing Risk Management Systems. Audit, risk & The composition, roles and responsibilities and activities The roles of the Chair and Group Chief Executive internal control of the Audit & Risk Committee are set out on pages 120 The division of responsibilities between the Chair of the board and the to 127 of the Audit & Risk Committee Report. Group Chief Executive is clearly defined and has been approved by the board. The Chair leads the board in the determination of its strategy and in the Details of the board’s assessment of the company’s achievement of its objectives and is responsible for organising the business principal risks are set out on pages 63 to 70 of the Strategic of the board and availability of timely information, ensuring its effectiveness, Report and details of the board’s assessment of the encouraging challenge from non-executive directors and setting its agenda. company’s risk management and internal control system The Chair has no day-to-day involvement in the management of the group. are set out on page 102 of this Corporate Governance Report. The Group Chief Executive has direct charge of the group on a day-to-day Please also see the Directors’ Report (including the basis and is accountable to the board for the strategic, financial and Going Concern Statement) (pages 128 to 130) and the operational performance of the group. Viability Statement (page 60) for details of the board’s Senior Independent Director assessment of the company’s position, business model, Jane Dale, who has been a non-executive board member since May 2016, strategy, and prospects. was appointed as the Senior Independent Director in October 2018. The senior independent director supports the Chair in both the delivery of the board’s Remuneration The composition, roles and responsibilities and activities objectives and in ensuring that the view of all shareholders and stakeholders of the Remuneration Committee are set out on page 108 are conveyed to the board. Jane is available to meet shareholders on request of the Directors’ Remuneration Report. and to ensure that the board is aware of shareholder concerns not resolved Pages 105 to 119 of the Directors’ Remuneration Report through the existing mechanisms for shareholder communication. The senior sets out details of remuneration policies and practices independent director also meets with the non-executive directors, without the Chair present, at least annually, and conducts the annual appraisal of the Chair’s and how these have been applied in determining director performance and provides feedback to the Chair and the board on the outputs and senior management remuneration. of that appraisal. 98 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 CORPORATE GOVERNANCE The following statement, together with the Directors’ Remuneration Report on pages 105 to 119, the Nomination & Governance Committee Report on pages 103 and 104, and the Audit & Risk Committee Report on pages 120 to 127, describes how the principles set out in the UK Corporate Governance Code 2018 (the ‘Code’) have been applied by the company and details the company’s compliance with the Code’s provisions for the year ended 31 December 2023. Directors and directors’ independence During 2023 a review was conducted to assess the independence of the board as a whole when set against a matrix of key measures set out in the Code. The table below shows the results of that review under the Code Provisions 11, 12 and 17 and Principle G. Code consideration Provision 11 & 12 Principle G Provision 17 1. Are at least half the board, excluding the 3. Does the board include an appropriate 5. Has the board established a Nomination chair, NEDs whom the board considers combination of executive and non-executive Committee to lead the process for to be independent? (and, in particular, independent non-executive) appointments, ensure plans are in place YES directors, such that no one individual or small for orderly succession to both the board group of individuals dominates the board’s and senior management positions, and 2. Has the board appointed one of the decision making? oversee the development of a diverse independent NEDs to be the senior YES pipeline for succession? independent director (SID) to provide YES a sounding board for the chair and serve 4. Is there a clear division of responsibilities as an intermediary for the other directors between the leadership of the board 6. Are a majority of members of the Nomination and shareholders? and the executive leadership of the Committee independent NEDs? YES company’s business? YES YES 7. Is the Nomination Committee chaired by an individual other than the chair of the board when it is dealing with the appointment of their successor? YES The review went further and, based on Code Provision 10, assessed each NED against a list of ten Yes/No questions, where, for each, a ‘No’ is determined to be a positive assessment of independence. The table below shows the results of that review: Questions: Has the non-executive director? LS JD EF MH CH KB 1. Been an employee of the company or group within the last five years? No No No No No No 2a. Had within the last three years, a material business relationship with the company: Directly? No No No No No No 2b. Had within the last three years, a material business relationship with the company: No No No No No No As a partner, shareholder, director or senior employee of a body that has such a relationship with the company? 3. Received additional remuneration from the company apart from a director’s fee? No No No No No No 4. Participated in the company’s share option or performance-related pay scheme? No No No No No No 5. A member of the company’s pension scheme? No No No No No No 6. Got close family ties with any of the company’s advisors, directors or senior employees? No No No No No No 7. Held cross-directorships or had significant links with other directors through involvement in other companies or bodies? No No No No No No 8. Represented a significant shareholder? No No No No No No 9. Served on the board for more than nine years from the date of their first appointment? No No No No No No As a result of this review the board considers that all non-executive directors were independent during the year under review. The board has no familial relationship with any other member of the board or senior management team. Other than their fees, and reimbursement of taxable expenses, which are disclosed on page 109, the non-executive directors received no remuneration from the company during the year. The directors are given access to independent professional advice, at the company’s expense, when the directors deem it necessary in order for them to carry out their responsibilities. Independent professional advice of this nature was drawn upon with regard remuneration matters. This has been disclosed on page 108 in the Remuneration Report. The board is satisfied that its overall balance continues to provide significant independence of mind and judgement and further considers that, taking the board as a whole, the independent directors are of sufficient calibre, knowledge and number that they are able to challenge the executive directors, their views carry significant weight in the company’s decision making and bring diverse cultural and territory insight and skills. CHESNARAANNUALREPORTANDACCOUNTS202399 CORPORATE GOVERNANCE CORPORATE GOVERNANCE REPORT Professional development Board effectiveness and performance evaluation The directors were advised, on their appointment, of their legal and other As part of the annual performance, an internal effectiveness evaluation of the duties and obligations as directors of a listed company. This has been board and each of its committees was undertaken in the latter part of 2023. supplemented by the circulation to each director of their responsibilities This was through directors completing an anonymous questionnaire followed and duties as contained within the group’s Corporate Governance & by individual meetings between the Chair and each director to obtain their Responsibilities Map. Throughout their period in office, the directors have, views on what was working well and what could be improved. Individual through the conduct of business at scheduled board meetings and training, director performance and time commitment to the board was considered been updated on the group’s business and on the competitive and regulatory as part of these meetings. environments in which it operates. The directors are committed to their own ongoing professional development and the Chair discusses training with The questionnaire covered wide-ranging matters, including how well the each non-executive director at least annually. All directors are encouraged board operates, the process of decision making, the balance between to suggest training topics of interest. In 2023, specific board awareness the focus on risk, good customer outcomes and running the business, and deep-dive sessions took place on corporate reporting under IFRS 17 the culture and dynamics of the board ensuring its composition and that Sustainability and key jurisdictional market trends. Each member of the of its committees are aligned. In addition, using similar methods to those board served on one or more subsidiary board during the period under review, described above, the non-executive directors, led by Jane Dale as Senior through which they have considerable knowledge and experience of the Independent Director under a separate process, contributed to a formal divisional businesses across the group. performance evaluation of the Chair. Information The outcome of the reviews of the board and its committees indicated Regular reports and information are circulated to the directors in a timely that they continue to be effective. The evaluation of directors’ performance manner in preparation for board and committee meetings. concluded that each of the directors demonstrates commitment to their role and dedicates sufficient time to effectively discharge their responsibilities As stated above, the company’s directors are also members of various boards to the company. of key subsidiaries within the UK, Dutch and Swedish divisions. These boards hold scheduled meetings, at least quarterly, which are serviced by regular The review indicated that information provided to the board is clear and reports and information, covering all of the key areas relevant to the direction focused and that the board operates in an open and constructive manner. and operation of those subsidiary entities, including business development, Continuous progress on the company’s long-term strategy and ensuring key projects, financial performance and position, actuarial assumptions setting appropriate time is allocated to this continues to be a focus for the board and results analysis, compliance, investments, information technology and in 2024. Similarly, having overseen a number of changes to the executive security, operations, customer care and communication, internal audit, all team in 2023 (detailed on page 103 of the Nomination and Governance aspects of the Risk function and own risk and solvency assessment. Report), talent and succession planning remains a focus for 2024 in order to ensure the group is well placed to meet its strategic ambitions. Key divisional subsidiaries monitor risk management procedures, including the identification, measurement and control of risks through the auspices The evaluation findings were presented back to each committee and formally of a risk committee. These committees are accountable to and report to approved on that basis before each committee then confirmed to the board their boards on a quarterly basis. that it continued to operate effectively. Annual reports are produced which cover an assessment of the capital Directors’ conflicts of interest requirements of the life assurance subsidiaries, their financial condition The board has a policy and effective procedures in place for managing and, and a review of risk management and internal control systems. where appropriate, approving conflicts or potential conflicts of interest. This is a recurring agenda item at all board meetings, giving directors the Also, the divisions are required to submit a quarterly risk report and an annual opportunity to raise any conflicts of interest they may have or to update report on risk management and internal control systems. In addition to these the board on any changes to previously lodged interests. A director may structured processes, the papers are supplemented by information which be required to leave a board meeting whilst such matters are discussed. the directors require from time to time in connection with major events and developments, where critical views and judgements are required of board The Company Secretary holds a register of interest, and a log of all potential members outside the normal reporting cycle. conflicts raised is maintained and updated. The board is empowered to authorise potential conflicts and agree what measures, if any, are required to mitigate or manage them. No material conflicts of interest were noted in 2023. THE BOARD OF DIRECTORS Whenever a director takes on additional external responsibilities, the Chair considers any potential conflicts that may arise and whether or RECEIVE REGULAR UPDATES AS not the director continues to have sufficient time to fulfil their duties. There were considered to be no such concerns in 2023. WELL AS SPECIFIC SPECIALIST Customer/third-party conflicts of interest The board has a policy in place to manage customer and third-party AND REGULATORY TRAINING. conflicts of interest. This policy sets out how the company and its regulated subsidiaries manage conflicts of interest fairly, both between the relevant company and its customers, between groups of customers and between customers, suppliers and shareholders. No material conflicts of interest were noted in 2023. 100 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 CORPORATE GOVERNANCE Employee engagement Hybrid working arrangements are in place across the group to the extent At our AGM on 16 May 2023 all resolutions were passed, with votes appropriate to each territory and business unit. This hybrid flexibility has for ranging from 72.64% to 99.98% (votes against ranging from 0.01% enabled the group to attract candidates to new roles that otherwise might to 27.35%). The lowest support was for Resolution 2 on the Directors’ not have considered its main office locations. Remuneration Report (DRR), the next least supported resolution passed with 95.46%. Since the AGM, the Remuneration Committee has engaged The board has a standard agenda item at each of its meetings to cover with the company’s major shareholders and proxy agencies to help culture and stakeholder engagement, including workforce engagement. understand the reasons for votes cast against Resolution 2. This has helped highlight workforce and other stakeholder matters as part of board discussion and decision making. Three areas were identified to which our proposed response will be to i) introduce Core Surplus Emergence as a target for the Long-Term Incentive A full description of our employee engagement and well-being is provided Plan for senior management; ii) to disclose prospectively all LTIP performance in our Corporate and Social Responsibility section on pages 71 to 91. targets; and iii) to replace the Strategic Scorecard (30% weighting) with Customer/supplier engagement an ESG metric (5% weighting) and a Strategic Activity Scorecard (25% The board remains vigilant to ensure the importance of customer – weighting) which focuses on the assessment of value-enhancing strategic and supplier – engagement remains high on the group’s agendas. activities. These are touched on further in this year’s DRR. Relations with shareholders Our next AGM is to be held on 14 May 2024 and details of the resolutions The Group Chief Executive and the Group Finance Director meet with to be proposed can be found in the Notice of the Meeting on pages 265 and institutional shareholders and are available for additional meetings when 266. It is intended that the meeting be held in person, with the chairs of the required. Should they consider it appropriate, institutional shareholders are board and its committees available to answer such questions as appropriate. able to meet with the Chair, the senior independent director and any other Shareholders are nonetheless encouraged to submit in advance any questions director. The Chair is responsible for ensuring that appropriate channels of that they may have in order that the chairs of the board committees can communication are established with shareholders through the Group Chief answer them on the day. Executive and the Group Finance Director and, with support from the senior TCFD and CFD independent director as appropriate, is responsible for ensuring that the views In accordance with Listing Rules, we have compiled our third report covering of shareholders are known to the board. This includes twice yearly feedback the broad range of climate-related information to be disclosed under the prepared by the company’s brokers on meetings that the executive directors four overarching pillars (Governance, Strategy, Risk Management and have held with institutional shareholders. The company has a programme of Metrics & Targets) of the TCFD, of which the full report is contained on meetings with its larger shareholders as managed by the Head of Strategic pages 71 to 91. In addition, Chesnara plc has complied with the new CFD Development and Investor Relations, which provides an opportunity to requirements by including climate-related financial disclosures consistent discuss the progress of the business on the basis of publicly available with the requirements under sections 414CA and 414CB of the Companies information. This programme continued during 2023 with enhanced Act 2006. use made of audio and video facilities and benefitted this year from commencement of our partnership with RBC as joint broker alongside Company Secretary long-established Panmure Gordon. Following the issuance of a Tier 2 Amanda Wright is Chesnara’s Group General Counsel & Company Secretary bond in 2022, the company also meets with existing and prospective debt and is responsible for advising the board, through the Chair, on all governance investors. These include specific meetings for the debt investor community matters. The directors had access to the advice and services of the Company as well as ad hoc meetings arranged either directly or through investor Secretary throughout the year. conferences. A significant proportion of the company’s shareholders are Remuneration Committee retail investors and, in order to ensure that they have access to relevant Full details of the composition and work of the Remuneration Committee information, the company maintains a detailed website for investors which are provided on page 108. includes access to equity research. Management also undertake webinars on the company’s prospects that are publicly available to private investors. Audit & Risk Committee Full details of the composition and work of the Audit & Risk Committee Annual and interim reports are published and those reports, together with are provided on pages 120 to 127. a wide range of information of interest to existing and potential shareholders, are made available on the company’s website, www.chesnara.co.uk Nomination & Governance Committee Full details of the composition and work of the Nomination & Governance All shareholders are encouraged to attend the Annual General Meeting (AGM) Committee are provided on pages 103 and 104. at which the results are explained and an opportunity is provided to ask questions on each proposed resolution. The attendance record of each of the directors at scheduled board and committee meetings for the period under review is: Nomination & Scheduled Governance Remuneration Audit & Risk 1 board Committee Committee Committee Luke Savage – Non-Executive Chair 11 (11) 4 (4) 10 (10) n/a Steve Murray – Executive Director 11 (11) n/a n/a n/a David Rimmington – Executive Director 11 (11) n/a n/a n/a Jane Dale – Non-Executive Director 11 (11) 4 (4) n/a 6 (6) Mark Hesketh – Non-Executive Director 11 (11) 4 (4) n/a 6 (6) Eamonn Flanagan – Non-Executive Director 11 (11) n/a 10 (10) 6 (6) Karin Bergstein – Non-Executive Director 11 (11) 4 (4) n/a 6 (6) Carol Hagh – Non-Executive Director 11 (11) 4 (4) 10 (10) n/a The figures in brackets indicate the maximum number of scheduled meetings in the period during which the individual was a board or committee member. Notes. 1. The number of scheduled board meetings includes 3 meetings that were called at short notice to discuss ad hoc/subject specific matters. CHESNARAANNUALREPORTANDACCOUNTS2023101 CORPORATE GOVERNANCE CORPORATE GOVERNANCE REPORT In addition, the Chesnara board confirms that it has undertaken a formal annual review of the effectiveness of the system of internal control for THE BOARD IS RESPONSIBLE the year ended 31 December 2023, and that it has considered material developments between that date and the date of approval of the Annual FOR THE GROUP’S SYSTEM Report and Accounts. The board confirms that these reviews took account of the findings by the Internal Audit and Compliance functions on the OF INTERNAL CONTROL AND operation of controls, internal financial controls, as well as management assurance on the maintenance of controls, and reports from the external REVIEWING ITS EFFECTIVENESS. auditor on matters identified in the course of statutory audit work. Conclusions of the Audit & Risk Committee’s annual review of effectiveness of the group’s risk management and internal control systems is reported Internal control in more detail in the Audit & Risk Committee Report as set out on pages The board is ultimately responsible for the group’s system of internal control 120 to 127. The board is not aware of any significant deficiencies in the and for reviewing its effectiveness. In establishing the system of internal effectiveness of the group’s systems of internal control and risk management control, the directors have regard to the significance of relevant risks, the for the year under review. That said it acknowledges that there are a number likelihood of risks occurring and the methods and costs of mitigating risks. of live IT change programmes that exist across the group. These include the It is, therefore, designed to manage rather than eliminate the risks, which planned migrations for the majority of the UK’s outsourced operations to might prevent the company meeting its objectives and, accordingly, only SS&C, Scildon’s IT improvement project, the integration of Conservatrix into provides reasonable, but not absolute, assurance against the risk of material the Waard group and the finalisation of the implementation of the group’s misstatement or loss. financial reporting consolidation tool. These are expected to enhance the IT control environment across the group. There has been no change of status In accordance with the FRC’s guidance on Risk Management, Internal Control to this up to the date of approval of this report. and Related Financial and Business Reporting, the board confirms that there is an ongoing process for identifying, evaluating and managing the significant Financial reporting risks faced by the group. This process has been in place for the year under Management is responsible for establishing and maintaining adequate internal review and up to the date of approval of the Annual Report and Accounts. controls over financial reporting. These controls are designed to provide The process is regularly reviewed by the board and accords with the guidance. reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes. In accordance with the regulatory requirements of the PRA, local regulators and SII, the relevant business divisions have maintained and enhanced their The group has comprehensive planning, budgeting, forecasting and reporting risk and responsibility regime. This ensures that the identification, assessment processes in place. A summary of the group’s financial results supported and control of risk are firmly embedded within the organisation and that there by commentary and performance measures are provided to the board on are procedures for monitoring and update of the same. The Audit & Risk a quarterly basis. Committee regularly reviews and reports quarterly on risks to the board. In relation to the preparation of the group financial statements, the controls The group also maintains a principal risk register, which ensures identification, in place include the finance governance team: assessment and control of the significant risks subsisting within the company – reviewing new developments in reporting requirements and standards and its business units CA, Waard Group, Movestic and Scildon. The principal to ensure that these are reflected in group accounting policies; and risks and uncertainties of the group can be found on pages 63 to 70. – developing the group’s financial control processes and procedures which The maintenance of the principal risk registers is the responsibility of senior are implemented across the group. management, who report on them quarterly to the respective divisional Audit & Risk Committees and to each Chesnara Audit & Risk Committee The group financial statements are presented for the first time at a year end meeting. The divisions maintain a risk and responsibility regime, which following the introduction of IFRS 17 Insurance Contracts and IFRS 9 Financial ensures that: Instruments. The multi-year implementation project regarding these standards is now complete, with all reporting processes and controls now substantially – the boards and Group Chief Executive have responsibility for ensuring that embedded across the group. the organisation and management of the operation are characterised by sound internal control, which is responsive to internal and external risks The reporting process is supported by transactional and consolidation finance and to changes in them; software. Reviews of the application of controls for external reporting – the boards have responsibility for the satisfactory management and control purposes are carried out by senior finance management. The results of of risks through the specification of internal procedures; these reviews are considered by the board as part of its monitoring of the performance of controls around financial reporting. The Audit & Risk – there is an explicit risk function, which is supported by compliance; and Committee reviews the application of financial reporting standards and – the Internal Audit functions provide independent assurance that the any significant accounting judgements made by management. risk management, governance and internal control processes are operating effectively. Going Concern and Viability Statement The Statement on Going Concern is included in the Directors’ Report on As an integral part of this regime, detailed risk registers are maintained page 130 and the Long-Term Viability Statement is set out on page 60. to identify, monitor and assess risk under appropriate classifications. It includes climate change risk. Financial crime and whistleblowing Amongst others, the company operates policies for Anti-Bribery & Corruption With regards to Countrywide Assured plc, Waard Group, Scildon and as well as Anti-Fraud in order to manage risks such as financial crime, Movestic, the group ensures that effective oversight is maintained, by way money laundering, fraud, corruption and terrorist financing. Related to this, of the membership of Chesnara directors on their local boards and quarterly a Whistleblowing Policy is also operated to facilitate the communication reporting to the Chesnara plc Audit & Risk Committee. of wrongdoing or suspected wrongdoing with clear communication lines highlighted to enable individuals to advise of their concerns in a safe and confidential manner. No instances of whistleblowing or financial crime were noted during the year. These policies are all reviewed annually and staff are asked to attest to their embedding and understanding. A Gifts & Hospitality Register is maintained and no breaches were recorded during the year. 102 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 CORPORATE GOVERNANCE NOMINATION & GOVERNANCE COMMITTEE REPORT THE MAIN FOCUS OF THE NOMINATION & GOVERNANCE COMMITTEE CONSIDERS THE MIX OF SKILLS AND EXPERIENCE THAT THE BOARD REQUIRES TO BE EFFECTIVE AND WITH FOCUS ON TALENT DEVELOPMENT AND SUCCESSION PLANNING ACROSS THE GROUP. Nomination & Governance Committee During the period under review, the committee comprised Mark Hesketh, who also served as Chair of the committee, Jane Dale, Luke Savage, Karin Bergstein and Carol Hagh. No individual participated in discussion or decision making when the matter under consideration related to themselves. The committee Chair reports material findings and recommendations from each meeting at the next board meeting. The Terms of Reference for the committee can be found on the company website, www.chesnara.co.uk The role of the Nomination & Governance Committee is to: – keep under review the balance, structure, size, diversity and composition of the board and its committees, ensuring that they remain appropriate; – assess the independence of each NED and any circumstances that are likely to impair, or could impair, their independence; – be responsible for overseeing the board’s succession planning requirements including the identification and assessment of potential board candidates and making recommendations to the board for its approval; – scrutinise and hold to account the performance of the executive directors against agreed performance objectives and advise the Remuneration Committee of their assessments; – keep under review the leadership needs of, and succession planning for, the group in relation to both its executive directors and other senior management; – identify and nominate, for the approval of the board, candidates to fill board vacancies as and when they arise; – manage the search process for new directors, recommending appointments to the board; and MARK HESKETH, CHAIR – evaluate the balance of skills, knowledge, experience and diversity of the board. This includes consideration of recommendations made by the Group Chief Executive for changes to the executive membership of the board. During the period, the committee met four times and attendance at those meetings is shown on page 101. By invitation, the Group CEO and Group Chief of Staff attend the Nomination & Governance Committee, as under their role does the Group General Counsel & Company Secretary but none were present when matters relating to their own performance were discussed. The composition of the board The committee has continued to focus on succession planning, with a view to maintaining an appropriate composition for the board and its committees to support the continued development of the group. The review also identified areas where the board should evolve to meet any expected future business and strategic direction of the group. During 2023 the committee managed the process that led to the announcement that Tom Howard would succeed David Rimmington as the Group’s future Chief Financial Officer. Of particular note is: – Pauline Derkman being appointed Scildon CEO; Jackie Ronson being appointed Chesnara UK CEO; and Sara Lindberg being appointed Movestic Livförsäkring CEO. The development of talent below board level is vital and an area of focus for the board. The company continues to both build an internal leadership pipeline for senior roles and ensure that the necessary skills and experience exist within the business to deal with challenges and to achieve set objectives. The appointment of Sara and of Chief Risk Officer Gavin Hughes taking the responsibility of Group Chief Actuary are examples of this. CHESNARAANNUALREPORTANDACCOUNTS2023103 CORPORATE GOVERNANCE NOMINATION & GOVERNANCE COMMITTEE REPORT Board appointment process Review of effectiveness The committee adopts a formal and transparent procedure for the The board and its committees undertook annual effectiveness reviews and appointment of new directors to the board. the respective chairs discussed the findings in each forum. Other standard processes were also undertaken, including Fit & Proper assessments, The board’s typical process may include the use of independent external Board Diversity Policy review, NED succession planning and the review recruitment consultants for appointing directors. The company will provide of the effectiveness of the Chair. The evaluations did not identify any a brief of the candidate desired, along with a role profile, to the recruitment additional changes needed to board composition over and above those consultant. As part of the appointment process, these external recruitment that had been initiated. consultants would be asked to provide candidates from a diverse range of backgrounds. Details of candidates who are deemed suitable, based on Any areas where increased focus and/or action was considered to be of merit and against objective criteria, are submitted to the committee and the potential value has either been addressed in 2023 or will be taken into committee will review a short list of suitable candidates and put forward for account as appropriate during 2024. The 2023 board effectiveness reviews interview by the board and the executive management team those most were internally facilitated in 2023 having been last led by an external third suitably qualified. Any candidate deemed suitable for appointment will, if party (Nasdaq Governance Solutions) in 2022. necessary, first have to go through the fit and proper assessment process Succession planning as outlined in the FCA Senior Managers & Certification Regime (SMCR). Succession planning is an important element of good governance, ensuring The board engaged the services of Teneo as independent external recruitment that Chesnara is fully prepared for planned or sudden departures from key consultants in its search for Chesnara’s prospective Chief Financial Officer. positions throughout the group. The committee, in the year, has reviewed With their support in that capacity, Tom Howard was, on 7 December 2023, the succession plans for the board and senior executives across the group. announced to be joining no later than the beginning of May and we can Mindful of the need for effectiveness and engagement, the committee confirm that Tom’s appointment as a director and Group CFO designate is through its ongoing review of board and committee memberships now expected to be on 15 April 2024. Current Group Finance Director David determined that a number of changes were appropriate as noted above. Rimmington will step down as a director of Chesnara at the conclusion of the And the committee will continue to also have efficiency and value in 2024 AGM, but has overseen the group’s year end reporting process and will mind when determining board membership and giving optionality for continue to support an orderly transition until that date. On that date, Tom will its longer-term composition as the group continues to change and be appointed Group CFO, subject to regulatory approvals. succession plans are effected. Diversity Non-executive director engagement The committee is mindful of the corporate governance developments in the It is important to the board that non-executive directors are provided with areas of diversity and gender balance, including the requirements under the training and development both within the business and at a group level. Disclosure and Transparency Rules. The board believes that ongoing training is essential to maintaining an The board recognises the benefits of having diversity across all areas of the effective and knowledgeable board. The Company Secretary supports group – please see the Equal Opportunities section on page 73 for further the Chair in ensuring that all new directors receive a tailored and detail. When considering the make-up of the board, the benefits of diversity comprehensive induction programme on joining the board. Continuing are reviewed and balanced where possible and appropriate, along with the education and development opportunities are made available to all board breadth of skills, sector experience, gender, race, disability, age, nationality members throughout the year. In 2023, a number of development initiatives and other contributions that individuals may make. In identifying suitable have continued, these included one-to-one sessions with key members candidates, the committee seeks candidates from a range of backgrounds, of the senior management team and training sessions given by external with the final decision being based on merit against the role criteria set. providers as well as our own internal IFRS 17 and Sustainability project teams. Through its Board Diversity Policy, the board maintains its practice of Directors standing for re-election embracing diversity and operates a measurable gender-based target of David Rimmington will stand down as a director at the company’s AGM having at least 40% representation of both male and female membership on 14 May 2023 at which time Tom Howard will be put forward for election. on the board by 31 December 2025 in recognition of the recommendations In accordance with the Code, all other directors will offer themselves for of the FTSE Women Leaders Review. We acknowledge that we do not meet re-election at that time. Following the annual board effectiveness reviews Listing Rule 9.8.6R of having at least 40% female directors but remain of individual directors, as applicable and subject to re-election/election, committed to achieving our 31 December 2025 target which will be achieved the Chair considers that each director: whilst taking account of the board’s succession plans. Throughout 2023, the board comprised 37.5% female: 62.5% males in line with the Hampton- – continues to operate as an effective member of the board; Alexander Review target of 33% for FTSE100 companies though a voluntary – has the necessary skills, knowledge and experience to enable them to target for FTSE350 organisations. In addition, the company will target having discharge their duties and contribute to the continued effectiveness of the a female appointee to at least one of the key senior roles of Chair; Senior board; and Independent Non-executive Director; Group CEO or Group CFO by – has sufficient time available to fulfil their duties. 31 December 2025 but has met this target for a number of years. Actual levels of gender diversity will be monitored and be reported upon in the The board, on the advice of the Nomination & Governance Committee, Annual Report and Accounts. The board currently comprises five men and recommends the election or re-election of each director so proposed three women (37.5%) with the role of Senior Independent Non-Executive at the 2024 AGM. The full 2024 AGM Notice can be found on page 265. Director held by Jane Dale. Further details of our board’s diversity, including our approach to collecting data, can be found at page 73 of the Strategic Report. Further, Chesnara has determined that it will ensure that it continues to meet the measurable target of having at least one director from an ethnic minority on the board in line with the Parker guidance. In consideration of the longer term, the board has discussed increasing its range of knowledge and experience from outside financial services and also a broader geographical experience base but is satisfied with its current composition. The business operates to principles for other roles and is mindful that it has a small Mark Hesketh workforce and therefore considers that it needs to take associated staff Chair of the Nomination & Governance Committee turnover expectations into account. The diversity of the Senior Leadership 27 March 2024 Team is reported on page 104. 104 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 CORPORATE GOVERNANCE DIRECTORS’ REMUNERATION REPORT REMUNERATION COMMITTEE CHAIR’S ANNUAL STATEMENT Dear Investor On behalf of the board and its Remuneration Committee (Committee), I am pleased to present the Directors’ Remuneration Report for the year ended 31 December 2023, for which we seek shareholder support at our forthcoming Annual General Meeting. Summary of the year Chesnara has a very clear strategic focus across three key areas: 1. Maximising value from our existing business; 2. Acquiring life and pension businesses that meet the strategic criteria of the company; and 3. Enhancing value through profitable new business generation. These three strategic objectives are underpinned by the culture, values and risk appetite of the group, which looks to deliver positive investment returns and value for money for our customers. From a remuneration perspective we seek to achieve strong alignment between the interests of stakeholders and executive directors and continue to operate two executive incentive schemes: the Short-Term Incentive Scheme (STIS) and Long-Term Incentive Plan (LTIP). As covered in the financial report, we have seen excellent delivery on our key performance metrics in the year: † 1. Cash generation of £32.5m contributed to the funding requirements of the dividend. 2. Commercial cash generation of £53.0m showing that Chesnara continues to deliver cash generation through a wide variety of market conditions. † 3. EcV increased by £48.3m before the impact of dividend distributions of £35.4m. EAMONN FLANAGAN, CHAIR 4. Strong solvency ratio of 205% well above our usual operating range. 5. £10.1m of new business profits were generated on a commercial basis. 6. Acquisition strategy saw the completion of two transactions in 2023, the insurance portfolio of Conservatrix and the onshore UK individual protection line of business of Canada Life Limited. 7. An increase in dividend of 3% retaining our track record of growing the dividend every year for the last 20 years. 2023 AGM voting results and summary of revised approach to remuneration for 2024 I would like to begin by thanking shareholders for their engagement and feedback in the development of our new Directors’ Remuneration Policy in early 2023. The Committee was delighted that the policy was approved by 96.25% of shareholders at the 2023 AGM. The policy can be found at www.chesnara.co.uk Our 31 December 2022 Directors’ Remuneration Report received 72.66% of votes in favour. Since the AGM the Remuneration Committee has engaged with the company’s major shareholders and proxy agencies to help understand the reasons for votes cast against the DRR. Three areas were identified, as announced by RNS on 15 November 2023. We intend to respond to each as follows: Assessment of the company’s M&A activity within the Strategic Scorecard of the STIS For 2024, the Remuneration Committee will make a small modification to the performance measures to be included in the STIS. The Strategic Scorecard (30% weighting) will be replaced by an ESG metric (5% weighting) and a Strategic Activity Scorecard (25% weighting) which focuses on the assessment of value-enhancing strategic activities including M&A, management actions, operational programme delivery and pipeline development. The weightings within the Strategic Activity Scorecard will vary year-to-year to reflect the relative priorities for the company. WE SEEK TO ACHIEVE STRONG ALIGNMENT BETWEEN THE INTERESTS OF STAKEHOLDERS AND EXECUTIVE DIRECTORS. † Alternative Performance Measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the Additional Information section of this Annual Report and Accounts. CHESNARAANNUALREPORTANDACCOUNTS2023105 CORPORATE GOVERNANCE DIRECTORS’ REMUNERATION REPORT This means that the assessment of M&A activity for the FY24 STIS will be New Group Chief Financial Officer (Group CFO) entirely contained within the Strategic Activity Scorecard with no discretion In December 2023, we announced that David Rimmington had agreed applied. There will also be no discretion applied to the FY23 STIS outcome. with the board that he would not seek re-election at the company’s Annual Full details of the assessment of the Strategic Activity Scorecard will be General Meeting (AGM) in 2024 and that he would step down as Group included in the Directors’ Remuneration Report each year. Finance Director and as a director of Chesnara plc at the conclusion of that meeting. David has overseen the 2023 year end reporting process LTIP to be based one third on Core Surplus Emergence and continues to support an orderly transition to his intended successor. One area of feedback related to the use of cash generation metrics in both the STIS and LTIP. In response to this, for LTIP awards granted in 2024, David is being treated as a good leaver in line with the definitions set out the commercial cash generation metric will be replaced by a new Core in our Remuneration Policy. He will not be eligible for a salary increase in Surplus Emergence metric. The existing relative TSR and Economic Value 2024 nor to receive an LTIP award in 2024. His 2024 STIS and inflight LTIP growth metrics will be retained. Each metric will be weighted one third awards will be pro-rated up to the date David commences Garden Leave. of the assessment in line with the current approach. Awards will continue to be subject to the original performance targets and there will be no acceleration of vesting. David leaves Chesnara in a strong Core Surplus Emergence will be consistent with the absolute surplus position with exciting potential opportunities ahead and we are grateful for movement of the divisions as used elsewhere in the Annual Report and the contribution he has made, and wish him well for the future. Accounts, including graphically on page 45, and the company’s other trading updates but adjustments will be made for the impact of items such as FX, Tom Howard will join as an Executive Director on Monday 15 April 2024 T2/T3 restrictions, acquisition impacts and shareholder dividends. It is linked at which time he will become Group CFO designate subject to regulatory to SII and creates differential between the LTIP and STIS KPIs. approval and will stand for election at the AGM. We are pleased to welcome Tom who brings with him over 25 years of industry experience, most recently All LTIP performance targets to be disclosed prospectively as CFO of Aviva Investors, the asset management division of Aviva plc. going forward He has held a variety of senior roles within Aviva plc, including Director of Shareholders expressed a preference for LTIP performance targets to be Mergers & Acquisitions for Aviva Group and CFO for Aviva’s Life and General disclosed prospectively, in line with the approach the company has always Insurance business in Ireland. Tom brings with him European actuarial taken for the relative TSR metric. The company acknowledges that this is and financial reporting capabilities and a strong track record of leadership increasingly common practice and going forward will disclose threshold in finance, M&A, capital management and business transformation. and maximum targets prospectively going forwards, commencing with the targets for the LTIP awards to be granted in 2024. Tom’s salary on appointment will be £350,000, positioned at the median of the FTSE Small Cap benchmark group, noting again that the group’s market The Remuneration Committee would like to thank the major shareholders capitalisation is above the upper quartile of this index. The structure of Tom’s who engaged in the consultation exercise since the AGM and believes that remuneration is the same as that provided to his predecessor, with an STIS the proposed changes address the key issues raised. and LTIP opportunity of 100% of salary each. Workforce We have agreed to compensate Tom for awards which he forfeited on leaving It is our normal practice to award all employees an annual salary increase Aviva Investors to join Chesnara. In the main these relate to deferred awards which takes into account factors such as inflation. which had no further performance conditions attached. These will be replaced In 2024, UK employees below executive level received a general salary by awards of Chesnara shares whose vesting profile mirrors as closely as increase from a pot of 6.0%, with the exception of individual awards being possible the vesting profile of the awards foregone. Other than these, a cash made as a result of staff progression. The Group CEO and Group FD are bonus has been agreed with regard to forfeited awards that were due to vest covered later. in 2024. These treatments are in line with the typical approach of companies in this scenario and within normal market practice. Further details will be disclosed by RNS in the normal manner once grants have been made Executive performance in 2023 following the conclusion of our year end Closed Period and final values will be Executive director remuneration outcomes for 2023 disclosed in the Directors’ Remuneration Report of the 2024 year-end. Further In light of the performance of the executive team relative to the financial details are disclosed in the report and in compliance with Listing Rules 9.4.2. targets and strategic objectives set at the start of the year, the Remuneration Implementation of pay in 2024 Committee is satisfied that the reward outcomes are appropriate and that As noted in the 2022 and 2021 Directors’ Remuneration Reports, we our Remuneration Policy worked as intended. Details on the STIS can be appointed our Group CEO, Steve Murray, on a salary below the market found on page 110 and under the 2021 LTIP awards on page 112. The targets benchmark when he joined in 2021. At the time I indicated that the and performance outcome can be found in the tables on pages 110 and 112. Committee would potentially return in future years to ask for shareholders’ The impact of acquisitions is excluded from the cash generation and EcV support in rewarding success with future pay rises for Steve, predicated results for STIS award purposes given their funding can have a distorting on company performance and his development in role. The Committee impact on short-term results. To recognise the importance of potential continues to be very impressed with our Group CEO’s performance and, M&A growth, historically the Committee has used its discretion to assess under his leadership in 2023, the group has: whether activity and results during a year warrants an award, with any – Reported an excellent set of financial results including positive commercial award subject to the overall STIS cap of 100% of basic salary. Although the cash generation of £53.0 million. acquisition strategy created over £28m of incremental Economic Value during – EcV earning growth of £48.3 million. the year, the Committee has noted the feedback of shareholders following the vote at the 2023 AGM and has applied no discretion in its assessment – Retained a resilient balance sheet with a strong solvency ratio of 205%, of the STIS outcome this year. above the usual 140-160% operating range. – Maintained momentum in acquisitions through the completion of the The Committee has reviewed the position of the 2021 LTIP ahead of the Conservatrix’s insurance portfolio in the Netherlands and Canada Life Limited vesting to understand whether any windfall gain has arisen in respect of onshore individual protection business here in the UK. The four deals the award which was granted at a price of 275.0p. Taking into account completed over the last 2 years have added c£50m of net EcV to the group. the Chesnara share price as at 8 March 2024 of 262.0p the Committee is satisfied that no windfall gains have occurred and that no adjustment – Remained very positive on the outlook for further M&A and continue to see is required on vesting. a positive pipeline of opportunities. 106 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 CORPORATE GOVERNANCE – Made a number of excellent hires to leadership positions including new Employee engagement CEOs for the UK, Movestic and Scildon business units and the future The management teams in each of the businesses are responsible for Group CFO Tom Howard who will join as a director in 2024. ensuring that employees are kept informed and their views are considered on key subject matters. – Increased the interim dividend 3% year-on-year, extending the company’s excellent and long-term track record of increasing its dividend to shareholders. The Committee engaged with UK staff on the components of the group’s – Delivered shareholder returns towards the upper quartile of our comparator remuneration offering and the alignment of directors’ pay with UK employees group since the Group CEO’s appointment. through a meeting held between myself as Remuneration Committee Chair and the Group CEO with representatives from across the UK team. The Committee has therefore decided to increase the Group CEO’s salary by 6% as part of the annual review process, in line with the salary pot available Shareholder engagement for UK employee salary increases, and to deliver an additional 8.6% to reflect The Directors’ Remuneration Report for the year ended 31 December 2023 his development in role. At £525,000, this positions the Group CEO’s salary comprises my Annual Statement as Chair of the Remuneration Committee between the median and the upper quartile of the FTSE Small Cap benchmark and our Annual Remuneration Report, which together are subject to an compared with the group’s market capitalisation above the upper quartile advisory shareholder vote at the AGM in May 2024. As noted in the of this index. The Committee believes that this positioning for 2024 reflects introduction to this letter, shareholder engagement following last year’s Steve’s contribution and the opportunities that he is developing to further AGM has directly influenced the proposed approach to remuneration grow the group. The increase reflects the Committee’s signposting in last for the upcoming year. As a Committee we will always be open to year’s report of its intention to review the Group CEO’s salary as he further shareholder feedback. developed in role, mindful of his performance and reward positioning The Remuneration Committee would like to thank the major shareholders compared to other such roles in peer organisations and within the parameters who engaged in the consultation exercise since the AGM and believes that of the Remuneration Policy. the proposed changes address the key issues raised. The executive directors’ remuneration for 2024 can be found on page 109. The voting outcome at the 2023 AGM in respect of the Directors’ Non-executive director fees Remuneration Report for the year ended 31 December 2022 and the The board took into account individual NEDs’ updated responsibilities and Remuneration Policy is set out on page 119 and reflects the support of wider benchmarks for NED pay when determining increases to their fees. both private and institutional shareholders. The committee will continue The Chair’s fee was raised by 8.9%, leaving it in the lower quartile of the to be mindful to the interests of shareholders. peer group. Directors’ fees are set out on page 118. I hope that my annual statement, together with our Remuneration Report, provides a clear account of the operation of the Remuneration Committee during 2023 and how we have put our Remuneration Policy into practice. As Chair of the Remuneration Committee, I look forward to engaging with you on our activities and the decisions that we have taken. Eamonn Flanagan Chair of the Remuneration Committee 27 March 2024 CHESNARAANNUALREPORTANDACCOUNTS2023107 CORPORATE GOVERNANCE DIRECTORS’ REMUNERATION REPORT • ANNUAL REMUNERATION REPORT This section sets out how the Remuneration Committee has implemented its Remuneration Policy for executive directors during 2023. Other than the single total figure of remuneration for each director tables on page 109, statement of directors’ shareholding and share interests on page 114, the information contained within this report has not been subject to audit. Composition and activities of the Remuneration Committee In accordance with its Terms of Reference, which can be viewed on the company’s website, the Remuneration Committee considered matters relating to directors’ remuneration and that of other senior managers at each of its meetings in 2023. Members of the Remuneration Committee during the course of the year were: Committee Role on the Committee Attendance Maximum possible 1 members committee member since in 2023 meetings in 2023 Luke Savage Committee member February 2020 10 10 2 Eamonn Flanagan Committee Chair July 2020 10 10 Carol Hagh Committee member February 2022 10 10 Notes. 1. By invitation, the Group CEO and Group Chief of Staff attended the Remuneration Committee, as under their role did the Group General Counsel & Company Secretary but none were present when matters relating to their own remuneration were discussed. 2. Eamonn Flanagan joined the Committee in July 2020, and was appointed Chair on 15 January 2022. The Committee appointed PricewaterhouseCoopers LLP (PwC) as its independent advisor from 10 October 2022 following a competitive tender process. During 2023 the Committee incurred external advisor fees totalling £156,530 excluding VAT. PwC is a member of the Remuneration Consultants Group and a signatory to its Code of Conduct and the Committee is therefore satisfied that the advice PwC provided was objective and independent. Highlights 2023 In 2023, the Committee met ten times and dealt with the following matters: Area of focus Matter considered Executive director Assessed and recommended to the board, approval of the outcome of awards made in 2022 under the STIS and in 2021 remuneration and reward under the LTIP having given due consideration to the risk report provided by the Audit & Risk Committee. The Committee also approved the outcomes of buyout awards made to Steve Murray as Group CEO on appointment. Approved the targets and the grant of awards to Executives in 2023 under the 2023 STIS and the 2023 LTIP and undertook a half-year evaluation. Also considered whether the share price at the time of making the LTIP award was likely to give rise to a ‘windfall’ for directors and determined that this was not the case. Approved the remuneration terms offered to the incoming Group CFO including awards to compensate them for inflight benefits otherwise to be forfeited upon leaving their previous employer. All employee and Reviewed the UK employee general salary increase of 6%, mindful of the continuing cost of living challenge, staff turnover executive remuneration and the ability to attract new talent including new business unit CEOs in an internationally competitive recruitment market. Reviewed and updated the STIS and LTIP Rules as presented to – and adopted by – shareholders at the 2023 AGM. Approved the expansion of LTIP grants eligibility to a broader participation group of targeted senior leaders and key talent who are able to materially influence the delivery of group strategy, ensuring that this critical group of executives are aligned to our long-term goals. Terms of Reference The Committee’s Terms of Reference were reviewed. A number of minor modifications were made in consultations with our advisors, PwC, but no material revisions were made to the scope of Committee duties as they were felt to continue to be appropriate and provide adequate scope to cater for the expectations set by the Code. Review of the A revised Remuneration Policy was presented to – and approved by – shareholders at the AGM in May 2023 and received Remuneration Policy 96.25% support. Committee evaluation An evaluation of the Committee’s performance by way of an internal questionnaire suggested that the Committee continued to operate well. This followed the external evaluation undertaken in the previous year which reached the same conclusion. Annual salary review The Committee reviewed the salaries of the executive directors and senior management and made changes in line with its Remuneration Policy and with due reference to staff salaries and economic conditions generally. Directors’ remuneration The Committee reviewed the draft Directors’ Remuneration Report for the 2023 Report and Accounts and recommended reporting its approval by the Chesnara board. Performance against The Committee reviewed the executive directors’ performance against objectives set. strategic objectives Shareholder engagement The Committee Chair responded to questions/queries raised by shareholders and conducted a consultation exercise following the outcome of the vote on the 2022 Directors’ Remuneration Report at the 2023 AGM, which has resulted in a number of changes to the operation of remuneration going forward as outlined in the Chair of the Committee’s letter. Employee engagement The Committee engaged with staff on the alignment of directors’ pay with UK employees through a meeting held between the Committee Chair, the Group CEO and a cross section of the UK workforce. Chair’s fees The Committee reviewed the level of fees payable to the Chair. Remuneration principles The Committee reviewed the Group Remuneration Principles, which guide the remuneration policies throughout the group. 108 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 CORPORATE GOVERNANCE Single total figure of remuneration for each director (audited information) The remuneration of the executive directors for the years ended 31 December 2023 and 31 December 2022 is made up as follows: Executive directors’ remuneration as a single figure – year ended 31 December 2023 Salary All taxable Non-taxable Total for 1 2 2&4 and fees benefits benefits STIS LTIP Pension 2023 Fixed Variable Name of director £000 £000 £000 £000 £000 £000 £000 £000 £000 5 Steve Murray 458 21 8 439 211 39 1,176 526 650 David Rimmington 315 41 8 299 105 30 798 394 404 Total 773 62 16 738 316 69 1,974 920 1,054 Executive directors’ remuneration as a single figure – year ended 31 December 2022 Salary All taxable Non-taxable Total for 3 and fees benefits benefits STIS LTIP Pension 2022 Fixed Variable Name of director £000 £000 £000 £000 £000 £000 £000 £000 £000 5 Steve Murray 420 21 2 321 294 36 1,094 479 615 David Rimmington 300 15 7 226 76 29 653 351 302 Total 720 36 9 547 370 65 1,747 830 917 Notes. 1. Includes amounts paid in lieu of accrued dividends and interest arising upon the exercise of share options under the 2014 STIS. 2. Includes amounts paid in lieu of accrued dividends and interest arising upon the exercise of share options under the 2014 LTIP. 3. The pension component in the single figure table represents employer contributions. No directors were members of a defined benefit scheme. 4. No portion of the LTIP single figure value in relation to the 2021 LTIP award is attributable to share price growth. 5. This vesting outcome of the 2021 LTIP award has been applied to the average share price between 1 October 2023 and 31 December 2023 (261.3p) to produce the estimated LTIP figures shown for 2023 above. There will be a true-up based on the actual share price on the day of vesting which will be shown in the 2024 Annual Report and Accounts. The remuneration of the non-executive directors for the years ended 31 December 2023 and 31 December 2022 is made up as follows, with the fee element being fixed and the benefits being variable in nature: Non-executive directors’ remuneration as a single figure – year ended 31 December 2023 and 2022 2023 2022 Fees Benefits Total Fees Benefits Total Name of director £000 £000 £000 £000 £000 £000 Luke Savage 135 – 135 128 – 128 Eamonn Flanagan 70 – 70 66 – 66 Jane Dale 75 – 75 71 – 71 Mark Hesketh 70 – 70 66 – 66 Carol Hagh 65 – 65 55 – 55 Karin Bergstein 65 – 65 55 – 55 Total 480 – 480 441 – 441 Salary and fees The Remuneration Committee usually reviews basic salaries annually. Assessments are made giving full regard to external factors such as earnings inflation and industry benchmarks and to internal factors such as changes to the role by way of either structural reorganisations or enlargement of the group. In addition, basic pay levels reflect levels of experience. The single earnings figures demonstrate the application of this assessment process. The Remuneration Policy for the executive directors is designed with regard to the policy for employees across the group as a whole. Our ability to meet our growth expectations and compete effectively is dependent on the skills, experience and performance of all our employees. Our employment policies, remuneration and benefit packages for employees are regularly reviewed. There are some differences in the structure of the Remuneration Policy for the executive directors and senior management team compared to other employees, reflecting their differing responsibilities, with the principal difference being the increased emphasis on performance related pay for the more senior employees within the organisation. UK employee share ownership is encouraged and facilitated through participation in the SAYE Scheme (subject to minimum service requirement). The Committee engaged directly with employees on the alignment of directors’ pay with UK employees, including with regard to the proposed 2024 salary increase. CHESNARAANNUALREPORTANDACCOUNTS2023109 CORPORATE GOVERNANCE DIRECTORS’ REMUNERATION REPORT • ANNUAL REMUNERATION REPORT Taxable benefits The taxable benefits for executive directors relate to the provision of a car, fuel allowance and medical insurance. For non-executive directors, the taxable benefits represent the reimbursement of travelling expenses incurred in attending board meetings at the Preston head office. These amounts also include an amount to compensate for the personal tax burden incurred. Short-Term Incentive Scheme The amounts reported as STIS in 2023 derive from awards made under the 2023 STIS. The amounts awarded to the executive directors under this scheme are † † based on performance against three core measures; cash generation , total EcV earnings and group strategic objectives. The table below shows the outcome of each measure, the target set and the resulting award. Actual Upper Percentage Percentage Minimum Percentage percentage threshold for award for award for threshold for award for Actual award, as minimum minimum On target on target maximum maximum Actual percentage percentage Total performance performance performance performance performance performance result total award of salary award (£) Steve Murray Cash £21.39m 0% £30.55m¹ 25.0% £39.73m 35.0% £51.87m¹ 35.0% 35.0% 160,230 1&3 generation Total EcV £9.34m 0% £13.34m 25.0% £20.01m 35.0% £42.24m 35.0% 35.0% 160,230 2&3 earnings Group strategic 75% 0% 100% 15.0% 125% 30.0% 86.8% 26.0% 26.0% 119,005 objectives of max Total 65.0% 100.0% 96.0% 96.0% 439,465 David Rimmington 1 1 Cash £21.39m 0% £30.55m 25.0% £39.73m 35.0% £51.87m 35.0% 35.0% 110,362 1&3 generation Total EcV £9.34m 0% £13.34m 25.0% £20.01m 35.0% £42.24m 35.0% 35.0% 110,362 2&3 earnings Group strategic 75% 0% 100% 15.0% 125% 30.0% 83.0% 24.9% 24.9% 78,394 objectives of max Total 65.0% 100.0% 94.9% 94.9% 299,118 For results between the performance thresholds, a straight-line basis applies. Notes. 1. This is stated after certain adjustments, such as consolidation adjustments. The actual results are also adjusted in the same manner. 2. The total EcV earnings before exceptional items on page 52 has been adjusted in line with the basis of the target. 3. Both the cash generation and EcV result have been adjusted to remove prospective Countrywide Assured/CASLP Part VII benefits to be consistent with the target setting basis. The following table details the requirements for delivery of the strategic objectives for 2023 and actual outcomes: Objectives area Objectives and performance Outcome Steve Murray Operational Set clear direction for, and ensure efficient – Signing of new strategic partnership with SS&C and associated TUPE transfer delivery (25%) delivery by, business units across Chesnara. of Chesnara staff, – CASLP Part VII delivered and detailed scoping work on migration underway, – Planning work for Canada Life Part VII also underway, – Delivery of enhancements to Scildon IT platform and associated cost savings in year, and – Migration and integration work for Robein Leven and Conservatrix portfolio complete. Communication Improve external and internal – Over 110 meetings with investors held across 2023 including attendance at debt and culture (10%) communications with key stakeholders. and equity conferences, podcasts with equity analysts and presentations to bank sales forces, – Further simplification of Investor Presentation with positive feedback received particularly as part of the HY 23 results, – Strong support for shareholder engagement on remuneration matters post AGM, and – RfP process run for one of the group’s corporate broking advisors with RBC selected. † Alternative Performance Measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the Additional Information section of this Annual Report and Accounts. 110 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 CORPORATE GOVERNANCE Short-Term Incentive Scheme continued The following table details the requirements for delivery of the strategic objectives for 2023 and actual outcomes: Objectives area Objectives and performance Outcome M&A (40%) Proactively identify and execute value – 2 deals executed in the period – Conservatrix insurance portfolio and Canada Life UK enhancing M&A. protection portfolio, – Proactive engagement with potential targets and advisors has continued with positive pipeline entering 2024, – Evaluation of Swedish market opportunities well underway, and – Excellent return from M&A – c£50m of incremental EcV against c£100m of capital deployed. People (10%) Development of direct reports and improve – Successfully transitioned leadership in UK division, Scildon and Movestic with three the talent pool across Chesnara. new CEOs in place and regulatory approved, – Announcement of the appointment of Tom Howard as new Group CFO, subject to regulatory approval with David Rimmington stepping off the board at the May AGM, – Further reshaping of Group Senior Leadership Team also undertaken, and – LTIP broadened. ESG (15%) Continued development of appropriate – Announced first ever sustainability targets, environmental/climate, people and – Published first ever Annual Sustainability Report, sustainability policies and practices, for the – Group programme now embedded, benefit of our customers, shareholders, staff, suppliers and other stakeholders, – Positive engagement with sustainability ratings agencies on scoring, which respond to regulatory and non- – Initial diversity and inclusion targets agreed with Nominations Committee, and regulatory guidance and industry practice. – M&A process updated to include sustainability considerations. David Rimmington Enhance investor Improve investor relations materials and – Over 110 meetings with investors held across 2023 including attendance at debt relations (10%) coverage and look to develop additional and equity conferences, podcasts with equity analysts and presentations to bank equity and debtholders including in the sales forces, Wealth Management area. – Further simplification of Investor Presentation with positive feedback received particularly as part of the HY 23 results, – First IFRS disclosures presented to the market, – Strong support for shareholder engagement on remuneration matters post AGM, and – RfP process run for one of the group’s corporate broking advisors with RBC selected. IFRS 17 (25%) Planning and delivery of IFRS 17 across – Successfully delivered IFRS 17 reporting requirements with first set of numbers group and divisions. shared with the market at HY 23, – Huge amount of work across the group to reshape financial processes and agree technical requirements and treatment strategies with our auditors, Deloitte; and – High quality training for Chesnara plc board also delivered. Balance sheet Proactive management of the group’s – Continued to develop and validate longer list of potential management actions (30%) balance sheet including in support of M&A. available across the group, – Broadened scope of group FX hedge which was executed again pre year end, – Mass lapse reinsurance also implemented in CA, and – Maintained investment grade rating from Fitch. People (10%) Enhance the Finance function talent pool. – Further investment in Finance function talent to support both business development and IFRS 17 BAU transition, – Revised operating structure also implemented, and – Wellness programme for Finance and wider UK employees implemented. ESG (25%) Continued development of appropriate – Continued sponsorship of Sustainability programme across the group, environmental/climate, people and – Published first ever Annual Sustainability Report, sustainability policies and practices, for – Group programme now embedded with additional resources secured, the benefit of our customers, shareholders, staff, suppliers and other stakeholders, – Positive engagement with sustainability ratings agencies on scoring, which respond to regulatory and non- – Substantial baselining work now complete, and regulatory guidance and industry practice. – Financial processes upgraded to support ESG requirements. CHESNARAANNUALREPORTANDACCOUNTS2023111 CORPORATE GOVERNANCE DIRECTORS’ REMUNERATION REPORT • ANNUAL REMUNERATION REPORT Short-Term Incentive Scheme continued In converting performance against the measures assessed for 2023 set out in the previous tables, the directors’ STIS awards are specified below. The Committee did not apply discretion in determining the final outcome: Name of director Salary Maximum on which award potential award Actual award as Total is based as % of salary % of salary value of award £ £ Steve Murray 457, 8 00 100.00% 95.99% 439,465 David Rimmington 315,321 100.00% 94.86% 29 9,118 Total 738,583 35% of the above awards are granted as deferred share awards that will vest at the end of a three-year deferred period. Long-Term Incentive Plan awards The following table sets out the amounts that are due to vest on 28 April 2024 under the 2014 LTIP, for which performance conditions were satisfied during the year. For the Group CEO, this award is a buy-out award granted under the 2014 LTIP in lieu of an LTIP grant from Steve’s ex-employer Royal London, with performance conditions aligned to the Chesnara 2021 LTIP award (50% EcV and 50% Relative TSR). For the relative TSR component, the Committee exercised its discretion to measure performance from the date that the Group CEO was appointed in role on 19 October 2021 as this was considered to be a fair and motivating approach to the performance condition on the basis that it was from this point that the Group CEO was able to affect the company’s TSR performance. Individual Measure Weight Ranges and targets Actual outcome Minimum achievement % of (as % of Target Max Opening Closing Performance award Value of target) achievement achievement EcV EcV achieved vesting award £ Steve Murray Award 1 100% n/a n/a n/a n/a n/a n/a 100.0% 56,053 Personal Performance Award 2 – TSR 50% =Median (7.7)% 13.4% n/a n/a 5.4% 33.4% 122,290 Award 2 – EcV 50% =94.3% £696.0m £716.0m £636.8m £524.7m 75.4% 0.0% nil David TSR 50% =Median 3.2% 27.1% n/a n/a 14.7% 34.9% 86,066 Rimmington EcV 50% =94.3% £696.0m £716.0m £636.8m £524.7m 75.4% 0.0% nil The table below sets out potential LTIP interests that have accrued during the year, and each directors’ interest in that scheme: % of award Length of Name of Amount of vesting for vesting period executive Name of Date award options Face value on the minimum – 3 years 1 2 director scheme was granted awarded date of grant performance Date of vesting 3 Steve Murray 2014 LTIP 06 July 2023 210,386 £457,800 10.0% 06 July 2026 based on share price (272.00p) 3 2014 LTIP 28 April 2022 147,6 27 £420,000 10.0% 28 April 2025 based on share price (284.50p) 3 2014 LTIP 26 November 119,089 £340,000 10.0% 28 April 2023 2021 based on share price (285.50p) 3 2014 LTIP 26 November 140,105 £400,000 10.0% 28 April 2024 2021 based on share price (285.50p) Notes. 1. No awards are made if performance is below the minimum criteria. 2. The face value is reported as an estimate of the maximum potential value on vesting. 3. LTIP awards from 2019 onwards are subject to a two-year holding period in addition to the three-year performance period. † Alternative Performance Measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the Additional Information section of this Annual Report and Accounts. 112 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 CORPORATE GOVERNANCE The table below sets out potential LTIP interests that have accrued during the year, and each directors’ interest in that scheme: % of award Length of Name of Amount of vesting for vesting period executive Name of Date award options Face value on the minimum – 3 years 1 2 director scheme was granted awarded date of grant performance Date of vesting 3 David 2014 LTIP 06 July 2023 115, 9 27 £315,321 10.0% 06 July 2026 Rimmington based on share price (272.00p) 3 2014 LTIP 28 April 2022 105,556 £300,306 10.0% 28 April 2025 based on share price (284.50p) 3 2014 LTIP 28 April 2021 94,502 £259,882 10.0% 28 April 2024 based on share price (275.00p) 3 2014 LTIP 28 April 2020 81,213 £259,882 10.0% 28 April 2023 based on share price (320.00p) 3 2014 LTIP 28 April 2019 71,070 £254,785 10.0% 28 April 2022 based on share price (358.50p) 2014 LTIP 28 April 2018 60,805 £249,300 10.0% 28 April 2021 based on share price (410.00p) 2014 LTIP 28 April 2017 61,996 £ 237,6 00 12.5% 28 April 2020 based on share price (383.25p) 2014 LTIP 28 April 2016 71,259 £222,328 12.5% 28 April 2019 based on share price (312.00p) Notes. 1. No awards are made if performance is below the minimum criteria. 2. The face value is reported as an estimate of the maximum potential value on vesting. 3. LTIP awards from 2019 onwards are subject to a two-year holding period in addition to the three-year performance period. Basis of awards and summary of performance measures and targets 2014 LTIP Share options awarded are based on the share price at close of business on date of award and a percentage of basic salary, that being Steve Murray 100% in 2022 and 125% in 2023; and David Rimmington 75% in 2014 and 2015, 90% in 2016 to 2021 and 100% in 2022 and 2023. Options have a nil exercise price. Total Shareholder Return Awards granted under the 2014 LTIP: 50% of the awards will vest subject to the TSR target being in a certain range, with the range being the ranking of the TSR of Chesnara against the TSR of the individual companies in the FTSE 350 Higher Yield Index. The award will be made on a sliding scale from nil if the Chesnara TSR is below the median to full if the Chesnara TSR is in the upper quartile. Awards granted under the 2023 LTIP: 33.3% will vest at maximum for TSR performance 6% per annum higher than the median company in the comparator group over the performance period with this calibration aiming to ensure that a maximum pay-out is achieved for performance comparable to the upper quartile of life insurance peer companies. The calibration of threshold is unchanged such that Chesnara must perform as a minimum at the median of the comparator group for any payout to be achieved subject to the TSR target being in a certain range, with the range being the ranking of the TSR of Chesnara against the TSR of the individual companies in the FTSE 350 Higher Yield Index. The award will be made on a sliding scale from nil if the Chesnara TSR is below the median to full if the Chesnara TSR is in the upper quartile. EcV growth target Awards granted under the 2014 LTIP: 50% of the award will vest subject to the EcV outcome being within a certain range of its target. Awards granted under the 2023 LTIP: 33.3% of the award will vest subject to the EcV outcome being within a certain range of its target. Commercial cash generation Awards granted under the 2023 LTIP: 33.3% of the award will vest subject to the commercial cash outcome being within a certain range of its target. This will be replaced by Core Surplus Emergence in 2024. Payments for loss of office (audited information) No payments were made during the year for loss of office. Payments to past directors (audited information) No payments were made during the year to past directors. Statement of directors’ shareholding and share interests (audited information) The Remuneration Policy requires executive directors to build up a shareholding through the retention of shares. For executives who joined Chesnara before 1 May 2021 (i.e. David Rimmington), their minimum is 100% of basic salary but with a 200% of salary shareholding requirement (including a provision for this to be held for the full 2 years in a post-employment scenario) applying to all future awards granted from 2023 onward. Executives joining from 1 May 2021 (e.g. Steve Murray and now Tom Howard) the minimum is 200% of salary. As at 31 December 2023 this criterion has been met by David Rimmington. Steve Murray who joined on 02 August 2021 has unsurprisingly not yet met this requirement albeit has continued to acquire shares in 2023 outside the LTIP programme. When the minimum holding level has not been achieved, directors may only dispose of shares where funds are required to discharge any income tax and National Insurance liabilities arising from awards received from a Chesnara incentive plan. The chair and non-executive directors are encouraged to hold shares in the company but are not subject to a formal shareholding guideline. CHESNARAANNUALREPORTANDACCOUNTS2023113 CORPORATE GOVERNANCE DIRECTORS’ REMUNERATION REPORT • ANNUAL REMUNERATION REPORT The following table shows, in relation to each director, the total number of share interests with and without performance conditions, the total number of share options with and without performance measures, those vested but unexercised and those exercised at 31 December 2023 or the date of resignation. STEVE MURRAY DAVID RIMMINGTON No changes took place in the interests of the directors between 31 December 2023 and 27 March 2024. Shares held Options With Without Exercised Percentage of 1 January 31 December performance performance Vested but during shareholding 1 2 Name of director 2023 2023 measures measures unexercised the year target held Steve Murray 69,671 147,24 8 531,743 77,6 44 – 123,16 0 108.5% David Rimmington 108,282 140,919 315,985 78,245 – 70,979 152.6% Luke Savage 20,000 30,000 – – – – – Jane Dale 3,333 3,333 – – – – – Eamonn Flanagan 30,000 30,000 – – – – – Mark Hesketh 15,362 15,849 – – – – – Carol Hagh – 10,000 – – – – – 3 Karin Bergstein – – – – – – – Total 246,648 377,3 49 847,728 155,889 – 194,139 – Notes. 1. The ‘options without performance measures’ column in the table does not include the share options that will be awarded as part of the mandatory deferral rules under the 2023 STIS in respect of awards made in relation to the 2023 financial year, which equate to 35% of the cash award under this scheme. The timetable for the administration of the scheme means that these will be reported in the 2024 Annual Report and Accounts. 2. Calculated using the share price of 261.50p at 31 December 2023. 3. As a Netherlands’ national, Karin Bergstein is not permitted by the Dutch Central Bank (De Nederlandsche Bank) to hold shares in a company of which she is a director. Outstanding share options and share awards Below are details of outstanding share options and awards for current executive directors. Number of Number of shares Number shares under under Number Number waived/ option and Name of option at granted exercised lapsed unexercised at End of Date of executive Grant Exercise 1 January during during during 31 December performance Performance expiry of director Scheme date price (p) 2023 year year year 2023 period Vesting date period option 2023 LTIP 06/07/23 Nil – 210,386 – – 210,386 31/12/25 06/07/26 3 Years 06/07/33 (2023 award) 2014 LTIP 28/04/22 Nil 147, 6 27 – – – 147, 6 27 31/12/24 28/04/25 3 Years 28/04/32 (2022 award) 2014 LTIP 26/11/21 Nil 50,456 – (50,456) – – 31/12/22 31/12 /22 1 Year 26/11/31 (2021 award) 2014 LTIP 26/11/21 Nil 119,089 – (51,982) (6 7,107) – 31/12/22 28/04/23 3 Years 26/11/31 (2021 award) 2014 LTIP 26/11/21 Nil 20,722 – (20,722) – – 30/06/23 30/06/23 2 Years 26/11/31 (2021 award) 2014 LTIP 26/11/21 Nil 14 0,105 – – – 14 0,105 31/12/23 28/04/24 3 Years 26/11/31 (2021 award) 2014 LTIP 26/11/21 Nil 33,625 – – – 33,625 31/12/23 30/06/24 3 Years 26/11/31 (2021 award) 2023 STIS 31/05/23 Nil – 39,953 – – 39,953 n/a 31/05/26 n/a 31/05/33 (2023 award) 2014 STIS 28/04/22 Nil 29,525 – – – 29,525 n/a 28/04/24 n/a 26/04/32 (2022 award) Share save 01/12/22 220.40 8,166 – – – 8,166 n/a 01/12/25 n/a 01/06/26 549,315 250,339 (123,160) (67,107) 609,387 2023 LTIP 06/07/23 Nil – 115,927 – – 115,927 31/12/25 06/07/26 3 Years 06/07/33 (2023 award) 2014 LTIP 28/04/22 Nil 105,556 – – – 105,556 31/12/24 28/04/25 3 Years 28/04/32 (2022 award) 2014 LTIP 28/04/21 Nil 94,502 – – – 94,502 31/12/23 28/04/24 3 Years 28/04/31 (2021 award) 2014 LTIP 28/04/20 Nil 81,213 – (27,612) (53,601) – 31/12/22 28/04/23 3 Years 28/04/30 (2020 award) 2023 STIS 31/05/23 Nil – 28,115 – – 28,115 n/a 31/05/26 n/a 31/05/33 (2023 award) 2014 STIS 28/04/22 Nil 31,327 – – – 31,327 n/a 28/04/25 n/a 28/04/32 (2022 award) 2014 STIS 28/04/21 Nil 18,803 – – – 18,803 n/a 28/04/24 n/a 28/04/31 (2021 award) 2014 STIS 28/04/20 Nil 27,418 – (27, 418) – – n/a 28/04/23 n/a 28/04/30 (2020 award) 2014 STIS 28/04/19 Nil 7,760 – (7,76 0) – – n/a 28/04/22 n/a 28/04/29 (2019 award) Share save 30/10/20 219.80 8,189 (8,189) – n/a 01/12/23 n/a 01/06 /24 374,768 144,042 (70,979) (53,601) 394,230 114 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 CORPORATE GOVERNANCE There has been no change made to share options granted or offered and the main conditions for the exercise of these rights compared to the previous year. Performance graph and 160 CEO remuneration table TSR Index Chesnara – Total Shareholder Return, rebased FTSE UK Life Insurance – Total Return Index, rebased 140 The following graph FTSE 350 Higher Yield – Total Return Index, rebased shows the company’s 120 performance compared with the performance of 100 the FTSE 350 Higher Yield Index and the FTSE UK 80 Life Insurance Index. The FTSE 350 Higher 60 Yield Index has been 40 selected since 2014 as a comparison because 20 it is the index used by the company for the 0 performance criterion for its LTIP, and the FTSE -20 UK Life Insurance Index has been selected due Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec to Chesnara’s inclusion 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 within this Index. The table below sets out the details for the director undertaking the role of Group CEO: Group CEO single Long-term incentive figure of total vesting rates Individual performing remuneration STIS pay-out against maximum Year Group CEO role £000 against maximum opportunity Note 2023 Steve Murray 1,176 96.00% 41.98% 1 & 5 2022 Steve Murray 1,094 76.37% 60.42% 1 & 4 2021 Steve Murray 721 57.0 0% 58.42% 1 2021 John Deane 978 95.57% – 2 2020 John Deane 782 53.38% – 2 2019 John Deane 1,111 98.79% 19.93% 2 2018 John Deane 965 31.08% 67.99% 2 2017 John Deane 1,142 86.96% 80.95% 2 2016 John Deane 902 98.33% – 2 2015 John Deane 596 81.96% – 2 2014 Graham Kettleborough 712 91.30% 34.52% 3 Notes. 1. Steve Murray joined Chesnara on 2 August 2021 and was appointed Group CEO 4. During 2022, Steve Murray had two LTIP awards that vested, with one vesting at 100% on 19 October 2021. and the other vesting at 33.40%. The figure reported above is a combined percentage, 2. John Deane was appointed Group CEO on 1 January 2015 and stood down on based upon the total number of shares vesting under both grants. 18 October 2021. 5. During 2023, Steve Murray had two LTIP awards that vested, with one vesting at 100% 3. During 2014 an LTIP that was granted to the CEO in 2012 vested. The LTIP included and the other vesting at 43.65%. The figure reported above is a combined percentage, a condition such that the sum of the LTIPs and STIS awarded in that year could not based upon the total number of shares vesting under both grants. exceed 100% of the CEO’s salary. The STIS in 2012 amounted to 65.48% of salary. When the performance measurements for the 2012 LTIP were assessed, the award was required to be restricted due to the operation of the 100% combined cap, such that the 2012 LTIP paid out 34.52% of the salary at the time of award. During 2014 the STIS that was awarded represented 68.5% of the CEO’s salary. The maximum payable was up to 75% of the CEO’s salary, resulting in a 91.3% pay-out with reference to the maximum potential award. CHESNARAANNUALREPORTANDACCOUNTS2023115 CORPORATE GOVERNANCE DIRECTORS’ REMUNERATION REPORT • ANNUAL REMUNERATION REPORT Rolling 5-year percentage change in remuneration for the executive and non-executive directors and group employees The table below shows the percentage change in remuneration for the executive and non-executive directors and the company’s employees as a whole between the years 2023 and 2020. In future years, this analysis will be repeated until a rolling 5-year comparison is ultimately reported. Percentage change Group CEO Group Luke Jane Dale Eamonn Mark Carol Hagh Karin Group in remuneration Finance Savage Flanagan Hesketh Bergstein employees Director % % % % % % % % % 2023 compared with 2022 2 2 Salary and fees 9.0 5.0 5.9 5.8 6.1 6.1 4.9 4.9 6.0 1 All taxable benefits – 173.4 – – – – – – (5.2) STIS 37.0 32.5 n/a n/a n/a n/a n/a n/a 42.0 2022 compared with 2021 Salary and fees – 4.0 3.7 6.8 7.4 7.4 n/a n/a 4.0 1 All taxable benefits 162.5 (75.0) – – – – n/a n/a 6.6 STIS 33.7 (11.4) n/a n/a n/a n/a n/a n/a (22.8) 2021 compared with 2020 Salary and fees – – – – – – n/a n/a – 1 All taxable benefits – 300.0 – – – – n/a n/a (1.1) STIS 80.0 72.4 n/a n/a n/a n/a n/a n/a 2.9 2020 compared with 2019 Salary and fees 2.0 2.0 n/a – n/a – n/a n/a 2.0 1 1 All taxable benefits (39.1) 20.3 n/a n/a n/a n/a n/a n/a 13.3 STIS (44.9) (41.0) n/a n/a n/a n/a n/a n/a n/a Notes 1. All taxable benefits include amounts paid in lieu of accrued dividends and interest arising upon the exercise of share options under the 2014 and 2023 STISs for the Group CEO and Group FD. For the non-executive directors, these relate to expenses grossed up for income tax, which is settled by the company for travel to Chesnara’s head office in Preston, which, for tax purposes, is deemed to be the non-executive director’s normal place of work. 2. The increases for Eamonn Flanagan and Mark Hesketh reflect the additional responsibilities they took on with regard to chairing Remuneration and Nominations Committees respectively as well as chairing Movestic Fonder AB and joining the CA With-Profits Committee respectively. Comparison of total remuneration for the Group CEO and UK employees We set out here our analysis on CEO pay ratio reporting as required by The Companies (Miscellaneous Reporting) Regulations 2018. This analysis has been conducted using ‘Option A’ as set out in the Regulations and has consisted of: – Determining the total FTE remuneration of all UK employees for the 2023 financial year; – Ranking all those employees based on their total FTE remuneration from low to high; and – Identifying the employees whose remuneration places them at the 25th, 50th (median) and 75th percentile points of this ranking. The analysis is then presented to show the ratio of the Group CEO’s 2023 single total figure of remuneration to the: – Median (i.e. 50th percentile) FTE remuneration of our UK employees; – 25th percentile FTE remuneration of our UK employees; and – 75th percentile FTE remuneration of our UK employees. Comparison of total remuneration Group CEO 25th percentile pay ratio Median pay ratio 75th percentile pay ratio (FTE UK employees (FTE UK employees total (FTE UK employees total remuneration) remuneration) total remuneration) £ £ Ratio £ Ratio £ Ratio 2023 1,176,000 74,990 15.7 : 1 114,79 6 10.2 : 1 165,656 7.1 : 1 2022 14.5 : 1 10.4 : 1 6.4 : 1 2021 13.7 : 1 9.7 : 1 5.4 : 1 2020 11.3 : 1 8.2 : 1 4.8 : 1 2019 15.7 : 1 11.8 : 1 6.6 : 1 116 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 CORPORATE GOVERNANCE The Remuneration Committee considers that the ratio is consistent with our Remuneration Policy and that no actions arise from this analysis. Base salaries of all employees, including our executive directors, are set with reference to a range of factors including market practice, experience and performance in role. The 2023 ratios are broadly consistent with the prior year. Over the longer term, the CEO pay ratios have moved broadly in line with the CEO’s single figure of remuneration. The Committee notes that the pay ratios for 2023 reflect the nature of the CEO’s package being more heavily weighted towards variable pay compared to more junior colleagues (consistent with our reward policies), and this means the ratio is likely to fluctuate depending on the performance of the business and associated outcomes of incentive plans in each year. Furthermore, the Committee is satisfied that our pay and broader people policies drive the right behaviours and reinforce the group’s values which in turn drive our culture. For these reasons, the Committee believes that the ratios are consistent with these policies. Relative importance of spend on pay £m The following graph shows the actual expenditure of the group and change between the current and previous years: 180 The graph shows a comparison of total employee pay and +26% shareholder dividends with the group’s total acquisition and 160 maintenance expenditure (which consists of administration 2023 2022 expenses and costs associated with the acquisition of new 140 business). This has been chosen as a comparator to give an indication of the employee pay relative to the overall cost 120 base. As can be seen, the total employee pay is a relatively small component. 100 Statement of Implementation of Remuneration Policy in the following financial year 80 162.5 The following states how remuneration will be implemented for the executive and non-executive directors in 2024. 128.5 60 Salaries and fees Will be set in accordance with the company’s policy. 40 +8% +3% Executive directors Steve Murray (Group CEO) received a 14.6% uplift in 20 35.4 32.8 36.1 35.0 recognition of the general 6% 2024 pot made available for UK employees as a whole as well as a shift to benchmark median 0 following assessment of his performance following a longer Total employee pay BusinessacquisitionDividends and maintenance period in his role. David Rimmington (Group FD) received no expenditure uplift for 2024 in line with his settlement agreement. Non-executive directors The Chair’s fee has been increased by 8.9%, remaining below the low end of the benchmark group and as decided by the other non-executive directors. The fee level for other non-executive directors reflect a base fee and then role-specific uplifts and have been set by the Chair in discussion with the Group CEO and increased by different levels in parallel with a review of individual responsibilities, particularly with regard to chairing board committees. Jane Dale’s fee has been increased by 11.3% in recognition of her responsibilities as the Chair of the Audit & Risk Committee as well as the increased complexity of the UK subsidiary Countrywide Assured plc and for chairing the Sustainability Committee. Eamonn Flanagan’s fee was increased by 8.5% in recognition of his responsibilities as the Chair of the Remuneration Committee as well as his appointment to chair the Movestic Livförsäkring AB board from May 2024. Carol Hagh’s fee was increased by 14.6% in recognition of the increased complexity of the UK subsidiary Countrywide Assured plc plus her role as Workforce NED. Karin Bergstein’s fee has been increased by 4.5% in light of her contribution across the full reach of our territories and the requirements this places upon her and Mark Hesketh’s by 10.8% given his role in the UK business and additional oversight of the Netherland entities. The table below sets out the anticipated payments for 2024: 1 Fees Benefits Total £000 £000 £000 Luke Savage 147.0 1 148.0 Eamonn Flanagan 75.4 1 76.4 Mark Hesketh 77.0 1 78.0 Jane Dale 82.9 1 83.9 Carol Hagh 73.9 1 74.9 Karin Bergstein 67.4 10 77.4 Total 523.6 15 538.6 Note 1. Benefits shown here mainly relate to expenses grossed up for income tax, which is settled by the company for travel to Chesnara’s head office in Preston, which, for tax purposes, is deemed to be the non-executive director’s normal place of work. The figure for Karin Bergstein represents amounts payable to the Dutch tax authorities by the company, under Dutch social security legislation to otherwise avoid Karin incurring double taxation. CHESNARAANNUALREPORTANDACCOUNTS2023117 CORPORATE GOVERNANCE DIRECTORS’ REMUNERATION REPORT • ANNUAL REMUNERATION REPORT 2024 award under the 2023 Short-Term Incentive Scheme The Remuneration Committee proposes to grant awards to the executive directors under the 2023 Short-Term Incentive Scheme. The table below and accompanying notes set out the performance measures, weightings and the potential outcomes for achieving minimum, on-target and maximum performance. The actual targets for each measure are deemed to be commercially sensitive and whilst they are not disclosed at this stage, they will be disclosed in 2024 together with the performance outcome relative to these targets. Individual Measures Weighting Ranges and targets Potential outcomes in terms of % of basic salary Minimum Target Maximum achievement achievement achievement Minimum Target Maximum (as % of target) (as % of target) (as % of target) achievement achievement achievement Steve Cash generation 35.0% 70.0% 100.0% 130.0% nil 25.0% 35.0% Murray & EcV earnings 35.0% 70.0% 100.0% 150.0% nil 25.0% 35.0% Tom Howard Strategic Activity 30.0% 75.0% 100.0% 125.0% nil 15.0% 30.0% Scorecard & ESG The STIS will be implemented and operated by the Remuneration Committee as set out within the policy. Measures Following review by the Remuneration Committee, changes were approved The objectives assigned to each executive director are relevant to their roles for 2019 onwards to remove the IFRS component used in prior years and and include major regulatory or business development initiatives that the † base performance assessment on cash generation and EcV earnings metrics Committee considers key to delivery of the company’s business plan. both with appropriate adjustments and group strategic objectives. The two Each individual development objective is assigned a ‘significance weighting’ financial measures were deemed to be complementary when operated influenced by factors such as business criticality, scale, complexity and level together, to encourage sensible executive behaviour and better reflect an of executive director influence. Developments with a higher significance overall assessment of company financial performance. For 2023, group are weighted more heavily when establishing the overall performance target. strategic objectives remained weighted 30% of the total to ensure that a Targets sufficient proportion of the bonus potential was attributed to good outcomes The cash generation and EcV earnings targets are initially based on the latest in relation to ESG and acquisitions. Our assessment measures continued to budget which is produced annually as part of the group business planning ensure there was a balance between aligning executive director remuneration process. The group business plan is subject to rigorous Chesnara board to shareholder returns whilst also recognising measures over which the scrutiny and approval. The Remuneration Committee can make discretionary directors can exercise more immediate and direct influence. The financial adjustments to either the targets or to the actual results for the year if it measures are recognised outputs from the audited year end Financial considers this to be appropriate, in accordance with the scheme rules. Statements, although it should be noted that the Remuneration Committee is, in accordance with the policy, able to make discretionary adjustments if Malus and clawback deemed necessary. As agreed in advance by the Remuneration Committee, The 2023 Scheme includes malus and clawback provisions covering a material the financial results for the year are adjusted to look through any impact of misstatement of the company’s results, regulatory breach, gross misconduct the symmetric adjustment and WP transfers/restrictions, be they negative on the part of the participant, reputational damage to the company, a material or positive. The results for STIS purposes exclude the impact of any failure of risk management, insolvency or corporate failure if this arises within acquisition activity in the year other than through the exercise of Committee two years of an award vesting and it is a precondition that the executive discretion. Successful acquisitions are rewarded primarily through the LTIP. accepts such provisions at the time of the award. 2024 award made under the 2023 LTIP In 2024 the Remuneration Committee proposes to grant awards to the executive directors under the Chesnara 2023 Long-Term Incentive Plan. The table below and accompanying notes set out the performance measures, weightings and the potential outcomes relative to achieving minimum, on-target and maximum performance for the executive directors. Individual Share award Measures Weighting Ranges and targets Vesting rates in terms of % of basic salary Minimum Maximum achievement achievement % of basic (as % of Target (as % of Minimum Target Maximum salary target) achievement target) achievement achievement achievement Steve 125% TSR 33.3% <Median Median +6% p.a. nil 10.4% 41.7% Murray EcV 33.3% above the nil 10.4% 41.7% Core Surplus 33.3% median nil 10.4% 41.7% Emergence Tom 100% TSR 33.3% <Median Median +6% p.a. nil 8.3% 33.3% Howard EcV 33.3% above the nil 8.3% 33.3% Core Surplus 33.3% median nil 8.3% 33.3% Emergence † Alternative Performance Measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the Additional Information section of this Annual Report and Accounts. 118 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 CORPORATE GOVERNANCE The two 2024 awards under the 2023 LTIP will be implemented and operated performance to other investment opportunities and the others assessing by the Remuneration Committee as set out within the policy. absolute performance. Measures The plan includes Change of Control provisions covering takeover, The three performance measures for the 2024 LTIP award use performance reconstruction, amalgamation or winding-up of the company and it is against the constituents of an index and internal targets. a precondition that the executive accepts such provisions at the time of the award. The external measure compares the 3-year TSR of Chesnara plc with the TSR of the companies comprising the FTSE 350 Higher Yield Index with averaging Weightings over the 3 months prior to the start and end of the performance period. For the 2024 award the three measures have been assigned equal weighting. The first internal measure will be Core Surplus Emergence. It will be the Holding period absolute surplus movement of the divisions including the Chesnara entity A two-year holding period was introduced to the LTIP for awards made from but adjustments will be made for the impact of items such as FX, T2/T3 2019, to follow the three-year performance period. restrictions, acquisition impacts and shareholder dividends, as deemed Targets appropriate. Being linked to SII rather than cash generation creates better Targets for the 2024 LTIP are set out in the table below. In the case of the differential between the LTIP and STIS KPIs. Economic Value and Core Surplus Emergence metrics, targets have been set The other internal measure assesses Economic Value growth. Both the EcV with reference to the group’s business plan for the period as set at the start of and Core Surplus Emergence targets are set with due regard to the board 2024. The relative TSR metric has been calibrated on a consistent basis as the approved business plan. All measures seek to ensure an alignment between 2023 LTIP. For all targets, straight line interpolation applies between threshold executive director reward and shareholder value, with one assessing relative and maximum to determine vesting. Performance target Rationale Threshold target Maximum target (25% of maximum vests) (100% of maximum vests) Relative TSR against the constituents of the Relative Total Shareholder Return Median Median plus 6% per annum FTSE 350 Higher Yield Index Economic Value (EcV) growth Measures 2026 EcV against a 2023 EcV baseline £107.3m before dividends and debt costs £157.3m before dividends and debt costs Aggregate Core Surplus Emergence over 2024 Core Surplus Emergence £81.7m £91.6m to 2026 * Targets based on 2023 forecast outturn as set in January 2024. Malus and Clawback The Remuneration Committee can make discretionary adjustments The 2023 plan includes malus and clawback provisions covering a material to either the target or to the actual result for the year if it considers this misstatement of the company’s results, regulatory breach, gross misconduct to be appropriate, in accordance with the scheme rules and the policy. on the part of the participant, reputational damage to the company, a material failure of risk management, insolvency or corporate failure if this arises within two years of an award vesting and it is a precondition that the executive accepts such provisions at the time of the award. The following table sets out the voting in respect of the Directors’ Remuneration Report at the 2023 AGM: Report Number of votes Percentage of votes Number of votes Percentage of votes Total votes cast Number of votes cast for cast for cast against cast against withheld Remuneration Report 66,203,911 72.66% 24,914,731 27. 3 4% 91,118,6 42 7,142 The following table sets out the voting in respect of the Directors’ Remuneration Policy at the 2022 AGM: Report Number of votes Percentage of votes Number of votes Percentage of votes Total votes cast Number of votes cast for cast for cast against cast against withheld Remuneration Policy 93,267,407 97. 4 3% 2,459,491 2.57% 95,726,898 34,15 9 Approval This report was approved by the board of directors on 27 March 2024 and signed on its behalf by: Eamonn Flanagan Chair of the Remuneration Committee 27 March 2024 CHESNARAANNUALREPORTANDACCOUNTS2023119 CORPORATE GOVERNANCE AUDIT & RISK COMMITTEE REPORT OUR FOCUS IN THE YEAR HAS INCLUDED IFRS 17, CLIMATE CHANGE REPORTING, ACQUISITIONS AND OPERATIONAL RESILIENCE. JANE DALE, CHAIR Chair’s introduction Welcome to the Audit & Risk Committee Report of the 2023 Annual Report and Accounts. It has been another busy year for the committee, with a packed agenda which has covered not only our business as usual activities, but a number of other key areas of focus. These have arisen from various internal and external factors and include applying IFRS 17 Insurance Contracts for the first time; sustainability; considering a number of key accounting judgements, not least in relation to the two acquisitions that completed in the year; and risk oversight over a number of key operational changes across the group. Further detail on these, and more, has been provided below. IFRS 17 The group is applying the new accounting standard IFRS 17 Insurance Contracts for the first time in its full year audited financial statements. This follows the first time reporting of these standards in our 2023 interim results. IFRS 17 is a complex accounting standard and significantly changes both the profit profile of the group’s insurance business and also the presentation and disclosure in the financial statements. The group-wide team has worked incredibly hard in implementing the new standard over many years across our different geographies and products. Over the course of the year, the committee oversaw the final stages of implementation of the standard. This included: ensuring key judgements and technical decisions were documented, reviewed and signed off both internally and by our external auditor; ensuring that the committee had a clear understanding of the dynamics of the standards and its impact on our results; and consideration of the implementation of the new controls that have been put in place to support robust financial reporting. We have had to work closely with our auditors across the group to ensure that all aspects of the implementation were appropriately signed off. I’m happy to say that we have a robust control environment in place and we will continue to bed down the controls around the reporting routines associated with the standard including implementing the final stages of the new consolidation software that we have been working on over the course of the year. Other accounting and financial reporting matters NUMBER OF MEETINGS DURING YEAR: 6 As well as the implementation of IFRS 17 the committee has considered a number of key accounting MEMBERS: matters pertinent to this year’s Annual Report and Accounts. This has included the accounting for two Jane Dale Chair acquisitions in the year, consideration of the accounting for the UK’s transformation programme and the Eamonn Flanagan Member disclosures required around the OECD’s new Pillar 2 Global Anti-Base Erosion (GloBE) rules (BEPS 2.0), Mark Hesketh Member which are designed to address tax avoidance, ensure coherence of international tax rules, and, ultimately Karin Bergstein Member deliver a more transparent tax environment. These have been covered in more detail on pages 124 and 125. (appointed 14 Feb 2022) Corporate governance reform In last year’s report I referred to the committee’s close monitoring of potential reforms in The requirements for the composition of the corporate reporting. Audit & Risk Committee are detailed within its Terms of Reference. The composition In January 2024 the Financial Reporting Council (FRC) announced its revisions to the Corporate of the committee, in accordance with Governance Code following its stakeholder consultation over the course of 2023. One of the main the requirements of the UK Corporate changes to the Code extends the disclosures that are expected regarding the board’s role in annually Governance Code and with DTR 7.1.1AR, reviewing the effectiveness of the company’s Risk Management and Internal Controls Framework. and committee member biographies are The 2024 code requests that boards explain through a declaration in their Annual Report and Accounts detailed on pages 94 and 95. how they have done this and their conclusions from this work. These new disclosures will apply from periods beginning on or after 1 January 2025, with the exception of Provision 29, which is effective from 1 January 2026. Over the course of 2024 and beyond the committee will work with the board Role of the Audit & Risk Committee in applying these new disclosures. The role of the Audit & Risk Committee includes assisting the board in discharging its duties and Sustainability responsibilities for financial reporting, corporate The committee’s role in the group’s sustainability programme is to oversee any reporting made by the governance and internal control. The scope of its responsibilities also includes focus on risk group in this area, as well as understanding the risk exposures of the group to climate change related management: accordingly, it also assists the board risks. The committee oversaw the production of the group’s inaugural Annual Sustainability Report (ASR) in fulfilling its obligations in this regard. The committee that was issued in March 2023 as well as the reporting within this year’s report, which has been is also responsible for making recommendations published alongside these Annual Report and Accounts. Our 2023 year end ASR includes an update to the board in relation to the appointment, re- appointment and removal of the external auditor. on the progress that has been made over the course of the year. As well as our ASR, these Report and The committee’s duties include keeping under review Accounts include a section covering the group’s Corporate and Social Responsibility. The committee the scope and results of the audit work, its cost has paid close attention to the reporting developments that are included in this year’s report on effectiveness and the independence and objectivity pages 71 to 91. This has included applying the new CFD (Climate Related Financial Disclosures) rules of the external auditor. The full Terms of Reference of the Audit & Risk Committee are available on our for the first time, as well as developments in our TCFD report (Task Force on Climate-Related Financial website www.chesnara.co.uk Disclosures). From a risk perspective, the TCFD report provides information on the key climate-related risks and opportunities facing the group’s business. This ultimately concluded that our main risk exposures arise in relation to how climate change could affect the assets that the group is invested 120 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 CORPORATE GOVERNANCE Governance The committee has continued to oversee some of the group’s core governance processes. This has included: – Monitoring the risk management and internal control system: The annual Risk Management and Internal Control Report was reviewed and challenged by the committee during the year. This concluded that the controls across the group were operating appropriately over the course of the year. – Systems of governance effectiveness: The committee oversaw the group’s annual assessment of the effectiveness of its systems of governance. This concluded there were no major areas of concern. – Committee evaluation process: The committee performed its own evaluation process during the year, and concluded that there were no particular areas of concern. Any feedback will be built into how the committee operates in the future. in as opposed to the potential physical risks associated with climate change Looking forward (such as flooding etc.) which are deemed to be lower materiality based on As ever, there is a full agenda ahead, much of which reflects a continuation the insurance risks that the group is exposed to. The committee reviewed of work that is currently in train. As well as the committee’s business as and challenged these conclusions through its oversight of the group’s annual usual activities particular focus will be given to: ORSA (Own Risk and Solvency Assessment) process. Sustainability reporting: This is developing rapidly and different regimes Operational change and operational resilience apply in the UK and Europe. The committee will need to ensure all regulatory The group has seen a reasonable level of operational change during the and public reporting is delivered on time and to a good standard. course of the year. This has included three new divisional CEOs being Operational change: There are a number of operational change programmes appointed; the UK division entering into a new strategic business process across the group, including the UK’s transformation programme as well as outsourcing partnership which has resulted in the formation of an associated ongoing developments in the Dutch division. The committee will ensure that migration programme; the integration of the business of Conservatrix into it maintains a close eye on risks around operational change across the group. the existing Waard business; and the ongoing IT change programme within Group operational resilience: The committee will be focusing on ensuring Scildon. The committee’s role has been to ensure that the risks associated that it is satisfied that the group remains materially operationally resilient, with these changes are appropriately captured and managed. Detailed risk with appropriate recovery plans in place. This will include monitoring emerging reporting and analysis is managed at a local level, and the committee has had regulation and industry practice. A particular focus will be on ensuring the full sight of this through a combination of direct interactions with local Audit requirements of the Digital Operational Resilience Act (DORA) are met Committees coupled with coverage through the Group’s Risk Reporting in our European businesses. processes, largely via the quarterly Chief Risk Officer’s risk report. Consumer Duty: The committee will be paying close attention to the From an operational resilience perspective, the committee has continued delivery of the remaining aspects of the UK’s Consumer Duty programme. to ensure that it is appropriately appraised regarding the group’s operational It will also be mindful of the impact that the Consumer Duty has regarding resilience. This has included obtaining updates regarding the status of the any associated risks for future UK-based acquisitions. UK’s operational resilience programme. Alongside this the committee Acquisitions: Should the group enter into any acquisition processes over the oversaw the update to the group’s Cyber Response Framework, which course of 2024 the committee will ensure that it has the appropriate oversight is designed to ensure that the group is appropriately positioned to respond over the process, commensurate with the size and complexity of the target, to any cyber incidents. mindful of any industry developments that will need to be considered in any Acquisitions future acquisition diligence process. Any associated benefits and risk analysis The company has completed two deals over the course of the year, namely will be scrutinised by the committee. the acquisition of Conservatrix on 1 January 2023 and the reinsurance Tax oversight: As the group becomes more complex, with more complex arrangement with Canada Life on 16 May 2023. The committee’s role is to transactions and arrangements in place, the committee’s role will be to focus on ensuring that the acquisition diligence process has been delivered in ensure that tax risks around the group are being appropriately identified line with the group’s risk-based acquisition process; that all key benefits and and managed. This includes the implementation of the new BEPS 2.0 risks are appropriately understood; and that the accounting and associated requirements. judgements for the transaction is in compliance with accounting standards. Financial reporting controls: From a financial controls perspective it The committee fully discharged its responsibilities regarding the oversight remains critical that the committee has good oversight over any financial of the diligence and deal benefit assessment processes for these two reporting control risks across the group. In particular the committee will focus transactions. Further information on the accounting for these transactions on areas of operational change such as acquisitions; the bedding in of new is included on page 253. controls in relation to IFRS 17 and finalising the implementation of the group’s In addition to transactions that completed in the year, the UK division has new financial and solvency reporting consolidation tool. continued to work on the post-acquisition activities arising from the CASLP acquisition that completed in 2022. This has involved the Part VII transfer of CASLP policies to CA, effective 31 December 2023, coupled with the migration of in-house operating activities of CASLP to our new outsource provider, SS&C. The committee has had appropriate risk oversight of the post completion programme for CASLP. Regulatory matters The committee has a role in overseeing key compliance matters of the group. This has included the UK’s Consumer Duty implementation programme; the Jane Dale UK’s Solvency II reform and the EU’s review of Solvency II. The committee Chair of the Audit and Risk Committee has had full sight of all these areas of focus over the course of the year and 27 March 2024 was kept appraised of any emerging issues. It is pleasing to report that the UK’s Consumer Duty programme met the July 2023 milestone for its small amount of open business and is on track to meet the July 2024 deadline for its remaining closed-book products. In terms of Solvency II developments, the UK business has adopted the initial phase reform which has resulted in a change in the risk margin for the UK business. From the perspective of the Dutch and Swedish businesses, the committee is monitoring any potential Solvency II changes closely. CHESNARAANNUALREPORTANDACCOUNTS2023121 CORPORATE GOVERNANCE AUDIT & RISK COMMITTEE REPORT An update against each of these two key obligations has been provided below. This section of the report includes the following: 1. Activities during 2023: A summary of the work performed by the Audit & Risk Committee during the year. 2. External audit: Further detail of how the committee has overseen various aspects of the external audit process. 4. Significant issues: Provides some insight into the significant issues that the committee has considered during the year in relation to the financial statements, 1. Activities during 2023 The committee’s work is driven by a combination of business as usual (BAU) activities and non-standard areas that have required attention during the year. The committee has focused on the following non-BAU areas during 2023: the finalisation of the group’s IFRS 17 implementation programme; the UK’s sustainability reporting; and any conduct regulatory developments, including the UK’s Consumer Duty. A summary of all the activities performed Other Internal audit External audit Financial reporting The Chesnara Audit & Risk Committee has responsibilities over a combination of both risk and audit matters. Audit responsibilities 3. Internal audit: The work performed by the committee in overseeing the Internal Audit function of Chesnara. and how these were addressed. outsourcer selection process and subsequent transformation programme; the group’s operational resilience programme; climate change and by the committee during 2023 in relation to its audit responsibilities is summarised below: Annual Report and Accounts: Reviewed the Annual Report and Accounts, including; compliance with accounting standards, noting the first time application of IFRS 17 Insurance Contracts; accounting policy appropriateness; consideration of any other financial reporting changes and emerging practice; whether they are fair, balanced and understandable; and disclosures surrounding going concern, prospects and longer-term viability. See Significant Issues section on pages 124 and 125 for further details on certain aspects of this year’s accounts. Half-year report: Reviewed and challenged the Chesnara half-year report for the six months ended 30 June 2023, which included the group’s first reporting at the half year under IFRS 17 Insurance Contracts. Actuarial assumptions: Reviewed and challenged the actuarial assumptions underpinning the quarterly financial reporting process, covering IFRS, Solvency II and EcV. See Significant Issues section on pages 124 and 125 for further detail. Solvency II narrative reporting: Reviewed the Chesnara group Solvency and Financial Condition Report, which is published annually on the Chesnara website and also sent to the Prudential Regulation Authority. Financial performance: Monitored and scrutinised the financial performance of the group, covering IFRS, Solvency, EcV, Cash Generation and expenses. IFRS 17: Monitored the finalisation of the group’s IFRS 17 programme, which included the oversight of any residual key matters to be resolved, close monitoring of the audit process and an ongoing committee education programme, which included a deeper dive analysis of the performance and position of the group’s results on an IFRS 17 basis. FRC updates: Actively monitored and reviewed any key publications issued by the Financial Reporting Council regarding financial reporting matters during the year. This has included, amongst other things, “IFRS 17 ‘Insurance Contracts’ Interim Disclosures in the First Year of Application”; “Annual Review of Corporate Reporting 2022/23”; “CRR Thematic review of climate-related metrics and targets”; and “Thematic Review: IFRS 13 ‘Fair value measurement’”. External audit plans: Reviewed the group-wide plans of the external auditor, including consideration of the key audit risks. External audit quality: Assessed the quality of the external auditor during the year. This has included, amongst other things, consideration of feedback from management, coupled with reviewing the FRC report entitled ‘Deloitte LLP Audit Quality Inspection and Supervision Report’ which was published in July 2023. External audit reporting and feedback: Reviewed key findings reported by the group external auditor on the Annual Report and Accounts and the IFRS 17 implementation audit work, including key judgements and control matters. As part of its interactions with the external auditor the committee met with the external auditor without the presence of executive directors. External audit independence: Reviewed the assessment regarding the independence of the external auditor, with specific consideration given to audit fees and also the nature and volume of the services delivered by the external auditor during the year. Oversight of Internal Audit function during the year: The committee reviewed and approved the plans of the Internal Audit functions across the group, via interactions with local Audit & Risk Committees, and their subsequent delivery. See page 123 for more information. Evaluation of internal audit effectiveness: The committee evaluates the effectiveness of internal audit on an annual basis and concluded that the function remains appropriate for the business. Review of internal audit findings: Received regular updates from business unit Audit & Risk Committees regarding key findings from internal audits that have been performed during the year. Reviewed the internal audit findings and management responses for Chesnara plc. Feedback from divisional Audit & Risk Committees: Reviewed and challenged regular feedback provided by the group’s divisional Audit & Risk Committees. The Audit & Risk Committee Chair of the Dutch divisions attended a Chesnara A&RC meeting during 2023; the Swedish and UK divisions are represented by plc directors who are also chairs of the local Audit & Risk Committtees. Committee Terms of Reference: Reviewed its Terms of Reference during the year and also completed its annual assessment of compliance with its Terms of Reference. Performance evaluation: Conducted an evaluation of the committee’s performance during the year, which was completed by members of the committee. The review showed that the committee performed well across all aspects of the Assessment Framework. 122 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 CORPORATE GOVERNANCE Audit responsibilities (continued) 2. External audit Quality and effectiveness of the audit process The quality and effectiveness of the external audit process is reviewed on an annual basis and had regard to the following factors: – The quality of the background papers and verbal presentations to the committee on the audit planning process and final audit findings and compliance with independence criteria; – The work that Deloitte performed in relation to the implementation of IFRS 17 Insurance Contracts over the course of the year; – The ongoing credentials and tenure of the lead audit partner, Matt Perkins. The committee concluded that Matt has the appropriate qualifications and experience to lead the audit; – The rationale put forward for the materiality limits established and the explanation given of the impact these have had on the work performed; – The views of the executive on the way in which the audit has been conducted; – The conclusion from the FRC’s publication entitled ‘Deloitte LLP Audit Quality Inspection and Supervision Report’ which was published in July 2023; and – The audit fees charged and the change in fees from the previous year. Changes in annual fees do, of course, need to reflect change in the nature of the company’s business which has expanded over time. For this year additional fees were paid to Deloitte to support the one off work associated with their audit of the implementation of IFRS 17. It was concluded that the audit process was effective. The company is committed to putting its audit out to tender at least every ten years, having completed its last external audit tender during 2017. The next audit tendering process will need to take place at the latest during 2027, following the 2026 audit. Provision of non-audit services and independence The committee has in place a policy on the engagement of the audit firm for non-audit services. Approval is granted where the service is clearly related to the process of audit services, including regulatory returns (assurance services). In other cases, the approval of the committee is required and documented governance processes are followed. The committee regularly monitors the level of fees paid for non-audit services to ensure, over a period of years, that these represent a low proportion of total fees paid. Reports from the auditor on independence are also reviewed annually and discussed with the auditor. It should be noted that total fees paid by the company are not material in the context of the overall business of the auditor. Details of the fees paid to Deloitte, and its associates, for both audit and non-audit services during the year have been provided below: Audit fees 2023 % 2022 % £000 proportion £000 proportion Audit services 3,456 100 2,050 90 Assurance services – – 227 10 Total 3,456 2,277 Audit services The fees charged for audit services have increased when compared with 2022. The key reasons for the net increase since the prior year are: – An increase of c£1,050k in relation to the preparatory audit work associated with the implementation of IFRS 17; – An increase of c£400k in relation to additional scope work, including ongoing additional scope work in relation to IFRS 17 and one-off work associated with the Part VII transfer within the UK and the two acquisitions completed in the year; and – A reduction of c£130k in relation to the additional work undertaken in 2022 due to reduced scope from the CASLP (formerly ‘Sanlam Life & Pensions UK’) acquisition. Audit fees of £1,056k (2022: £950k) were paid to Ernst & Young (EY) during the year for the audits of Scildon, the Waard group and Movestic. Assurance services The reduction of assurance service fees from the prior year is due to the one-off assurance work over the Tier 2 debt issuance performed in 2022 and separately the half-year review as not performed for 2023. Non-audit services Non-audit services totalling £71k (2022: £nil) were delivered in 2023. This was in relation to market analysis and strategic planning work delivered by EY to Movestic. 3. Internal audit Within Chesnara, Internal Audit operates as separate functions within each of its businesses and these report into their own Audit & Risk Committee who have the primary oversight and supervisory responsibility. This includes determining how the local Internal Audit function will be resourced and as a result these are a mix of outsourced and in-house capabilities. At a group level the Chesnara Audit & Risk Committee sets three high level principles which must be followed by each of the businesses. This committee then receives periodic reports from each business on matters such as the make up of the audit plan, progress against this plan and any significant issues identified/reported. The remit of the UK based Internal Audit team also covers Chesnara and consequently the committee get similar periodic reports to the local committees on its own audit plan throughout the year. Across the group, internal audit covered a broad range of topics including Remuneration, Reinsurance, Business Continuity planning, Outsourcing, Underwriting, Product Governance, Risk Management, Premiums, IT Development, Acquisitions, Claims Handling, ORSA, Information Security, EUCs and Consumer Duty. No significant issues have been identified through the delivery of the internal audit programme during the year. CHESNARAANNUALREPORTANDACCOUNTS2023123 CORPORATE GOVERNANCE AUDIT & RISK COMMITTEE REPORT 4. Significant issues The table below provides information regarding the significant issues that the committee has considered in relation to the preparation of the Annual Report and Accounts. This includes consideration of matters communicated by the auditors. Area of focus Reporting issue Role of the committee Conclusion/action taken Reporting IFRS 17 Insurance Contracts is a new accounting standard Over the course of the year the The committee is satisfied that IFRS 17 under IFRS 17 that is being reported for the first time within the group’s committee has ensured that it has been appropriately applied in the for the 2023 annual financial statements. The reporting within has remained abreast of all key year end 2023 financial statements. first time these financial statements is the culmination of a multi-year, aspects of the final stages of multi-jurisdictional programme that was necessary in order the implementation. This has to ensure that this complex accounting standard would be included key judgements, audit appropriately applied across the group. work progress and results analysis / education. The committee has reviewed and challenged the IFRS 17 information in the year end 2023 accounts, including the transition disclosures and key judgements. Accounting for On 1 January 2023, the group completed the acquisition The committee’s role is to The committee has reviewed and the acquisition of the insurance portfolio of Nederlandsche Algemeene ensure that accounting for challenged the judgement papers of Conservatrix Maatschappij van Levensverzekering ‘Conservatrix’ N.V. the acquisition is performed that have supported the accounting This represents a large one-off transaction that requires in line with required accounting and disclosures associated with this special attention from an accounting perspective. standards, and is appropriately transaction. The committee has supported by accounting reviewed the disclosures within judgement papers that reflect the financial statements and the underlying facts and is satisfied that they meet the circumstances of the transaction. required accounting standards. Accounting for On 16 May 2023 the UK division reached an agreement Management provided an The committee is satisfied that the the Canada Life with Canada Life UK Limited to acquire its onshore individual overview of the accounting accounting considerations regarding arrangement protection line of business. Customers’ policies are implications of incorporating this transaction were appropriately expected to transfer to the UK, subject to the completion the Canada Life transaction documented by management and of a court-approved Part VII transfer. In the interim period into the UK division, initially as scrutinised by the committee, and Canada Life UK will reinsure the portfolio to the UK a reinsurance arrangement, to that the financial statements include division. The accounting for this transaction requires be followed by Part VII transfer. appropriate disclosures in compliance careful consideration. The paper includes the IFRS 17 with relevant accounting standards. and IFRS 3 implications including the rationale and details in respect of calculating an opening CSM value. The committee’s role is to review and challenge the conclusions documented within this paper. Accounting On 22 May 2023 the UK division entered into a new A paper has been produced The committee has concluded that for the UK’s long-term strategic partnership with SS&C to provide policy documenting the overall costs the accounting for the costs of the transformation administration to the UK division. As a result of entering of the programme and how the UK’s transformation programme have programme into this new agreement there are plans in place to migrate relevant accounting standards been performed in line with relevant the majority of the administration of the UK division’s should be applied. The paper accounting standards and is satisfied policies to SS&C. The accounting for the costs of this covers the key judgements made with the associated disclosures in programme requires careful consideration as the programme by management in arriving at the financial statements. involves the migration of a mix of investment and insurance the conclusions drawn, which contracts, which results in a combination of both IFRS 17 have been reviewed and Insurance contracts and IAS 37 Provisions, Contingent challenged by the committee. Liabilities and Contingent Assets applying to the accounting for these costs. Valuation of Chesnara plc’s solo balance sheet includes the value of The committee’s role is As a result of the annual impairment Chesnara plc’s its investment in its various subsidiaries. These are to review and challenge process it was concluded that the investment typically carried at cost and are reviewed at least annually management’s paper covering carrying value of Chesnara plc’s in CA plc for impairment. As a result of dividend payments over time, the assessment of the carrying investment in Countrywide Assured plc at some point the underlying value of the group’s closed- value of Chesnara’s investment required writing down by £14.4m. book subsidiaries will become lower than the carrying in its subsidiaries. This includes This reflects that the underlying value value that it is held at in the Chesnara plc balance sheet, scrutinising the underlying of Countrywide Assured has reduced, resulting in a need to write down the carrying value. assumptions underpinning the largely as a result of its continued ‘value in use’ assessment dividend streams up to Chesnara plc. and the conclusions made. Further detail can be found on page 168. 124 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 CORPORATE GOVERNANCE Area of focus Reporting issue Role of the committee Conclusion/action taken Impairment The group IFRS balance sheet includes intangible assets The committee is required The review concluded that the net assessment (the ‘AVIF’ assets), representing the acquired value to review the work performed of tax AVIF associated with the of AVIF of the in-force policies at the point of previous acquisitions, by management in assessing acquisition of CASLP Limited should intangible which is amortised over the estimated profit profile of the the carrying value of the AVIF be written down by £6.1m, mainly assets associated polices that were acquired. An impairment test intangible assets, including reflecting the impact of poor of these intangible assets is required on an annual basis. scrutinising the assumptions persistency experience over 2023, made and conclusions drawn. coupled with a change in management’s view of assumed future investment returns. BEPS 2.0 The group is in the process of assessing the impact of the A paper has been produced The committee has reviewed the OECD’s Pillar 2 Global Anti-Base Erosion (GloBE) rules for the committee that IAS 12 disclosures that have been (BEPS 2.0). The assumption of the group is that it is within summarises the initial impact made within these financial statements the scope of the new regulations, but the fact that its of BEPS 2.0 on the group. This and concluded that they reflect our operations are carried out in established tax jurisdictions has been supported by an initial current view of the impact of BEPS (the United Kingdom, Sweden and the Netherlands) should impact assessment by KPMG. 2.0 on the group. ensure that top-up tax is not applicable. Under IAS 12 The committee’s role is to review ‘Income Taxes’, which has been amended in recognition and challenge the assessment of the GloBE rules, the group is required to provide relevant that has been performed by disclosure in the consolidated financial statements. management in forming the disclosures within this year’s financial statements. TCFD/CFD The group is required to disclose information in order The role of the committee is The committee is satisfied that disclosures to comply with the requirements of the TCFD (Task Force to ensure that it has reviewed the disclosures in the Annual Report on Climate-Related Financial Disclosures). In addition, for the disclosures in the Annual and Accounts meet the requirements the first time this year the group is also required to comply Report and Accounts in relation of TCFD and CFD and reflect the with the new mandatory CFD (Climate Related Financial to the group’s TCFD and CFD underlying facts and circumstances Disclosures), which is a new legislative requirement for reporting obligations, noting of the group and its climate-related this year. where there are any key objectives. judgements in the disclosures that have been produced. Expense The actuarial reserving process for the UK division includes The responsibility of the The committee is satisfied that assumptions an assumption on the future expenses that are required committee is to satisfy itself the expense assumptions included used in to run the business. This includes making judgements that the judgements underpinning in the valuation of the insurance determining on both the future outsourcer and non-outsourcer costs, the projected future expenses contract liabilities of the UK division insurance and any associated transition costs that might be incurred required to the run the UK at 31 December 2023 are appropriate contract in achieving the longer-term expense assumptions. life insurance operations are and that they are suitably described provisions appropriate, and to ensure these in note A6(n) on page 168. judgements are appropriately reflected in the year end 2023 financial statements. Actuarial A key aspect of the Audit & Risk Committee’s role is The committee’s role is to The committee concluded that the assumptions to review and challenge the actuarial assumptions that review and challenge the actuarial assumptions were appropriate. underpin the valuation of the policyholder liabilities in actuarial assumptions report Disclosures over key judgements are the financial statements. The assumptions are inherently which underpins the valuation included in note A6 and note B2 of the judgemental and are updated at least annually to reflect of insurance liabilities. IFRS financial statements. the facts and circumstances available at the time. The assumptions are underpinned by a combination of internally observed experience coupled with data that is available at a market level. The key assumptions include estimates over: – future mortality and morbidity rates; – future lapse assumptions; – future expense required to manage the policies in force; and – policyholder options and guarantees. CHESNARAANNUALREPORTANDACCOUNTS2023125 CORPORATE GOVERNANCE AUDIT & RISK COMMITTEE REPORT Risk responsibilities This section of the report provides information regarding the risk oversight responsibilities of the Audit & Risk Committee. General responsibilities Overall the committee is responsible for: – the group’s risk management and internal control systems and their effectiveness; – overseeing the group’s risk profile in the context of its current and future strategy; – discussing and recommending to the board for approval, the group’s risk appetite statement, reverse stress testing and scenario stress testing; – advising the board on proposed changes to the group’s risk appetite statement where this is deemed appropriate; – monitoring risk exposures across the group and advising the board where such exposures do not appear to accord with the group’s risk appetite statement; – reviewing the group’s capability to identify and manage emerging and new risk types; – challenging the regular stress and scenario testing of the group’s business; – determining whether there is a sufficient level of risk mitigation in place; – overseeing due diligence of a major strategic transaction, including any proposed acquisition or disposal, prior to the board taking a decision to proceed with a view to ensuring that the board is aware of all material risks associated with the transaction; – considering the adequacy and effectiveness of the technology infrastructure and supporting documentation in the Risk Management System and Framework; – considering and approving the remit of the Risk function and ensure it has adequate resources and appropriate access to information to enable it to perform its function effectively and in accordance with the relevant professional standards; – providing qualitative and quantitative advice to the Remuneration Committee on risk weightings to be applied to any performance objectives; and – considering and recommending to the board for approval, the group’s risk related regulatory submissions, including the ORSA. Focused activities performed during the year The table below provides some information regarding the more focused activities that the committee has performed during the year in discharging its risk oversight responsibilities. Acquisitions The Audit & Risk Committee has overseen the due diligence for the acquisition of Canada Life, ensuring that the board is aware of all material associated risks, in particular the implications for the risk appetite and tolerance of the company, taking independent external advice where appropriate and available. The committee has also been focusing on overseeing the risks associated with the integration of the Conservatrix book in Waard and the Part VII transfer of CASLP into CA. The committee was satisfied that the risk reporting surrounding these activities has been appropriate and that management has responded to any associated risks as they emerge. UK transition and transformation During the year the UK business agreed a new long-term strategic partnership with Fin Tech market leader SS&C Technologies (SS&C) to provide policy administration services. The Audit & Risk Committee was provided with appropriate due diligence information on the range of risks associated with onboarding the new administration partner and delivering a multi-dimensional transformation programme, including: – financial risks, including financial resources and liquidity, and potential impact on financial resilience; – operational risks, including service delivery, information security, data protection; – business continuity risks, sub-outsourcing risks, and potential impact on operational resilience; – concentration risks, including outsourcing or third-party dependencies and the potential impact on operational resilience. The committee is satisfied that there was appropriate visibility of the key strategic risks and mitigants. IT/data security and cyber risk The committee’s risk responsibilities include overseeing management’s plans to continue to ensure the group remains resilient to IT risks. This includes monitoring results from various initiatives such as the group’s ‘phishing’ tests, cyber attack simulations and penetration testing. Chesnara has established a group-wide Cyber Response Framework to guide the group in preparing and responding effectively to a cyber-attack which includes an updated policy on ransomware. The committee was satisfied that the group’s IT risk programme continues to focus on the right priorities in this ever-evolving area. Global market instability Ongoing global conflict and economic uncertainty remains a prominent emerging risk for the group, with inflation driven expense risk and future investment returns being the affected key areas with greatest potential impact. As a result of these observations the committee has obtained regular updates from management on potential impacts. This has included consideration of the following: – Financial results volatility; – Increased expense base with wage inflation and increasing supplier costs; and – 3rd party/supplier failure risks. The committee is satisfied that management is monitoring these risks closely, and that the group’s ORSA process suitably examines these scenarios. Operational and regulatory change There are a number of operational and regulatory change projects across the group, and as a result the committee has been monitoring these closely. Activity across the group includes: – integration and Part VII activity for the acquisitions of CASLP and Conservatrix; – the operational implementation of IFRS 17; – the ongoing policy administration IT upgrade programme in Scildon; – operational resilience and digital operational resilience; – Consumer Duty; and – climate change risk and sustainability. The committee was satisfied that the risk reporting surrounding these programmes has been appropriate and that management has responded to any associated risks as they emerge. 126 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 CORPORATE GOVERNANCE Regular activities performed during the year The table below provides some further information regarding the ‘business as usual’ activities that the committee has performed during the year in discharging its risk oversight responsibilities: Quarterly risk reporting: During the year the committee reviewed the quarterly group and divisional risk reports on the identification, evaluation and management of principal risks across the group, including any emerging risks. The quarterly risk reporting included ‘in focus’ topics as required and also reports against the group’s ‘watchlist’ of items. Principal risk definition: Reviewed and challenged the group’s definition of principal risks for the purpose of reporting and monitoring against these risks, including how they are mitigated through the group’s Internal Control Framework. Dividend proposal: The committee considered the final dividend proposal review document prepared by the Group Chief Risk Officer. Risk plan review and sign off: The committee reviewed and approved the group and divisional risk plans and associated resourcing needs. Internal control report: The committee reviewed and approved the annual internal controls assessment report, which concluded that the controls across the group are operating effectively. Systems of governance review: An annual review of the effectiveness of the systems of governance review was facilitated by the Risk function. This considered a number of areas of the overall system of governance including its completeness, effectiveness, its use and the overall culture. This concluded there were no major areas of concern. Any areas for improvement have been built into future plans, with suitable priorities attached. ORSA review: The committee reviewed the 2023 group ORSA and made a formal recommendation to the board to approve it. The ORSA includes the outcome of the group’s stress and scenario testing. The stresses that are modelled are reviewed and approved as part of the ORSA planning process, and the results are included in the final ORSA report. Risk appetite: Partially reviewed and re-approved the group’s Risk Appetite Framework, including reviewing and challenging the key risk indicators/tolerance limits and key business performance measures. Some aspects of the annual review were deferred to 2024-Q2 following a decision to move the timing of the annual review to allow sufficient time to consider the latest scenario analysis from the ORSA. Review divisional Audit & Risk Committee progress: Received and challenged updates provided by divisional Audit & Risk Committees. Continuous solvency monitoring: Reviewed the output from the group’s continuous solvency monitoring activities. There were no issues arising from this process during the year. Standard formula assessment: As part of its annual cycle the Actuarial function performs an assessment of the appropriateness of the standard formula for the purposes of calculating the group’s capital requirements under Solvency II. The work and associated findings was reviewed and challenged by the committee. Assurance Taken together, the group’s Risk function and Internal Audit function ensure that the committee is provided with appropriate assurance throughout each year. The second-line Risk function ensures independent review and challenge of business performance and activities with the opportunity to influence areas of review to be undertaken by the independent third-line Internal Audit function. The committee can direct the activity of either function as circumstances require, amending work plans to accommodate deep dives if felt appropriate to do so. The committee leverages these functions within the group’s proportionate three-lines of defence model in addition to engaging with, and having board representation on, the business unit Audit & Risk Committees which themselves have local Risk and Internal Audit functions. In this way, and through receiving assurance reports from each business unit on a quarterly basis, the committee satisfies itself with regard the assurance it obtains on the group’s activities and performance. Jane Dale Chair of the Audit & Risk Committee 27 March 2024 CHESNARAANNUALREPORTANDACCOUNTS2023127 CORPORATE GOVERNANCE DIRECTORS’ REPORT The directors present their Annual Report and Accounts and the audited consolidated financial statements of Chesnara plc for the year ended 31 December 2023. The Corporate Governance Report on pages 98 to 102 forms part of the Directors’ Report. Chesnara plc – Company No. 4947166 Share capital The following information, that has been included by way of a cross Details of the issued share capital, together with details of movements reference to other areas of the Annual Report and Accounts, is required in the issued share capital of Chesnara plc during the year are shown in by the Companies Act to be included within the Directors’ Report: note H1 to the IFRS Financial Statements which is incorporated by reference and deemed to be part of this report. Requirements/reference The company has one class of ordinary share which carries no right to fixed Financial risk management objectives and policies income. Each share carries the right to one vote at general meetings of the The Financial Management section on pages 59 and 60 and the company. The ordinary shares are listed on the Official List and traded on Risk Management section on pages 61 to 70. the London Stock Exchange. As at 31 December 2023, the company had 150,650,275 ordinary shares in issue, of which none were held as treasury Exposure to price risk, credit risk, liquidity risk and cash flow risk shares. During the year, no treasury shares were held or traded. Note 6 ‘Management of financial risk’ to the IFRS Financial Statements. Likely future developments In order to retain maximum flexibility, the company proposes to renew the The Business Review section on pages 38 to 44. authority granted by ordinary shareholders at the Annual General Meeting in 2023, to repurchase up to 10% of its issued share capital. Further details Greenhouse gas reporting are provided in the Notice of this year’s Annual General Meeting. The Corporate and Social Responsibility section on pages 71 to 91. Environmental, employee and social community matters At the Annual General Meeting in 2023, shareholders approved resolutions The Corporate and Social Responsibility section on pages 71 to 91. to allot shares up to an aggregate nominal value of £5,012,959 and to allot shares for cash other than pro rata to existing shareholders. Resolutions will be proposed at this year’s Annual General Meeting to renew these authorities. Directors Full information of the directors who served in 2023 is detailed in the No person has any special rights of control over the company’s share capital Corporate Governance Report on pages 98 to 102. and all issued shares are fully paid. There are no specific restrictions on the size of holding nor on the transfer of shares which are both governed by the Details of the non-executive directors who served as chairs and members of general provisions of the Articles of Association and prevailing legislation. the board committees of the board are set out in the Corporate Governance The directors are not aware of any agreements between holders of the Report on pages 98 to 102. Information in respect of the Chair and members company’s shares that may result in restrictions on the transfer of securities of the Remuneration Committee and in respect of directors’ service contracts or voting rights. The directors have no current plans to issue shares. is included in the Remuneration Report on pages 105 to 119, which also includes details of directors’ interests in shares and share options. The Chair Articles of Association and all the non-executive directors will retire at the Annual General Meeting The company’s Articles of Association may only be amended by special and, being eligible, offer themselves for election or re-election as appropriate. resolution of the company at a general meeting of its shareholders. All of the executive directors have service contracts with the company of no Conflicts of interest more than one year’s duration and will offer themselves for re-election at least Procedures are in place to ensure compliance with the directors’ conflict every three years. of interest duties as set out in the Companies Act 2006. The company has The service contracts of all the directors are retained at the company’s office complied with these procedures during the year and the board considers and will be available for inspection for 15 minutes prior to the Annual General that the procedures operated effectively. During the year, details of any new Meeting. No director had any material interest in any significant contract with conflicts or potential conflicts were advised and submitted to the board the company or with any of the subsidiary companies during the year. for consideration, and where appropriate, approved. The directors benefitted from qualifying third party indemnity provisions There were no material conflicts of interest noted in 2023. in place during the years ended 31 December 2022 and 31 December 2023 and the period to 27 March 2024. Director evaluations WE EVALUATE ALL OUR During the year, the Chair evaluated the performance of all appointed directors in one to one meetings and the senior independent director evaluated the APPOINTED DIRECTORS AND performance of the Chair. It was confirmed that each director continued to make effective contributions in their role and to the board as a whole. THE CHAIR TO ENSURE THEY Director appointments ARE CONTINUING TO MAKE With regard to the appointment and replacement of directors, the company follows the UK Corporate Governance Code 2018 and is governed by its EFFECTIVE CONTRIBUTIONS. Articles of Association, the Companies Act 2006 and related legislation. The Articles of Association may be amended by special resolution. † Alternative Performance Measure (APM) used to enhance understanding of financial performance. Further information on APMs can be found in the Additional Information section of this Annual Report and Accounts. 128 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 CORPORATE GOVERNANCE Results and dividends The consolidated statement of comprehensive income for the year ended 31 December 2023, prepared in accordance with United Kingdom adopted international accounting standards and set out on page 142 shows: Restated 2023 2022 £m £m Profit/(loss) for year attributable to shareholders 18.7 (33.7) The group IFRS results are reported under IFRS 17 for the first time in the annual financial statements. IFRS 17 is the new accounting standard for recognising, measuring and disclosing insurance contracts. This is effective for the first time in these financial statements and replaces the previous standard, IFRS 4. IFRS 17 has been implemented as if it had always been in place and so previous results have been restated. An interim dividend of 8.36p (2022: 8.12p) per ordinary share was paid by Chesnara on 10 November 2023. The board recommends payment of a final dividend of 15.61p (2022: 15.16p) per ordinary share on 28 May 2024 to shareholders on the register at the close of business on 12 April 2024. The Chesnara Dividend Policy is directly influenced by two key factors. We recognise that our shares are predominantly held as a source of predictable and sustainable income. Our primary aim is therefore to provide an attractive yield with steady growth where possible. Our aim to satisfy investor expectations cannot and will not be delivered at the expense of financial security and solvency. As such, dividend capacity is assessed giving full regard to our Group Capital Management Policy which currently prohibits dividends to be declared that would result in Chesnara having a solvency ratio below 110%. Total dividend as a ratio of cash generated Considerations Dividend growth Historic and projected cash generation levels need to support any dividend Cash payment although there is no explicit requirement for the current year’s generation cash generation to cover the dividend. £36.1m £35.0m £33.9m £32.9m £31.9m Dividends will not be paid if they were to result in a breach in our Capital Solvency Management Policy which currently sets a minimum dividend paying solvency constraint of 110%. The Chesnara business model is based upon making future acquisitions Acquisition and any dividend payments consider the financial requirements to continue strategy to deliver our acquisition strategy. 87% 119% 167% 42% 111% In addition to a stable and attractive dividend yield our investors value Investor predictability and sustainability of earnings. As such, under normal 2019 2020 2021 2022 2023 expectations circumstances, ‘special dividends’ are unlikely. The chart above shows the dividend paid in each respective year as a percentage of the cash generated. Over the past 5 years £170m of dividends have been paid at an average annual yield of 7.8% (based on average annual share prices) representing 85% of the cash generated over the period. The board makes dividend decisions with reference to a range of management information, reports and policies including the group ORSA, group business plan, solvency analysis including sensitivities, analysis of historic financial results and the Group Capital Management Policy. Substantial shareholdings Information provided to the company by major shareholders pursuant to the FCA’s Disclosure and Transparency Rules (DTR), is published via a Regulatory Information Service and is available on the company’s website. The company had been notified under Rule 5 of the DTR of the following interests in voting rights in its shares as at 16 February 2023; 20 April 2023; 24 October 2023; and 28 November 2023: Name of substantial shareholder Total number of ordinary shares held Percentage of the issued share capital as at 31 December 2023 Columbia Threadneedle Investments (London) 17,733,9 50 11.76% Aberdeen Standard Investments (Standard Life) (Edinburgh) 16,334,208 10.83% Hargreaves Lansdown Asset Mgt (Bristol) 11,677,651 7.74% Interactive Investor (Manchester) 11,138 ,75 8 7.3 8% M&G Investments (London) 9,558,884 6.34% Canaccord Genuity Wealth Mgt (London) 6,075,000 4.03% Janus Henderson Investors (London) 5,623,316 3.73% Royal London Asset Mgt (London) 5,502,369 3.65% CHESNARAANNUALREPORTANDACCOUNTS2023129 CORPORATE GOVERNANCE DIRECTORS’ REPORT Subsequent to 31 December 2023 there have been changes to this position and the holdings as at 15 March 2024 are shown below. No other person holds a notifiable interest in the issued share capital of the company. Name of substantial shareholder Total number of ordinary shares held Percentage of the issued share capital as at 15 March 2024 Columbia Threadneedle Investments (London) 17,740,780 11.76% Aberdeen Standard Investments (Standard Life) (Edinburgh) 15,904,519 10.54% Hargreaves Lansdown Asset Mgt (Bristol) 11,810,3 86 7.8 3% Interactive Investor (Manchester) 11,238,648 7.45% M&G Investments (London) 9,788,490 6.49% Canaccord Genuity Wealth Mgt (London) 6,350,567 4.21% Janus Henderson Investors (London) 5,592,777 3.71% Royal London Asset Mgt (London) 5,502,369 3.65% Chesnara plc has no multiple voting rights or voting certificates relative to total voting rights and no issued share capital is composed of non-voting shares. Depositary receipts represent 0% of voting rights and our free float percentage of voting rights exceeds 98%. Related party transactions and significant contracts Going concern statement During the year ended 31 December 2023, the company did not have After making appropriate enquiries, including consideration of the economic any material transactions or transactions of an unusual nature with, and uncertainty in the wake of a high-inflation environment on the group’s did not make loans to, related parties in which any director has or had operations, financial position and prospects, the directors confirm that they a material interest. are satisfied that the company and the group have adequate resources to continue in business for the foreseeable future. Accordingly, they continue There were no significant contracts with substantial shareholders during to adopt the going concern basis in the preparation of the financial the year. statements. Further details can be found within the Financial Management Post balance sheet events section on page 60. There have been no post balance sheet events that either require Disclosure of information to the auditor adjustment to the financial statements or are important in the understanding The directors who held office at the date of approval of this Directors’ of the company’s current position, financial performance or results. Report confirm that, so far as they are each aware, there is no relevant audit Charitable donations information of which the company’s auditor is unaware; and each director Charitable donations made by group companies during the year ended has taken all the steps that they ought to have taken as a director to make 31 December 2023 were £36,285 (2022: £65,353). This consisted of themselves aware of any relevant audit information and to establish that the a donation of £22,075 to an environmental sustainability charity based company’s auditor is aware of that information. This information is given and in the Netherlands and £14,210 donated to a range of other charitable should be interpreted in accordance with the provisions of section 418 of the initiatives by our Swedish, Dutch and UK divisions. Companies Act 2006. No political contributions were made during the year ended Auditor 31 December 2023 (2022: £nil). A resolution for the re-appointment of Deloitte LLP as auditor of the company is to be proposed at the forthcoming Annual General Meeting. Chesnara is Employees satisfied that it adheres to the rules that are imposed on UK listed companies The average number of employees during 2023 was 387 (2022: 414). to perform a tender after 10 years and with a mandatory change of auditors after 20 years. Employee involvement The group believes that employee communication and consultation is Approved by the board on 27 March 2024 and signed on its behalf by: important in enhancing the company culture and connectivity, and in motivating and retaining employees. An open communications programme enables all employees to understand key strategies and other matters of interest and importance, quickly and efficiently. The communication includes face-to-face briefings, open discussion forums with senior management and updates via email. Business relationships David Rimmington Throughout the year the directors have had regard for the need to foster the Group Finance Director company’s business relationships with suppliers, customers and stakeholders, including on the principal decisions taken by the company during the financial year. Information supporting this is provided in the Section 172 disclosures on pages 30 to 37. 130 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 CORPORATE GOVERNANCE DIRECTORS’ RESPONSIBILITIES STATEMENT Directors’ responsibilities Disclosures under Listing Rule 9.8.4R The directors are responsible for preparing the Annual Report and the financial For the purposes of Listing Rule 9.8.4C, the information required to be statements in accordance with applicable law and regulations. disclosed under Listing Rule 9.8.4R can be found within the following sections of the Report and Accounts: Company law requires the directors to prepare financial statements for each financial year. Under that law, the directors are required to prepare Section Requirement Location the group financial statements in accordance with UK-adopted international accounting standards. 1 Statement of interest capitalised Not applicable In preparing the financial statements, International Accounting Standard 1 requires that directors: 2 Publication of unaudited financial information Not applicable – properly select and apply accounting policies; 3 Deleted Not applicable – present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; Directors’ – provide additional disclosures when compliance with the specific 4 Details of long-term incentive schemes Remuneration requirements in IFRS Standards are insufficient to enable users to understand Report the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and 5 Waiver of emoluments by a director Not applicable – make an assessment of the company’s ability to continue as a going concern. 6 Waiver of any future emoluments by a director Not applicable The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and disclose 7 Non pre-emptive issue of equity for cash Not applicable with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the 8 As per 7, but for major subsidiary undertakings Not applicable Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention Parent participation in any placing 9 Not applicable and detection of fraud and other irregularities. of a subsidiary The directors are responsible for the maintenance and integrity of the 10 Contracts of significance Not applicable corporate and financial information included on the company’s website. Legislation in the United Kingdom governing the preparation and 11 Controlling shareholder provision of services Not applicable dissemination of financial statements may differ from legislation in other jurisdictions. 12 Shareholder dividend waiver Not applicable Details of the company’s greenhouse gas emissions, energy consumption and energy efficiency can be found in the Climate-Related Financial 13 Shareholder dividend waiver – future periods Not applicable Disclosures within the Strategic Report section, on pages 71 to 91. 14 Controlling shareholder agreements Not applicable Responsibility statement The directors whose names and functions are listed in the Board Profile and Board of Directors section on pages 94 and 95, confirm that to the best of our knowledge: – the financial statements, prepared in accordance with the relevant Financial Reporting Framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; – the Strategic Report includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and – the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the company’s position, performance, business model and strategy. Approved by the board on 27 March 2024 and signed on its behalf by Luke Savage Steve Murray Chair Chief Executive Officer 27 March 2024 27 March 2024 CHESNARAANNUALREPORTANDACCOUNTS2023131 IFRS FINANCIAL STATEMENTS The City of London, England 134 Independent Auditor’s Report to the members of Chesnara plc IFRS Financial Statements 142 Consolidated Statement of Comprehensive Income 143 Consolidated Balance Sheet 144 Consolidated Statement of Cash Flows 145 Consolidated Statement of Changes in Equity Notes to the Consolidated Financial Statements 146 Section A – General information and accounting policies and judgements 169 Section B – Risk and capital management 185 Section C – Segmental information 188 Section D – Performance in the year 197 Section E – Balance sheet assets 206 Section F – Insurance and reinsurance contracts 235 Section G – Balance sheet liabilities 241 Section H – Shareholder equity 243 Section I – Additional disclosures Company Financial Statements 254 Company Balance Sheet 255 Company Statement of Cash Flows 256 Company Statement of Changes in Equity Notes to the Company Financial Statements 257 Section J – Notes to the financial statements 113232CHESNARAANNUALREPORTANDACCOUNTS2023 CHESNARAANNUALREPORTANDACCOUNTS2023133133 IFRS FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CHESNARA PLC REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS Opinion In our opinion: – the financial statements of Chesnara plc (the parent company) and its subsidiaries (the group) give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2023 and of the group’s profit for the year then ended; – the group financial statements have been properly prepared in accordance with United Kingdom adopted international accounting standards; – the parent company financial statements have been properly prepared in accordance with United Kingdom adopted international accounting standards and as applied in accordance with the provisions of the Companies Act 2006; and – the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. We have audited the financial statements, which comprise: – the Consolidated Statement of Comprehensive Income; – the Consolidated and Parent Company Balance Sheets; – the Consolidated and Parent Company Statements of Changes in Equity; – the Consolidated and Parent Company Statement of Cash Flows; and – the related Notes A1 to J9, excluding the Capital Management disclosures calculated in accordance with the Solvency II regime in Note B4, which are labelled as ‘unaudited’. The Financial Reporting Framework that has been applied in their preparation is applicable law and United Kingdom adopted international accounting standards and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. Basis of opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the group and the parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the Financial Reporting Council’s (the FRC’s) Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We confirm that we have not provided any non-audit services prohibited by the FRC’s Ethical Standard to the group or the parent company. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Summary of our audit approach Key audit The key audit matters that we identified in the current year were: matters – Initial adoption of IFRS 17; – Expense assumptions used in the valuation of insurance contract liabilities; and – Valuation of Chesnara plc’s investment in Countrywide Assured plc (CA) Within this report, key audit matters are identified as follows: Newly identified Increased level of risk Similar level of risk Decreased level of risk Materiality The materiality that we used for the group financial statements was £10.3m which was determined on the basis of 2% of adjusted net assets. IFRS 17 brought in the concept of Contractual Service Margin (CSM), which reflects the estimated deferred profit that is expected to be realised within net assets in future reporting periods. We deem it appropriate to adjust net assets by adding CSM to the benchmark, in the determination of materiality in the current year. Scoping Our group audit work focused on the material components where the group’s policies are administered. In 2023, the full scope of audit covered all components of the group. 134 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS Significant changes With effect from 1 January 2023, the group transitioned to IFRS 17 ‘Insurance Contracts’, which replaced the existing standard in our approach for insurance contracts, IFRS 4. The group’s financial statements for the year ended 31 December 2023 are the group’s first set of financial statements to include the adoption of the new standard, including the retrospective application to the preceding period. Given the significance, complexity and judgements associated with the transition, we have identified a key audit matter in relation to the initial adoption of IFRS 17. In the current period we have identified a new key audit matter relating to the insurance contract liabilities, specifically to the expense assumptions used within the valuation. In the prior year, we identified key audit matters pertaining to the valuation of the CASLP Limited Acquired Value In-Force (AVIF) intangible asset, Scildon insurance liabilities, and the Movestic Deferred Acquisition Costs (DAC) intangible asset. The quantum of the AVIF intangible at the 2023 period end is such that the valuation is not materially sensitive to assumptions, the use of historic assumptions underpinning the Scildon insurance liabilities is no longer an appropriate practice under IFRS 17, and the Movestic DAC has sufficient headroom. We have therefore not included these items as key audit matters in the current period. Conclusions relating to going concern In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. Our evaluation of the directors’ assessment of the group’s and parent company’s ability to continue to adopt the going concern basis of accounting included: – gaining an understanding of the controls in relation to management’s assessment of going concern and the governance process around the going concern assumption; – evaluating management’s stress and scenario testing within the group Own Risk and Solvency Assessment (ORSA), and the key assumptions used with reference to internal and external information; – with the involvement of actuarial specialists, reviewing the governance over, and the production of, solvency monitoring information, and considering its consistency with other available information and our understanding of the business; – evaluating management’s assessment of the risks across the group, including: investment and liquidity risk, regulatory change risk, acquisition risk, demographic experience risk, expense risk, operational risk, IT and data security and cyber risk, new business risk, and reputational risk; – evaluating the key assumptions underpinning the group’s forecasted profitability and liquidity within the group business plan; – assessing the mitigating actions management have put in place, and further plans they have if required, in anticipation of any further deterioration of the wider UK and global economy; and – assessing the appropriateness of the going concern disclosures in the financial statements, based on our knowledge gained throughout the audit. Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the group’s and parent company’s ability to continue as a going concern for a period of at least 12 months from when the financial statements are authorised for issue. In relation to the reporting on how the group has applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting. Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. CHESNARAANNUALREPORTANDACCOUNTS2023135 IFRS FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CHESNARA PLC Initial adoption of IFRS 17 Key audit matter description IFRS 17 ‘Insurance Contracts’ became effective from 1 January 2023, replacing IFRS 4 ‘Insurance Contracts’. The new standard establishes principles for the recognition, measurement, presentation, and disclosure of insurance contracts, which are significantly different to those required under IFRS 4. The group’s financial statements for the year ended 31 December 2023 are the group’s first set of financial statements under the new standard and include comparative financial information that has been restated from 1 January 2022. The first-time adoption resulted in a reduction in the group’s net equity of £14.8m upon transition. The application of IFRS 17 to the group’s insurance contracts requires significant management judgement in developing the valuation methodology, defining the related accounting policies, and implementing those policies appropriately within the relevant calculation models. The judgements, policy choices and elections made have the potential to significantly impact the financial results of the group. The new standard has introduced a number of significant changes, including new requirements regarding the recognition and measurement of insurance contracts and related account balances and classes of transactions. This resulted in an increased extent of audit effort, including the involvement of our internal actuarial specialists. Due to the pervasive impact of the IFRS 17 transition on the group’s financial reporting, we have concluded that the implementation of the new standard forms a key audit matter. The transitional approach and impact of IFRS 17 is documented within Note A4 to the financial statements, and the Audit & Risk Committee Report on page 120. How the scope of our audit responded to the key audit matter In assessing management’s judgements in the interpretation and application of IFRS 17, we have performed the following procedures: – with the involvement of IFRS 17 accounting and actuarial specialists, we have critically evaluated the appropriateness of key technical accounting decisions, judgements, assumptions, and elections made in determining the impacts to assess compliance with the requirements of the standard; – assessed and validated materiality-based judgements taken by management in the application of IFRS 17 to the group’s contracts, by agreeing key inputs back to audited source data; – with the involvement of actuarial specialists we assessed the group’s implementation of the defined methodology and IFRS 17 actuarial models; – substantiated the incremental data and other information required for the IFRS 17 calculations, including the relevant input data; and – evaluated the new ongoing disclosures and the disclosures related to the transition impact and reconciled the disclosures to underlying accounting records and supporting data. Key observations Based on the procedures described above, we consider the group’s initial adoption of IFRS 17 to be appropriate and in compliance with the standard. Expenses assumptions used in the valuation of insurance contract liabilities Key audit matter description The insurance contract liabilities are one of the largest balances on the balance sheet, held at £4.2bn (2022: £3.8bn) at 31 December 2023. The valuation of insurance contract liabilities is determined using actuarial assumptions that require complex judgements and estimates to be made by management. A number of the assumptions, such as mortality and morbidity, economic assumptions, and lapse rates, are made with reference to industry tables and actual experience, and hence market benchmarking highlights material deviations from industry practices. The expense assumptions require management to make significant judgements and estimates relating to the future expenses attributable to insurance contracts. The risk associated with the expense assumptions has increased during the period, as a result of: – the restructure of the administration outsourcing arrangements for the UK business, including the anticipated project costs of migration and termination; – the impact of inflation on future expenses in the short- and longer-term, particularly given the current high interest rate environment; and – the cost implications of maintaining insurance portfolios in run-off, particularly where variable cost assumptions are used. Given the significance of the insurance contract liabilities held within CA (£1.4bn), Waard (£0.8bn) and Scildon (£1.9bn), our key audit matter has been pinpointed to the expense assumptions within these subsidiaries. As the expense assumptions are susceptible to manipulation by management, we have determined that there was a risk of misstatement due to fraud. The accounting policy relating to the insurance contract liabilities has been presented in Note A5(a), with details of the balance and movement set out within Note F1. The expense assumptions used in determining insurance contracts liabilities are also referred to in the Audit & Risk Committee Report on page 120. How the scope of our audit responded to the key audit matter In respect of the expense assumptions used in the valuation of the insurance contract liabilities, we have performed the following procedures: – gained an understanding of the relevant controls in relation to the derivation and approval of expense assumptions; – with involvement of actuarial specialists, we evaluated the appropriateness of expense assumptions and methodology, by benchmarking with industry expectations, and the assessment of management actions; – tested the key inputs into significant judgements, such as assessing whether the anticipated costs of migration and termination are consistent with contractual arrangements; – tested ‘actual’ expenses, and compared previous forecasts to observed actuals to understand management’s forecasting accuracy; and – assessed the mechanical accuracy of the underlying calculation verifying whether the methodology has been applied correctly. Key observations Based on the procedures performed, we consider the expense assumptions used in the valuation of insurance contract liabilities to be appropriate. 136 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS Valuation of Chesnara plc’s investment in CA Key audit matter description Chesnara plc, the parent company, holds a total investment of £399.6m (2022: £414.0m) on the Company Balance Sheet relating to its investment in group subsidiaries, at cost less impairment. At 31 December 2022, the company held investments of £142.9m and £62.9m in CA and CASLP, respectively. At 31 December 2023, following a £14.4m impairment, an investment of £191.4m was held in CA as a result of substantially all of the CASLP insurance business, and therefore corresponding investment, being Part VII transferred into CA. In line with IAS 36: Impairment of Assets, management are required to carry out an impairment assessment if there is indication of impairment loss at the balance sheet date. Through the assessment management evaluated whether the investment in CA is carried at more or less than the recoverable amount, which is the higher of fair value less costs of disposal and value in use, and therefore whether an impairment is required. Management have historically deemed economic value (EcV) to be an appropriate proxy for the IAS 36 ‘value in use’ within their impairment assessment. Management’s definition of EcV has been set out on page 49. In recent periods the CA EcV has been on a downwards trend as over this time period dividends paid to the parent company have exceeded its EcV growth, with this dynamic being a function of it being a closed book. The impairment assessment performed by management at the balance sheet date highlighted £14.4m (2022: £25.0m) of impairment over the carrying value of the investment. We therefore identified a key audit matter relating to the valuation of the parent company’s investment in CA. Due to the potential for management to introduce inappropriate bias to judgements made in the impairment assessment, we have determined that there was a risk of misstatement due to fraud. The accounting policy relating to the valuation of Chesnara plc’s investment in CA has been presented in Note A5(z), with details of the impairment sensitivities within Note A6(k). The investment in CA is also referred to in the Audit & Risk Committee Report on page 120. How the scope of our audit responded to the key audit matter In respect of the investment in CA, we have performed the following procedures: – gained an understanding of the relevant controls in place around the impairment assessment and EcV valuation; – evaluated management’s methodology and the appropriateness of using EcV as a proxy for the ‘value in use’ with reference to the requirements of IAS 36; – evaluated management’s assessment by performing benchmarking against other recent industry transactions to gain corroborative and contradictory evidence; and – with the involvement of actuarial specialists, we evaluated the accuracy and completeness of adjustments made to the IFRS balance sheet to determine EcV. Key observations Based on the procedures performed, we consider the carrying value of Chesnara plc’s investment in CA is appropriate. Our application of materiality Materiality We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Group financial statements Parent company financial statements Materiality £10.3m (2022: £9.9m) £9.0m (2022: £9.4m) Basis for determining 2% of adjusted net assets 3% of net assets materiality (2022: 3% of net assets). The basis of determining materiality is consistent with the prior period, however the prior period parent company materiality was capped at 95% of group materiality. Rationale for the The key stakeholders of the group are focussed on the A net assets or equity measure is closely aligned to the benchmark applied management of capital under Solvency II, and therefore objectives of parent company, in making dividend payments we consider the most relevant metric to be the net asset from the distributable reserves, and the benchmark position of the group. represents a stable long-term measure of the company’s financial position. IFRS 17 brought in the concept of CSM, which reflects the estimated deferred profit that is expected to be realised within net assets in future reporting periods. We deem it appropriate to adjust net assets by adding CSM to the benchmark, reflecting the future value of the group. We have updated the benchmark to reflect the changes in the balance sheet as a result of IFRS 17 implementation. CHESNARAANNUALREPORTANDACCOUNTS2023137 IFRS FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CHESNARA PLC Our application of materiality (continued) Adjusted net assets Group materiality Group materiality £10.3m Component materiality range Adjusted net assets £516.2m £5.2m to £7.2m Audit & Risk Committee reporting threshold £0.5m Performance materiality We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and undetected misstatements exceed the materiality for the financial statements as a whole. Group financial statements Parent company financial statements Performance materiality 65% (2022: 65%) of group materiality 65% (2022: 65%) of parent company materiality Basis and rationale In determining performance materiality, we considered the quality of the control environment and whether we were able to for determining rely on controls, internal and external factors affecting the business, the nature of the balances, and the level of corrected and performance uncorrected misstatements identified in the previous audit. materiality As permitted by FRC Practice Note 20 ‘The Audit of Insurers in the United Kingdom’, we applied a separate testing threshold of £24m within the UK component, for testing the unit-linked assets and liabilities, the associated statement of comprehensive income balances and related notes. This was determined with reference to 1% of unit-linked assets. Error reporting threshold We agreed with the Audit & Risk Committee that we would report to the committee all audit differences in excess of £500,000 (2022: £495,000), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit & Risk Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements. An overview of the scope of our audit Identification and scoping of components Our group audit was scoped by obtaining an understanding of the group and its environment, including group-wide controls, and assessing the risks of material misstatement at the group level. The risk assessment and scoping for the group has been performed centrally by the group audit team. Based on this assessment and consistent with the prior year, we focused our group audit scope primarily where the group’s policies are administered. This included the UK reporting segment (including all UK incorporated companies per Note I7), Waard Group and Scildon in the Netherlands and Movestic Livförsäkring AB in Sweden. These components account for all the operations of the group and were all subject to a full scope audit, which covered 100% of net assets, profit before tax and revenue of the group. Excluding the parent company, the component materiality levels set by the group auditor range from £5.2m to £7.2m (2022: £5.0m to £5.4m). The audit at each location involved the use of component audit teams. The procedures performed by the group audit team specifically relate to the parent company, and group consolidation. Our consideration of the control environment We have focused our assessment of controls around each of the key audit matters detailed on pages 135 to 137, and significant balances and business processes, including premiums, claims, reserving, investments, and financial reporting. With the support of our IT specialists, we have performed walkthroughs to gain an understanding of the underlying IT systems. The extent of the controls assessment and testing performed across the group varies depending on the maturity of the IT systems and controls. If, through the process of understanding the systems and controls, we identified deficiencies or found that previously identified deficiencies had not been remediated or had been risk accepted by management, we did not seek to take a controls reliance approach. Management recognises the need to enhance certain aspects of its general IT controls across the group, as stated on page 102. We took a controls reliance approach over the Movestic listed investments cycle. We have shared observations arising from our procedures with management and the Audit & Risk Committee. The board’s assessment of the control environment is set out on page 102. 138 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS Our consideration of climate-related risks In planning our audit, we have considered the potential impact of climate change on the group’s business and its financial statements. The group’s Risk Management Policy and Framework encompass the potential impacts and opportunities of environmental, social and governance factors (ESG) and climate change as explained in the Strategic Report on pages 24 to 91. Climate-related risks and opportunities are overseen by the group board as well as management, with climate change matters assigned to Group Chief Executive Officer (Group CEO) at a group level and the respective CEOs at business unit level. As set out in Note A5(ad), management does not consider that climate change risk is currently a key source of estimation uncertainty nor that it presents a material impact to the judgements made in the financial statements. We have held discussions with management and reviewed their supporting papers to understand the climate-related risk assessment, legal and regulatory requirements, ESG strategy, governance, and disclosures. Further, we have obtained an understanding of management’s process and controls in considering the impact of climate risks. With the involvement of our actuarial and ESG specialists, we performed our own qualitative risk assessment of the potential impact of climate change on the group’s account balances and classes of transaction, incorporating the external and internal factors affecting the entity, and did not identify any additional risks of material misstatement. With the involvement of our ESG specialists, we read the disclosures included in the Annual Report and Accounts to consider whether they are materially consistent with the financial statements and our knowledge obtained in the audit, and evaluated the appropriateness of disclosures included in the financial statements in Note A5(ad). Working with other auditors Referral instructions have been provided to each of the component audit teams detailing the procedures to be performed to support the group audit opinion. The group audit team have utilised virtual meetings and in-person visits throughout the audit, to monitor and challenge each of the component audit teams, including the attendance of senior group audit team members at key component meetings. The group audit team have reviewed the audit files of each component team, focusing on the following areas; – independence and continuance; – assessment of the control environment; – procedures around key audit matters and financial reporting; and – legal and regulatory compliance. In addition to the review of the component audit files, the group audit team has evaluated the component responses to the referral instructions ensuring that the planned procedures have been performed appropriately. Other information The other information comprises the information included in the Annual Report and Accounts, other than the financial We have nothing to statements and our auditor’s report thereon. The directors are responsible for the other information contained within the report in this regard. Annual Report and Accounts. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements, or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. Responsibilities of directors As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities This description forms part of our auditor’s report. CHESNARAANNUALREPORTANDACCOUNTS2023139 IFRS FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CHESNARA PLC Extent to which the audit was considered capable of detecting irregularities, including fraud Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below. Identifying and assessing potential risks related to irregularities In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws and regulations, we considered the following: – the nature of the industry and sector, control environment and business performance including the design of the group’s remuneration policies, key drivers for directors’ remuneration, bonus levels and performance targets; – the group’s own assessment of the risks that irregularities may occur either as a result of fraud or error that was approved by the board; – results of our enquiries of management, internal audit, the directors and the Audit & Risk Committee about their own identification and assessment of the risks of irregularities, including those that are specific to the group’s sector; – any matters we identified having obtained and reviewed the group’s documentation of their policies and procedures relating to: – identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance; – detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud; – the internal controls established to mitigate risks of fraud or non-compliance with laws and regulations; – the matters discussed among the audit engagement team, including significant component audit teams, and relevant internal specialists, including tax, actuarial, IT, IFRS 17, ESG and financial instrument specialists regarding how and where fraud might occur in the financial statements and any potential indicators of fraud. As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation for fraud and identified the greatest potential for fraud in the following areas: expense assumptions used in the valuation of insurance contract liabilities and the valuation of Chesnara plc’s investment in CA. In common with all audits under ISAs (UK), we are also required to perform specific procedures to respond to the risk of management override. We also obtained an understanding of the legal and regulatory frameworks that the group operates in, focusing on provisions of those laws and regulations that had a direct effect on the determination of material amounts and disclosures in the financial statements. The key laws and regulations we considered in this context included the UK Companies Act, Listing Rules, pensions legislation, and tax legislation. In addition, we considered provisions of other laws and regulations that do not have a direct effect on the financial statements but compliance with which may be fundamental to the group’s ability to operate or to avoid a material penalty. These included the group’s regulatory solvency requirements and compliance with the requirements of the Financial Conduct Authority (FCA), Prudential Regulatory Authority (PRA), De Nederlandsche Bank (DNB) and the Swedish Financial Services Authority (FSA). Audit response to risks identified As a result of performing the above, we identified expense assumptions used in the valuation of insurance contract liabilities and the valuation of Chesnara plc’s investment in CA as key audit matters related to the potential risk of fraud. The Key Audit Matters section of our report explains the matters in more detail and also describes the specific procedures we performed in response to those key audit matters. In addition to the above, our procedures to respond to risks identified included the following: – reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with provisions of relevant laws and regulations described as having a direct effect on the financial statements; – enquiring of management, the Audit & Risk Committee and external legal counsel concerning actual and potential litigation and claims; – performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due to fraud; – reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence with the FRC, PRA, DNB and the FSA; and – in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business. We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including internal specialists and significant component audit teams, and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit. Report on other legal and regulatory requirements Opinions on other matters prescribed by the Companies Act 2006 In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. In our opinion, based on the work undertaken in the course of the audit: – the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and – the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements. In the light of the knowledge and understanding of the group and the parent company and their environment obtained in the course of the audit, we have not identified any material misstatements in the Strategic Report or the Directors’ Report. 140 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS Corporate Governance Statement The Listing Rules require us to review the directors’ statement in relation to going concern, longer-term viability and that part of the Corporate Governance Statement relating to the group’s compliance with the provisions of the UK Corporate Governance Code specified for our review. Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance Statement is materially consistent with the financial statements and our knowledge obtained during the audit: – the directors’ statement with regards to the appropriateness of adopting the going concern basis of accounting and any material uncertainties identified, set out on page 130; – the directors’ explanation as to its assessment of the group’s prospects, the period this assessment covers and why the period is appropriate, set out on page 130; – the directors’ statement on fair, balanced and understandable, set out on page 131; – the board’s confirmation that it has carried out a robust assessment of the emerging and principal risks, set out on page 63; – the section of the Annual Report and Accounts that describes the review of effectiveness of risk management and internal control systems, set out on page 102; and – the section describing the work of the Audit & Risk Committee, set out on page 120. Matters on which we are required to report by exception Adequacy of explanations received and accounting records We have nothing to Under the Companies Act 2006 we are required to report to you if, in our opinion: report in respect of these matters. – we have not received all the information and explanations we require for our audit; or – adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or – the parent company financial statements are not in agreement with the accounting records and returns. Directors’ remuneration We have nothing to Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration report in respect of have not been made or the part of the Directors’ Remuneration Report to be audited is not in agreement with the accounting these matters. records and returns. Other matters which we are required to address Auditor tenure Following the recommendation of the Audit & Risk Committee, we were appointed by the group’s board on 1 October 2009 to audit the financial statements for the year ending 31 December 2009 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments of the firm is 15 years, covering the years ending 31 December 2009 to 31 December 2023. Consistency of the audit report with the additional report to the Audit & Risk Committee Our audit opinion is consistent with the additional report to the Audit & Risk Committee we are required to provide in accordance with ISAs (UK). Use of our report This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. As required by the FCA Disclosure Guidance and Transparency Rule (DTR) 4.1.15R – DTR 4.1.18R, these financial statements form part of the Electronic Format Annual Financial Report filed on the National Storage Mechanism of the FCA in accordance with DTR 4.1.15R – DTR 4.1.18R. This auditor’s report provides no assurance over whether the Electronic Format Annual Financial Report has been prepared in compliance with DTR 4.1.15R – DTR 4.1.18R. Matthew Perkins (Senior Statutory Auditor) for and on behalf of Deloitte LLP Statutory Auditor Birmingham, United Kingdom 27 March 2024 CHESNARAANNUALREPORTANDACCOUNTS2023141 IFRS FINANCIAL STATEMENTS IFRS FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Year ended 31 December Restated 2023 2022 Note £m £m Insurance revenue D1 228.0 225.1 Insurance service expense D1 (224.7 ) (206.1 ) Net expenses from reinsurance contracts held D1 (8.4 ) (5.7 ) Insurance service result (5. 1 ) 1 3 . 3 Net investment return D2 1,023.5 (1,556.9 ) Net finance (expenses)/income from insurance contracts issued D2 (314 .9 ) 54 8.8 Net finance income/(expenses) from reinsurance contracts held D2 6 .7 (13.1 ) Net change in investment contract liabilities D2 (529.6 ) 589.3 Change in liabilities relating to policyholders’ funds held by the group D2 (1 14 .0 ) 392.9 Net investment result 7 1.7 (39 .0 ) Fee, commission and other operating income D3 89.4 59.6 Total revenue net of investment result 15 6 .0 3 3 .9 Other operating expenses D4 (149.9 ) ( 100.9 ) Total income less expenses 6 .1 (67.0 ) Financing costs D5 (1 1.0 ) (1 0.5 ) Profit arising on business combinations and portfolio acquisitions I8 6.7 1 5.4 Profit/(loss) before income taxes C2 1 .8 (6 2 .1 ) Income tax credit D6 16 .9 28 .4 Profit/(loss) for the period C2 18 .7 (33 .7 ) Items that may be reclassified subsequently to profit and loss: Foreign exchange translation differences arising on the revaluation of foreign operations (7 .8 ) 6.9 Revaluation of pension obligations after tax (0.7 ) – Revaluation of land and building 0.1 0.7 Other comprehensive (expense)/income for the period, net of tax (8 . 4 ) 7.6 Total comprehensive income/(expense) for the period 1 0. 3 (26 .1 ) Basic earnings per share (based on profit or loss for the period) I3 12.41 p (22 .40 )p Diluted earnings per share (based on profit or loss for the period) I3 12.29 p (2 2.13 )p The Notes and information on pages 146 to 253 form part of these financial statements. 142 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET 31 December Restated Restated 2023 2022 2021 Note £m £m £m Assets Intangible assets E1 96 .4 126.1 80.4 Property and equipment E2 8.4 7.9 7 .8 Investment properties E3 88 .1 94 .5 1.1 Insurance contract assets F1 4 .0 – – Reinsurance contract assets F1 185.7 194.0 242.3 Amounts deposited with reinsurers 32.5 32.8 38.3 Financial investments E4 1 1,456 . 1 1 0,536.8 9,176.0 Derivative financial instruments E5 0. 3 0.1 0. 3 Other assets E6 57 .7 46.4 4 7 .3 Deferred tax assets G4 54.6 1 1.7 0.9 Cash and cash equivalents E7 146.0 204.6 7 0.1 Total assets 12 ,12 9. 8 1 1 , 2 54 . 9 9,6 6 4 . 5 Liabilities Insurance contract liabilities F1 4 ,203.0 3, 821.6 4,032.1 Reinsurance contract liabilities F1 17.1 17.3 33.1 Other provisions G1 23. 2 8 .7 1.7 Investment contracts at fair value through profit or loss 5,872.3 5,660 .8 3,982.0 Liabilities relating to policyholders’ funds held by the group 1,28 1.8 986.8 990.6 Lease contract liabilities G2 1.2 1.2 2.0 Borrowings G3 207 .9 21 2.0 4 7 .2 Derivative financial instruments E5 4.4 3.8 – Deferred tax liabilities G4 24.3 3 1.8 8.9 Deferred income G5 2 .8 3.5 4. 5 Other current liabilities G6 1 31.7 123.3 1 1 8.7 Bank overdrafts E7 0. 2 – 0.3 Total liabilities 1 1,769. 9 10,870. 8 9 ,2 21 .1 Net assets C2 3 59 .9 3 8 4 .1 4 4 3. 4 Shareholders’ equity Share capital H1 7.5 7 .5 7 .5 Merger reserve H1 36.3 36.3 36.3 Share premium H1 142.5 142. 3 142.1 Other reserves H2 6.5 14.9 7 .3 Retained earnings H3 167 .1 183.1 250.2 Total shareholders’ equity 3 59 .9 38 4 .1 4 4 3. 4 The Notes and information on pages 146 to 253 form part of these financial statements. Approved by the board of directors and authorised for issue on 27 March 2024 and signed on its behalf by: Luke Savage Steve Murray Chair Chief Executive Officer Company number: 04947166 CHESNARAANNUALREPORTANDACCOUNTS2023143 IFRS FINANCIAL STATEMENTS IFRS FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF CASH FLOWS Year ended 31 December Restated 2023 2022 Note £m £m Profit/(Loss) for the period 18 .7 (3 3 .7 ) Adjustments for: Depreciation of property and equipment E2 0.8 0.7 Depreciation on right-of-use assets 0.8 0.7 Amortisation of intangible assets E1 17.1 17 .5 Impairment of intangible assets 21.0 – Interest on lease liabilities – – Share-based payment 0.7 0.9 Tax paid/(recovered) (16.9 ) 1 3.0 Interest receivable (5.6 ) (9.5 ) Dividends receivable (2.3 ) (1. 5 ) Interest expense 10.3 10.5 Fair value (gains)/losses on financial assets and investment properties (1,023.5 ) 1, 428.2 Profit on business combinations and portfolio acquisitions (6.7 ) (1 5.4 ) Increase in intangible assets related to investment contracts (1 0.2 ) (9 .1 ) Adjustment total (1 ,0 14 . 5 ) 1 ,4 3 6 .0 Interest received 7.5 9.6 Dividends received 19.6 1.5 Changes in operating assets and liabilities: Decrease/(increase) in financial assets and investment properties 327. 6 (138.7 ) Decrease/(increase) in net reinsurers contract assets 7.8 28 .3 Decrease/(increase) in amounts deposited with reinsurers 0.3 5. 5 (Increase)/decrease in other assets (19.5 ) 8.6 Increase/(decrease) in net insurance contract liabilities 93.7 (557 .9 ) Increase/(decrease) in investment contract liabilities 526.4 (7 4 7 .9 ) Increase/(decrease) in provisions 2.3 (2.8 ) Increase/(decrease) in other current liabilities 5.7 (38.4 ) Cash utilised from operations (24 . 4 ) (2 9. 9 ) Income tax paid (10.5 ) (12 .1 ) Net cash utilised from operating activities (34 . 9 ) (42 . 0 ) Cash flows from investing activities Acquisition of subsidiary, net of cash acquired 30.3 55.6 Development of software – (2.4 ) Net proceeds/(purchases) of property and equipment (0.8 ) (1.1 ) Net cash generated by investing activities 2 9. 5 52 .1 Cash flows from financing activities Net proceeds from the issue of share capital 0.2 0.3 Net proceeds from Tier 2 debt raised – 196.5 Proceeds from borrowings – 2.0 Repayment of borrowings (3.9 ) (37 .1 ) Repayment of lease liabilities (0.6 ) (0.3 ) Dividends paid (35.4 ) (34 .3 ) Interest paid (1 0.1 ) (5. 8 ) Net cash (utilised)/generated by from financing activities (49. 8 ) 1 2 1 . 3 Net (decrease)/increase in cash and cash equivalents (5 5 . 2 ) 1 3 1 . 4 Net cash and cash equivalents at beginning of period E7 204 .6 69.8 Effect of exchange rate changes on net cash and cash equivalents (3.6 ) 3.4 Net cash and cash equivalents at end of the period E7 145.8 2 04 . 6 Note. Net cash and cash equivalents includes overdrafts. The Notes and information on pages 146 to 253 form part of these financial statements. 144 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Year ended 31 December 2023 Share Share Merger Other Retained capital premium reserve reserves earnings Total Note £m £m £m £m £m £m Equity shareholders’ funds at 1 January 2023 (restated) 7.5 14 2 . 3 3 6. 3 14. 9 18 3 .1 3 84 .1 Profit for the year – – – – 18 .7 1 8.7 Dividends paid – – – – (35.4 ) (35.4 ) Foreign exchange translation differences – – – (7 .8 ) – (7 .8 ) Other items of comprehensive income – – – (0.6 ) – (0.6 ) Issue of share premium – 0.2 – – – 0.2 Share-based payment – – – – 0.7 0.7 Equity shareholders’ funds at 31 December 2023 7.5 14 2 . 5 36 . 3 6 . 5 1 67.1 3 59 . 9 Year ended 31 December 2022 Share Share Merger Other Retained capital premium reserve reserves earnings Total Note £m £m £m £m £m £m Equity shareholders’ funds at 1 January 2022 7.5 142 . 1 36 . 3 7. 3 2 6 5. 0 45 8 . 2 (as previously stated) Transition adjustments A4 – – – – (14. 8 ) (14.8 ) Equity shareholders’ funds at 1 January 2022 (restated) 7. 5 14 2 .1 3 6 . 3 7. 3 2 50 . 2 4 4 3. 4 Loss for the year – – – – (33.7 ) (33.7 ) Dividends paid – – – – (34.3 ) (34 .3 ) Foreign exchange translation differences – – – 6.9 – 6.9 Other items of comprehensive income – – – 0.7 – 0.7 Issue of share premium – 0.2 – – – 0.2 Share-based payment – – – – 0.9 0.9 Equity shareholders’ funds at 31 December 2022 (restated) 7. 5 142 . 3 36 . 3 14 . 9 18 3.1 3 84 .1 The Notes and information on pages 146 to 253 form part of these financial statements. CHESNARAANNUALREPORTANDACCOUNTS2023145 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION A – GENERAL INFORMATION AND ACCOUNTING POLICIES AND JUDGEMENTS A1 General information Chesnara plc (Registered number 4947166) (the company) is a limited liability company, incorporated in the United Kingdom and registered in England and Wales. The company is limited by shares and has a primary listing on the London Stock Exchange. The address of the registered office is 2nd Floor, Building 4, West Strand Business Park, West Strand Road, Preston, England, PR1 8UY, UK. The company and its subsidiaries, together forming the group, comprise UK, Swedish and Dutch life and pensions businesses. The UK segment consists of the CA and CASLP businesses, as described in Note C1. The acquisition of Sanlam Life & Pensions UK (SLP) took place on 28 April 2022, and the business subsequently changed its legal name to CASLP. On 31 December 2023, the long-term business of CASLP, along with the majority of the assets of the company were transferred into CA via a Business Transfer Scheme under Part VII of the Financial Services and Markets Act 2000. During the year, the group also reached an agreement to acquire the onshore UK individual protection business of Canada Life Limited. Further detail on this transaction can be found in Note I8. The UK segment is substantially closed to new business, such that new insurance contracts are only issued to existing customers, dependent on their changing needs. The Swedish segment comprises the Movestic business, as described in Note C1. Its activities are performed predominantly in Sweden, where it underwrites life, accident and health risks and provides a portfolio of investment contracts. It is open to new business, distributing its products principally through independent financial advisors. The Dutch segment comprises the Waard Group and Scildon businesses, as described in Note C1. The group’s Dutch life businesses contain a mix of term life, unit-linked, index-linked and non-linked business. Scildon is open to new business for some of its products, whilst there have been a number of acquisitions into the Waard Group in recent years, the most recent being the acquisition of Conservatrix, which completed on 1 January 2023. These financial statements are presented in pounds sterling, which is the functional currency of the parent company. Foreign operations are included in accordance with the policies set out in Note A5. The results and cash flows of these operations have been translated into sterling at an average rate for the year of £1 = SEK 13.20 (2022: £1 = SEK 12.47) for the Swedish business and £1 = EUR 1.15 (2022: £1 = EUR 1.17) for the Dutch business. Assets and liabilities have been translated at the year end rate of £1 = SEK 12.84 (31 December 2022: £1 = SEK 12.49) for the Swedish business and £1 = EUR 1.15 (31 December 2022: £1 = EUR 1.13) for the Dutch business. Total foreign currency exchange rate loss for the year ended 31 December 2023 recognised in the Consolidated Statement of Comprehensive Income of £7.8m (year ended 31 December 2022: gain of £6.9m). The financial statements were authorised for issue by the directors on 27 March 2024. A2 Basis of consolidation The Consolidated Financial Statements incorporate the financial statements of the company and of entities controlled by the company (its subsidiaries), made up to 31 December each year. Control is achieved when the company is exposed or has rights to the variable returns from the involvement with the entity and has the ability to affect those returns through its power over the entity. The parent company financial statements present information about the company as a separate entity and not about its group. Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the group’s equity therein. Non-controlling interests consist of the amount of those interests at the date of the original business combination and the non-controlling interest’s share of changes in equity since the date of the combination. Profit or loss and each component of other comprehensive income are attributed to the company and to the non-controlling interests. Total comprehensive income is attributed to the company shareholders and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. The results of subsidiaries acquired or disposed of during the year are included in the Consolidated Statement of Comprehensive Income from the effective date of acquisition or up to the effective date of disposal. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the group. All intra-group transactions, balances, income and expenses are eliminated on consolidation. A3 Basis of preparation The consolidated and parent company financial statements have been prepared on a going concern basis. The directors believe that they have a reasonable expectation that the group has adequate resources to continue in operational existence for the foreseeable future. In making this assessment, the directors have taken into consideration the points as set out in the Financial Management section of the Annual Report and Accounts under the heading ‘Maintain the group as a going concern’. The financial statements are presented in pounds sterling, rounded to the nearest one hundred thousand, and are prepared on the historical cost basis except for insurance and reinsurance contracts which are stated at their fulfilment value in accordance with IFRS 17 and the following assets and liabilities which are stated at their fair value: derivative financial instruments; financial instruments at fair value through profit or loss; assets and liabilities held for sale; investment property; and investment contract liabilities at fair value through profit or loss. Assets and liabilities are presented in a liquidity order in the balance sheet. In addition, amounts expected to be recovered or settled within a year are classified as current in the notes to the accounts. If they are expected to be recovered or settled in more than one year, they are classified as non-current in the notes to the accounts. Assets and liabilities are presented on a current and non-current basis in the Company Balance Sheet. The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates . 146 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS The estimates and underlying assumptions are reviewed on an ongoing basis. Judgements made by management in the process of applying the group’s accounting policies that have a significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are set out in Note A6. The group prepares interim financial statement at half year and as permitted by IFRS 17 has elected to apply the ‘year-to-date’ method and restate estimates in respect of insurance contracts made in the previous interim financial statements, in these year end financial statements. This Accounting Policy election applies to all groups of insurance and reinsurance contracts. The accounting policies set in Note A5, unless otherwise stated, have been applied consistently to all years presented in these Consolidated Financial Statements. This includes the changes in accounting policies introduced by IFRS 17 ‘Insurance Contracts’ and IFRS 9 ‘Financial Instruments’, both of which have been applied in these financial statements. Note A4 below details the impact to the group of adopting IFRS 17 and IFRS 9 in these financial statements. The Consolidated Financial Statements have been prepared in accordance with United Kingdom adopted international accounting standards in conformity with the requirements of the Companies Act 2006. Both the parent company financial statements and the group financial statements have been prepared and approved by the directors in accordance with United Kingdom adopted international accounting standards. A4 New accounting standards and impact on adoption The group has applied IFRS 17 ‘Insurance Contracts’ and IFRS 9 ‘Financial Instruments’ for the first time in these Annual Report and Accounts and as a result comparative amounts and the shareholder equity position at 1 January 2022 have been restated to reflect this. The introduction of these standards means there are significant changes to the accounting for insurance and reinsurance contracts and financial instruments, although the impact for the group in respect of IFRS 9 is less significant. IFRS 17 ‘Insurance Contracts’ IFRS 17 ‘Insurance Contracts’ introduces significant changes in the recognition, measurement, presentation and disclosure of insurance and reinsurance contracts for the group. The scope of IFRS 17 is very similar to that of IFRS 4 and all of the insurance and reinsurance contracts accounted for under IFRS 4 are accounted for under IFRS 17, with some additional benefits within the Swedish business now accounted for under IFRS 17 that were previously accounted for under IAS 39. These contracts now come into scope for IFRS 17 due to the different separation rules regarding component parts of contracts that now apply in IFRS 17 compared to IFRS 4. Insurance and reinsurance contracts are aggregated into portfolios. The portfolios are determined by identifying contracts that have similar risks and that are managed together. The portfolios are then further divided into contract groups based on annual cohorts (ie by year of issue) and profitability. Under IFRS 17, the insurance contract liabilities are broken down into the following component parts: (i) Present Value of Future Cash Flows (pvFCF): estimates of future cash flows adjusted to reflect the effect of the time value of money and other financial risks where applicable (ii) Risk Adjustment (RA) for non-financial risk: the compensation required for bearing uncertainty about the amount and timing of the cash flows that arises from non-financial risk (iii) Contractual Service Margin (CSM): the unearned profit that will be recognised as the group provides insurance contract services (iv) Liability for Incurred Claims (LIC) – claims and expenses for insurance contracts that have not yet been paid, including claims and expenses that have been incurred but not yet reported Collectively, the pvFCF and RA are referred to as Fulfilment Cash Flows (FCF). Changes in the FCF will impact either profit or loss or the CSM, depending on whether they relate to future or current service and the ‘measurement model’ applicable to the group of contracts. If the CSM for a group of contracts becomes onerous (ie negative) then a ‘loss component’ is established in respect of the negative amount and the CSM is floored at zero, with losses recognised in profit or loss immediately. The FCF and the CSM are collectively referred to as the Liability for Remaining Coverage (LRC) and the total of the LRC and LIC make up the total value for a given group of insurance contracts. For reinsurance contracts held, in line with the description above of the measurement components of the gross insurance contracts issued, the groups of reinsurance contracts consists of an Asset for Remaining Coverage (ARC) or LRC and the Asset for Incurred Claims (AIC). The components of the reinsurance ARC / LRC are similar to the LRC arising from the insurance contracts issued, with the following distinct differences: – The RA for non-financial risk represents the amount of risk being transferred by the group to the reinsurer. – The CSM represents the net cost or net gain on purchasing reinsurance and can be positive or negative on initial recognition and subsequent measurement. – To the extent that onerous contracts are reinsured, a ‘loss-recovery component’ is 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. – There is an explicit allowance for the risk of non-performance of the issuer of the reinsurance contract which includes allowance for expected losses arising from disputes. CHESNARAANNUALREPORTANDACCOUNTS2023147 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION A – GENERAL INFORMATION AND ACCOUNTING POLICIES AND JUDGEMENTS A4 New accounting standards and impact on adoption (continued) IFRS 17 ‘Insurance Contracts’ (continued) The following three measurement models are applicable under IFRS 17: (i) General Measurement Model (GMM): this is the default measurement method which determines how movements in the fulfilment cash flows impact either profit and loss or the CSM. Under the GMM, changes in the fulfilment cash flows that relate to future service impact the CSM with other changes to the fulfilment cash flows instead impacting profit and loss. (ii) Variable Fee Approach (VFA): this is used where the contract meets the IFRS 17 definition of an insurance contract with direct participating features. This means that the nature of the services provided are substantially investment related with insurance benefits also being provided. Under the VFA changes in the group’s share of the underlying items in respect of financial and economic impacts will adjust the CSM and not the profit or loss. (iii) Premium Allocation Approach (PAA): this is a simplified approach that can be applied to eligible short-duration contracts whereby all movements in the liability go to profit and loss (ie there is no CSM). Reinsurance contracts are considered separately to gross insurance contracts with the majority of reinsurance contracts within the group measured under the GMM and a small amount measured under PAA. With the adoption of IFRS 17, certain line items in the group’s Consolidated Balance Sheet have been replaced with new line items. For example, the group now presents separately the carrying amount of portfolios of: – Insurance contracts issued that are assets; – Insurance contracts issued that are liabilities; – Reinsurance contracts held that are assets; and – Reinsurance contracts held that are liabilities. The assessment as to whether a given portfolio is an asset or liability considers the portfolio as a whole, so LRC plus LIC for gross insurance contracts for example. The line items in the consolidated income statement have also changed significantly compared to that under IFRS 4 with specific line items now for: – Insurance revenue; – Insurance service expenses; – Net income (expense) from reinsurance contracts held; – Insurance Finance Income or Expense (IFIE) for insurance contracts issued; and – Net IFIE for reinsurance contracts held. Under IFRS 17, for contracts not measured under the PAA, the group recognises insurance revenue to depict the transfer of promised services provided under groups of insurance contracts. The insurance revenue for each year represents the changes in the LRC that relate to services provided in that year for which the group expects to receive consideration. This mainly comprises the release of expected claims, the release of the expired risk adjustment for non-financial risk and the CSM amounts recognised in profit or loss 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 repay back to the policyholder regardless of the occurrence of the insured event and are excluded from profit or loss. The ‘investment result’ comprises the ‘net investment return’, changes in investment contract liabilities and policyholder funds held by the group and 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 . 148 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS Transition approach – IFRS 17 Transition refers to the determination of the opening balance sheet at the beginning of the annual reporting period immediately preceding the date of IFRS 17 initial application (ie at 1 January 2022). The future cash flows and risk adjustment are measured on a current basis in the same manner as they would be calculated for subsequent measurement. The key component of transition is therefore the determination of the CSM. IFRS 17 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 full retrospective approach (FRA), the CSM at the date of transition is calculated by rolling forward the CSM from the initial recognition of the groups of the insurance contracts to the transition date as if the accounting policies under IFRS 17 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 in the UK where the length of time elapsed since acquisition into the group has meant that the retrospective application of IFRS 17 is not possible or practicable for any of the contract groups. The relatively small part of the Movestic business in Sweden to which a CSM is applicable has also been treated as FVA at the date of transition. Information regarding the fair value methodology used at transition is provided in Note A6. 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 IFRS 9 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. IFRS 9.4.1 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: – 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). – 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 SPPI. – 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. 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: – Fair Value Through Profit or Loss (FVTPL); and – Amortised Cost (AC). The majority of the group’s financial assets and liabilities are classified as FVTPL either mandatorily as prescribed by IFRS 9, or by designating as such, as permitted under IFRS 9.4.1.5 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 IAS 39 and will continue to be valued at FVTPL under IFRS 9 to reflect the way the business is managed and in line with a fair value approach to SII and EcV reporting. The 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 IAS 39. 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 IFRS 17 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 are classified as AC and no assets will be categorised as FVTOCI. 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: – It eliminates, or significantly reduces, a measurement of recognition inconsistency; or – 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 IFRS 9, as was also the case under IAS 39. This includes the Tier 2 debt within the parent company of the group . CHESNARAANNUALREPORTANDACCOUNTS2023149 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION A – GENERAL INFORMATION AND ACCOUNTING POLICIES AND JUDGEMENTS A4 New accounting standards and impact on adoption (continued) Effect of adoption of IFRS 17 and IFRS 9 The following table shows by balance sheet line item how the adoption of IFRS 17 and IFRS 9 has impacted the balance sheet that was reported in the Consolidated Financial Statements of the group as at 31 December 2021. Unaudited 31 December IFRS 17 As at 2021 – as Items Items and IFRS 9 1 January reported derecognised reclassified remeasurement 2022 £m £m £m £m £m Intangible assets 122.1 (41.7 ) – – 80.4 Property and equipment 7.8 – – – 7.8 Investment properties 1.1 – – – 1.1 Reinsurance contract assets 247.8 – 23.3 (28.8 ) 242.3 Amounts deposited with reinsurers 38.3 – – – 38.3 Financial investments 9,127.1 – – 48.9 9,176.0 Derivative financial instruments 0.3 – – – 0.3 Other assets 72.4 – (25.1 ) – 47.3 Deferred tax assets – 0.5 2.2 (1.8 ) 0.9 Cash and cash equivalents 70.1 – – – 70.1 Total assets/transition effects on assets 9,687.0 (41.2 ) 0.4 18.3 9,664.5 Insurance contract liabilities 3,818.4 – 106.5 107.2 4,032.1 Reinsurance contract liabilities – – – 33.1 33.1 Other provisions 1.0 – 0.7 – 1.7 Investment contracts at fair value through profit or loss 4,120.6 – – (138.6 ) 3,982.0 Liabilities relating to policyholder funds held by the group 990.6 – – – 990.6 Lease contract liabilities 2.0 – – – 2.0 Borrowings 47.2 – – – 47.2 Derivative financial instruments – – – – – Deferred tax liabilities 15.7 (9.6 ) 2.2 0.6 8.9 Deferred income 2.8 (0.5 ) 2.2 – 4.5 Other current liabilities 230.2 (0.4 ) (111.2 ) 0.1 118.7 Bank overdrafts 0.3 – – – 0.3 Total liabilities/transition effects on liabilities 9,228.8 (10.5 ) 0.4 2.4 9,221.1 Net assets/transition effects on shareholders’ equity 458.2 (30.7 ) – 15.9 443.4 For the entities applying the full retrospective approach, the group has identified, recognised and measured each group of insurance contracts as if IFRS 17 had always applied since the date of their acquisition into the group; derecognised any existing balances that would not exist if IFRS 17 had always applied; and recognised any resulting difference in net equity. For entities or contracts applying the fair value method this position is estimated using fair value techniques. IFRS 9 may be applied prospectively from 1 January 2023 but the group has elected to apply IFRS 9 within these financial statements from 1 January 2022 in line with IFRS 17 in order to avoid an accounting mismatch for the comparative period, as the measurement of assets under IFRS 9 cannot be considered without reference to the liabilities under IFRS 17. The overall impact to the net equity position of the group at 1 January 2022 as a result of applying IFRS 17 and IFRS 9 is a reduction in net equity of £14.8m. 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: On transition to IFRS 17, AVIF previously recognised in respect of acquired insurance contracts is derecognised as a balance that would not exist had IFRS 17 always applied. Similarly, DAC is no longer recognised for new contracts written. Instead, acquisition cash flows paid or expected to be paid on or after the initial recognition of the FRA and FVA groups of insurance contracts, have been considered when determining the initial CSM of those groups. Intangible assets of £41.7m consisting of AVIF of £31.3m and DAC of £10.4m have been derecognised from the consolidated group balance sheet at the date of transition, with a corresponding adjustment to net equity. The derecognition of the deferred tax liability of £9.6m is all in respect of deferred tax balances relating to the AVIF and DAC assets. The derecognition of the intangible assets and associated deferred tax, together with other smaller impacts, results in an overall reduction of net equity of £30.7m at the transition date. 150 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS IFRS 17 and IFRS 9 remeasurement: (i) Recognition of the CSM as an explicit liability representing future unearned profits: At 1 January 2022, a CSM of £119.6m net of reinsurance was established resulting in a decrease to net equity. (ii) Recognition of an explicit liability for Risk Adjustment for non-financial risk: At 1 January 2022, a RA of £39.7m net of reinsurance was established resulting in a decrease to net equity. (iii) Change in classification of contracts between from investment to insurance liabilities: The benefits for certain pension contracts in the Swedish business were previously separated under IFRS 4 with the savings element measured under IAS 39. The benefits can no longer be separated under IFRS 17 and therefore they are removed from the investment contract line in full and now reported within insurance contract liabilities. This reduction of £138.6m to the investment contract liability line is therefore largely offset by an increase in the insurance contract liability line. Note A6(b) provides further details regarding this change in classification. No contracts have switched from insurance to investment. (iv) IFRS 9 impacts: The assets held in respect of certain mortgage savings products in the Waard Group previously valued at amortised cost have been revalued to fair value under IFRS 9. The increase in value of £48.9m in the financial investment line is largely offset by an increase in the insurance contract liabilities line as both the asset cash flows and liability cash flows are measured using similar techniques. Further detail regarding the judgements involved in the mortgage asset revaluation can be found in Note A6(i). (v) Revaluation of the present value of future cash flows for insurance and reinsurance contracts: A variety of local methodologies with different areas of implicit margin has been replaced by a valuation of ‘best estimate’ future cash flows, discounted at market interest rates, results in an increase to net equity of £177.7m. The combined impacts in respect of items (i) to (v) above net of the deferred tax impact (£2.5m decrease to net equity) results in an overall increase to net equity of £15.9m at the transition date. 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. Standards and amendments issued but not yet effective At the date of authorisation of these financial statements the following standards and interpretations, which are applicable to the group, and which have not been applied in these financial statements, were in issue but not yet effective: Title Subject Amendments to IAS 1 Classification of liabilities as current or non-current Amendments to IAS 1 Disclosure of accounting policies Amendments to IAS 1 Non-current liabilities with covenants Amendments to IAS 8 Definition of accounting estimates Amendments to IFRS 16 Lease liability in a sale and leaseback The directors do not expect that the adoption of the standards, amendments and interpretations listed above will have a material impact on the financial statements of the group in future periods. BEPS 2.0 The Organisation for Economic Cooperation and Development (OECD) has released a package of international tax reform measures as part of the Two-Pillar solution to address tax challenges of the digitisation of the economy. This includes the Global Anti-Base Erosion (GloBE) rules, released in December 2021, which introduce a global minimum tax rate of 15% for multi-national groups with a consolidated turnover of at least EUR 750m. The Chesnara group operates in the United Kingdom, Sweden and the Netherlands, all of which have enacted and substantively enacted new legislation to implement the global minimum top-up tax, effective from 1 January 2024. The group is working to understand the application and impact of this legislation as it applies to insurance groups, which settle taxes on behalf of policyholders as well as corporate entities. This includes an exploration of the items of revenue which constitute turnover for the GloBE rues and a clearer understanding of the classification of the taxes that we settle on behalf of our policyholders. Chesnara is working with the tax authorities of the jurisdictions in which we operate to further this understanding. The group has applied the IAS 12 mandatory exemption from recognising and disclosing information on the associated deferred tax assets and liabilities at 31 December 2023. At the balance sheet date it is not possible to quantify any potential liability. CHESNARAANNUALREPORTANDACCOUNTS2023 151 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION A – GENERAL INFORMATION AND ACCOUNTING POLICIES AND JUDGEMENTS A5 Significant accounting policies (a) Insurance contracts and reinsurance contracts (i) Scope and classification Contracts under which the group accepts significant insurance risk 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. Insurance contracts may be issued, and reinsurance contracts may be initiated by the group, or they may be acquired in a business combination or in a transfer of contracts that do not form a business. All references in these accounting policies to ‘insurance contracts’ and ‘reinsurance contracts’ include contracts issued, reinsurance contracts initiated or insurance or reinsurance contracts acquired by the group, unless otherwise stated. Some contracts entered into by the group have the legal form of insurance contracts but do not transfer significant insurance risk. These contracts are classified as financial liabilities and are referred to as ‘investment contracts’ (see Note A5(b)). Similarly financial reinsurance contracts do not transfer significant insurance risk and are accounted for under IFRS 9. Mass lapse reinsurance contracts also contain no insurance risk and are accounted for under IAS 37. Insurance contracts are classified as direct participating contracts or contracts without direct participating 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 participating features. Some of these contracts are measured under the PAA. The following table provides a summary of the broad product categories and the measurement model approach applied. Classification Product category Long-term contracts without direct participating features ( GMM ) Immediate annuities Term assurance and other non-linked Unit-linked/index-linked/with-profits – GMM Long-term contracts with direct participating features ( VFA ) Unit-linked/index-linked/with-profits – VFA Short-term contracts ( PAA ) Short-term protection (ii) Separating components from insurance and reinsurance contracts The group does not have any distinct investment components which require separation from the insurance or reinsurance contract. 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 The group does not have any insurance contracts containing embedded derivatives or have any insurance contracts which transfer distinct goods and services other than insurance contract services which require separation from the host contract. (iii) 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. Further detail regarding the judgements involved in the defining portfolios and profitability groups can be found in Note A6(c). 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 can be included in the same group, however the group has not taken advantage of this. Portfolios of reinsurance contracts held are assessed separately from insurance contracts issued and are assessed for aggregation on an individual contract basis. Some reinsurance contracts provide cover for underlying contracts that are included in different groups. As per the gross insurance contracts the reinsurance contracts are divided into profitability groupings as follows: – any contracts on which there is a net gain on initial recognition; – any contracts that, on initial recognition, have no significant possibility of showing a net gain subsequently; and – any remaining contracts in the annual cohort. All reinsurance contracts within the group fall into the third profitability category above. 152 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS (iv) Recognition and derecognition of insurance and reinsurance contracts 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 a group of contracts becomes onerous or if the facts and circumstances indicate that a group of contract is onerous for those contracts measured using the PAA. 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. Non-proportionate reinsurance contracts are recognised at the earlier of: (a) the beginning of the coverage period of the group of reinsurance contracts; or (b) the date the entity recognises an onerous group of underlying insurance contracts if the entity entered into the related reinsurance contract held at or before that date. The recognition of proportionate reinsurance contracts is delayed until the date that any underlying insurance contract is initially recognised, if that date is later than the beginning of the coverage period of the group of reinsurance contracts held. Reinsurance contracts acquired as recognised at the date of acquisition. 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. (v) Fulfilment cash flows The Fulfilment Cash Flows (FCF) are the current estimates of the future cash flows within the contract boundary of a group of contracts and: – are unbiased estimates of the future cash flows; – are determined from the perspective of the group, provided that the estimates are consistent with observable market practises and variables; and – reflect conditions existing at the period-end date. An explicit risk adjustment for non-financial risk is estimated separately from the other estimates and reflects the compensation that the group requires for bearing the uncertainty about the amount and timing of the cash flows from non-financial risk as the group fulfils insurance contracts. For reinsurance contracts held, the risk adjustment for non financial risk represents the amount of risk being transferred by the group to the reinsurer. Methods and assumptions used to determine the risk adjustment for non-financial risk are discussed in Note A6(e). The estimates of the future cash flows are adjusted using current discount rates to reflect the time value of money and the financial risks related to those 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 (See Note A6(d)). The group estimates certain FCF at the portfolio level or higher and then allocates such estimates to groups of contracts. The group uses consistent assumptions to measure the estimates of the present value of future cash flows for the group of reinsurance contracts held and such estimates for the groups of underlying insurance contracts. (vi) 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 related services). A substantive obligation to provide insurance contract services ends when either: – 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 – 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. (vii) 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 and the asset is derecognised, when the insurance acquisition cash flows are included in the measurement of the group of contracts. The group derecognises the assets for insurance acquisition cash flows in the year within the reporting period in which the expenses are incurred and therefore does not have any assets for insurance acquisition cash flows on the balance sheet at the reporting date. CHESNARAANNUALREPORTANDACCOUNTS2023153 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION A – GENERAL INFORMATION AND ACCOUNTING POLICIES AND JUDGEMENTS A5 Significant accounting policies (continued) (a) Insurance contracts and reinsurance contracts (continued) (viii) Initial measurement – insurance contracts not measured under the PAA The CSM is a component of the carrying amount of the asset or liability for a group of insurance contracts issued representing the unearned profit that the group will recognise as it provides insurance contract services in the future. At initial recognition, the CSM is an amount that results in no income or expenses (unless a group of contracts is onerous) arising from: (a) the initial recognition of the FCF; and (b) cash flows arising from the contracts in the group at that date. When the above calculation results in a net outflow, the group of insurance contracts issued is onerous. A loss from onerous insurance contracts is recognised in profit or loss immediately, with no CSM recognised on the balance sheet on initial recognition, and a loss component is established in the amount of loss recognised (see Note A5(a)(xi)). (ix) Initial measurement – reinsurance contracts not measured under the PAA For groups of reinsurance contracts held, any net gain or loss at initial recognition is recognised as the CSM unless the net cost of purchasing reinsurance relates to past events, in which case the group recognises the net cost immediately in profit or loss. For reinsurance contracts held, the CSM represents a deferred gain or loss that the group will recognise as a reinsurance expense as it receives insurance contract services from the reinsurer in the future and is calculated as the sum of: (a) the initial recognition of the FCF; (b) cash flows arising from the contracts in the group at that date; and (c) any income recognised in profit or loss when the entity recognises a loss on initial recognition of an onerous group of underlying insurance contracts or on addition of onerous underlying insurance contracts to that group. A loss-recovery component is established or adjusted within the remaining coverage for reinsurance contracts held for the amount of income recognised in (c) above. This amount is calculated by multiplying the loss recognised on underlying insurance contracts by the percentage of claims on underlying insurance contracts that the group expects to recover from the reinsurance contracts held that are entered into before or at the same time as the loss is recognised on the underlying insurance contracts. When underlying insurance contracts are included in the same group with insurance contracts issued that are not reinsured, the group applies a systematic and rational method of allocation to determine the portion of losses that relates to underlying insurance contracts. (x) Contracts acquired in a business combination or portfolio transfer 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 the 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 and instead reported within ‘insurance service expense’. (xi) Subsequent measurement – insurance contracts not measured under the PAA 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 the FCF that relate to services that will be provided under the contracts in future periods and any remaining CSM at that date. The LIC includes the FCF for incurred claims and expenses that have not yet been paid, including claims that have been incurred but not yet reported. The 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 follow the general principle below: (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. 154 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS 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; and (c) experience adjustments relating to insurance service expenses (excluding insurance acquisition cash flows). The group does not classify any premiums received in the period as relating to current service on materiality grounds. For insurance contracts under the VFA: Direct participating contracts are contracts under which the group’s obligation to the policyholder is the net of: – the obligation to pay the policyholder an amount equal to the fair value of the underlying items; and – a variable fee in exchange for future services provided by the contracts, being the amount of the group’s share of the fair value of the underlying items less fulfilment cash flows that do not vary based on the returns on underlying items. The group provides investment related services under these contracts by promising an investment return based on underlying items, in addition to insurance coverage. The group has not applied the risk mitigation option that is available under IFRS 17.B115 regarding offsetting the impacts of derivatives and reinsurance contracts and therefore recognises all changes in financial risk and the time value of money against the CSM for direct participating contracts. 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) changes in estimates of the present value of future cash flows in the LRC; and (iii) changes in the risk adjustment for non-financial risk that relate to future service. Adjustments 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; and (ii) experience adjustments relating to insurance service expenses (excluding insurance acquisition cash flows). The group does not classify any premiums received in the period as relating to current service on materiality grounds. Changes to the CSM for insurance contracts: For insurance contracts, the carrying amount of the CSM at each reporting date is the carrying amount at the start of the year, adjusted for: (i) the CSM of any new contracts that are added to the group in the year; (ii) interest accreted on the carrying amount of the CSM during the year (for contracts under the GMM, using discount rates determined at initial recognition that are applied to nominal cash flows that do not vary based on the returns of underlying items); (iii) as detailed above, changes in fulfilment cash flows that relate to future services, to the extent that there is a CSM available. When an increase in the FCF exceeds the carrying amount of the CSM, the CSM is reduced to zero, the excess is recognised in insurance service expenses and a loss component is recognised within the LRC. When the CSM is zero, changes in the FCF adjust the loss component within the LRC with the impact going to insurance service expenses. The excess of any decrease in the FCF over the loss component reduces the loss component to zero and reinstates the CSM; (iv) the effect of any currency exchange differences on the CSM; and (v) the amount recognised as insurance revenue for insurance services provided in the year, determined after all other adjustments above. Release of the CSM to profit or loss for insurance contracts – coverage units The amount of the CSM recognised in profit or loss for insurance contract services in the period is determined by the allocation of the CSM remaining at the end of the reporting period over the current and remaining expected coverage period of the group of insurance contracts based on coverage units. The coverage period is defined as a period during which the entity provides insurance contract services. Insurance contract services include coverage for an insured event (insurance coverage), the generation of an investment return for the policyholder, if applicable (investment-return service) for the contracts under the GMM, and the management of underlying items on behalf of the policyholder (investment-related service) for the contracts under the VFA. Investment-return services are provided only when an investment component exists in insurance contracts or the policyholder has a right to withdraw an amount, and the group expects these amounts to include an investment return that is achieved by the group by performing investment activities to generate that investment return. Note A6(g) sets out the coverage units that are applied to the products within the group. CHESNARAANNUALREPORTANDACCOUNTS2023155 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION A – GENERAL INFORMATION AND ACCOUNTING POLICIES AND JUDGEMENTS A5 Significant accounting policies (continued) (a) Insurance contracts and reinsurance contracts (continued) (xi) Subsequent measurement – insurance contracts not measured under the PAA (continued) Insurance contracts – loss component When the negative adjustments to the CSM exceed the amount of the CSM, the group of contracts becomes onerous, and the group recognises the excess in insurance service expenses and records the excess as a loss component of the LRC. When a loss component exists, the group allocates between the loss component and the remaining component of the LRC for the respective group of contracts, on a systematic and rational basis for: (a) expected incurred claims and other directly attributable expenses for the period; (b) changes in the risk adjustment for non-financial risk for the risk expired; and (c) finance income (expenses) from insurance contracts issued. The amounts of loss component allocation in (a) and (b) above reduce the respective components of insurance revenue and are reflected in insurance service expenses. Decreases in the FCF in subsequent periods that relate to future service reduce the remaining loss component and reinstate the CSM after the loss component is reduced to zero. Increases in the FCF in subsequent periods that relate to future service increase the loss component. (xii) Subsequent measurement – reinsurance contracts not measured under the PAA The carrying amount of a group of insurance contracts at each reporting date is the sum of the Asset for Remaining Coverage (ARC) and the Asset for Incurred Claims (AIC). The ARC comprises the FCF that relate to services that will be received under the reinsurance contracts held in future periods and any remaining CSM at that date. The AIC comprises the FCF related to past service for incurred claims that have not yet been received. Changes to the CSM for reinsurance contracts: For reinsurance contracts, the carrying amount of the CSM at each reporting date is the carrying amount at the start of the year, adjusted for: (i) the CSM of any new contracts that are added to the group in the year; (ii) Interest accreted on the carrying amount of the CSM during the year, measured at the discount rates on nominal cash flows that do not vary based on the returns on any underlying items determined on initial recognition; (iii) Income recognised in profit or loss in the year on initial recognition of onerous underlying contracts; (iv) reversals of a loss-recovery component to the extent that they are not changes in the fulfilment cash flows of the group of reinsurance contracts; (v) changes in fulfilment cash flows that relate to future services, measured at the discount rates determined on initial recognition, unless they result from changes in fulfilment cash flows of onerous underlying contracts, in which case they are recognised in profit or loss and create or adjust a loss-recovery component; (vi) the effect of any currency exchange differences on the CSM; and (vii) the amount recognised in profit or loss because of the services received in the year. Income referred to in (iii) above is calculated by multiplying the loss recognised on underlying insurance contracts by the percentage of claims on underlying insurance contracts that the group expects to recover from the reinsurance contract held that is entered into before or at the same time as the loss is recognised on the underlying insurance contracts. For the purposes of (iii) to (v) above, when underlying insurance contracts are included in the same group with insurance contracts issued that are not reinsured, the group applies a systematic and rational method of allocation to determine the portion of losses that relates to underlying insurance contracts. Release of the CSM to profit or loss for reinsurance contracts – coverage units For reinsurance contracts held, the CSM is released to profit or loss as insurance contract services are received from the reinsurer in the period. Note A6(g) sets out the coverage units that are applied to the reinsurance contracts held within the group. Reinsurance contracts held – loss-recovery component A loss-recovery component is established or adjusted within the asset for remaining coverage for reinsurance contracts held for the amount of income recognised in profit or loss when the group recognises a loss on initial recognition of an onerous group of underlying insurance contracts or on addition of onerous underlying insurance contracts to that group. Subsequently, the loss-recovery component is adjusted to reflect changes in the loss component of an onerous group of underlying insurance contracts. The loss-recovery component is further adjusted, if required, to ensure that it does not exceed the portion of the carrying amount of the loss component of the onerous group of underlying insurance contracts that the group expects to recover from the group of reinsurance contracts held. The loss-recovery component determines the amounts that are presented as a reduction of incurred claims recovery from reinsurance contracts held and are consequently excluded from the reinsurance expenses determination. (xiii) Insurance and reinsurance contracts measured under PAA The group uses PAA to simplify the measurement of groups of contracts where the coverage period of each contract in the group is 1 year or less. This approach is used for stand-alone short-term protection products in Movestic. On initial recognition of each group of insurance contracts, the carrying amount of the LRC is measured at the premiums received. The group has chosen to expense insurance acquisition cash flows when they are incurred. 156 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS Subsequently, the carrying amount of the LRC is increased by any premiums received and decreased by the amount recognised as insurance revenue for services provided. On initial recognition of each group of contracts, the group expects that the time between providing each part of the services and the related premium due date is no more than a year. Accordingly, the group has chosen not to adjust the LRC to reflect the time value of money and the effect of financial risk. For contracts measured under the PAA, the LIC is adjusted for the time value of money, as the contracts issued and measured under the PAA typically have a settlement period of over 1 year. A risk adjustment for non-financial risk is also calculated. There are no investment components within insurance contracts issued and reinsurance contracts held that are measured under the PAA. (xiv) Non-distinct investment components Insurance revenue and insurance service expenses exclude any Non-Distinct Investment Components (NDIC). 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, being recognised instead directly in the balance sheet. The table that follows details the source of the NDIC’s for the broad product categories. Product category Typical NDIC Immediate annuities None Term assurance and other non-linked Term assurance: None Other non-linked: Lower of death, surrender and maturity benefit Unit-linked/index-linked/with-profits – GMM Lower of death, surrender and maturity benefit Unit-linked/index-linked/with-profits – VFA Lower of death, surrender and maturity benefit Short-term protection None (xv) Presentation in the profit and loss and balance sheet IFRS 17 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 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 equates to 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. Income and expenses from reinsurance contracts are presented separately from income and expenses from insurance contracts issued. Income and expenses from reinsurance contracts, other than insurance finance income or expenses, are presented on a net basis on the face of the income statement as ‘net expenses from reinsurance contracts’ in the insurance service result. 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. The ‘investment result’ comprises the ‘net investment return’, changes in investment contract liabilities and policyholder funds held by the group and 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. The group includes all IFIE in the profit or loss, with no disaggregation into Other Comprehensive Income. The group disaggregates changes in the risk adjustment for non-financial risk between the insurance service result and insurance finance income or expenses. 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 balance sheet. 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. CHESNARAANNUALREPORTANDACCOUNTS2023157 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION A – GENERAL INFORMATION AND ACCOUNTING POLICIES AND JUDGEMENTS A5 Significant accounting policies (continued) (b) Investment contracts Investment contracts are contracts that carry financial risk, with no significant insurance risk and are accounted for under IFRS 9. Where contracts contain both insurance and investment components the investment component can only be separated if it meets the requirements of a ‘distinct investment component’. Distinct in this sense is where the investment component is not highly inter-related with the insurance component and for which contracts with equivalent terms are sold, or could be sold, separately in the same market or the same jurisdiction. This requirement is different from IFRS 4 where previously if the investment component could be reliably measured then separation was permitted. As a result of this change, one of the savings type products in Movestic is now classed as insurance and accounted for under IFRS 17 along with some UK pensions contracts with waiver of premium benefit. All investment contract liabilities are designated on initial recognition as held at fair value through profit or loss. The group has designated investment contract liabilities at fair value through profit or loss as this more closely reflects the basis on which the businesses are managed. The financial liability in respect of unit-linked contracts is measured by reference to the value of the underlying net asset value of the unitised investment funds, determined on a bid value, at the balance sheet date. For the UK business, the impact of deferred tax on unrealised capital gains is passed to the policyholder and for the Swedish business a policyholder yield tax in respect of an estimate of the investment return on the underlying investments in the unitised funds are also reflected in the measurement of the respective unit-linked liabilities. Investment contract liabilities are managed together with related investment assets on a fair value basis as part of the documented risk management strategy. The fair value of other investment contracts is measured by discounting current estimates of all contractual cash flows that are expected to arise under contracts. Amounts deposited with reinsurers under reinsurance arrangements, which primarily involve the transfer of financial risk, are entered directly to the balance sheet as amounts deposited with reinsurers. These assets are designated on initial recognition as at fair value through profit or loss. Amounts collected on investment contracts, which primarily involve the transfer of financial risk such as long-term savings contracts, are accounted for using deposit accounting, under which the amounts collected, less any initial fees deducted, are credited directly to the balance sheet as an adjustment to the liability to the investor. Similarly, benefits paid are not included in the income statement but are instead deducted from investment contract liabilities in the accounting period in which they are paid. Acquisition costs relating to investment contracts comprise directly attributable incremental acquisition costs, which vary with, and are related to, securing new contracts, and are recognised as an asset to the extent that they represent the contractual right to benefit from the provision of investment management services. The asset is presented as a deferred acquisition cost asset and is amortised over the expected term of the contract, as the fees relating to the provision of the services are recognised. All other costs are recognised as expenses when incurred. (c) Investment return Investment return comprises investment income from financial assets and rental income from investment properties. Income from financial assets comprises dividend and interest income, net fair value gains and losses (both unrealised and realised) in respect of financial assets classified as fair value through profit or loss, and realised gains on financial assets classified as loans and receivables. Dividends are accrued on an ex-dividend basis. Interest received and receivable in respect of interest-bearing financial assets classified as fair value through profit or loss is included in net fair value gains and losses. For loans and receivables and cash and cash equivalents interest income is calculated using the effective interest method. Rental income from investment properties under operating leases is recognised in the Consolidated Statement of Comprehensive Income on a straight-line basis over the term of each lease. Lease incentives are recognised in the Consolidated Statement of Comprehensive Income as an integral part of the total lease income. The investment return in respect of assets backing investment contracts is presented separately from the investment return for those assets backing insurance contracts in order to meet the IFRS 17 requirement to illustrate the relationship between insurance finance income or expenses and the corresponding return on the assets. (d) Fee, commission income and other operating income Fee and commission income for investment contracts: In accordance with IFRS 15, fees charged for investment management services provided in connection with investment contracts are recognised as revenue over time, as the services are provided. Initial fees which exceed the level of recurring fees and relate to the future provision of services are deferred and amortised over the anticipated period over time in which services will be provided. Initial fees, annual management charges and contract administration charges are recognised over time as revenue on an accruals basis. Surrender charges are recognised as a reduction to policyholder claims and benefits incurred when the surrender benefits are paid. Commissions received or receivable which do not require the group to render further services are recognised at the point at which the commission becomes due. However, when it is probable that the group will be required to render further services during the life of the contract, the commission, or part thereof, is deferred and recognised over time as revenue over the period in which services are rendered. All fees in respect of insurance contracts are now recognised within insurance revenue. Other operating income: Fee income from investment managers, which is in relation to Movestic, is recognised in accordance with IFRS 15. The income is received from the fund companies based on the value of the managed assets. The fee income is recognised and adjusted on an ongoing basis, as Movestic meets its commitments. 158 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS (e) Other operating expenses Actual incurred expenses within the group are assessed according to the group’s guidelines to consider whether they are attributable to fulfilling insurance contracts and those meeting this requirement are reported as ‘insurance service expenses’. As part of this assessment, the eligible expenses are apportioned between investment and insurance contracts on a systematic and rational basis. Certain expenses such as project expenses and one-off expenses are considered to be non-attributable and are therefore excluded from the apportionment and directly allocated to ‘other operating expenses’. The ‘other operating expenses’ therefore include all expenses that are not attributable to insurance contracts, as they are either not eligible or have been apportioned to investment contracts. Operating lease payments Under IFRS 16, the deprecation of right-of-use assets is recognised in the Statement of Comprehensive Income as an administration expense. Payments made in relation to lease commitments are reflected in the balance sheet as a reduction to the corresponding lease liability. (f) Financing costs Financing costs comprise interest payable on borrowings and on reinsurance claims deposits included within reinsurance payables, calculated using the effective interest rate method. Under IFRS 16, interest on lease liabilities is recognised in the Statement of Comprehensive Income as finance costs. (g) Income taxes Income tax on the profit or loss for the year comprises current and deferred tax and is recognised in the Consolidated Statement of Comprehensive Income. Tax that relates directly to transactions reflected within equity is also presented within equity. (i) Current tax Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. (ii) Deferred tax Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. In accordance with IAS 12, deferred tax assets and deferred tax liabilities arising from different tax jurisdictions in which the group operates are not offset against each other. (iii) Policyholders’ fund yield tax Certain of the group’s policyholders within the Swedish business are subject to a yield tax which is calculated based on an estimate of the investment return on underlying investments within their unitised funds. The group is under an obligation to deduct the yield tax from the policyholders’ unitised funds and to remit these deductions to the tax authorities. The remittance of this tax payment is included in other operating expenses as it does not comprise a tax charge on group profits. (h) Intangible assets (i) Acquired value of in-force business Acquired in-force investment contracts arising from business combinations are measured at fair value at the time of acquisition. The present value of in-force investment contracts recognised under IFRS 9 is stated at cost less accumulated amortisation and impairment losses. The initia l cost is deemed to be the fair value of the contractual customer relationships acquired. The acquired present value of the in-force investment contracts is carried gross of tax and is amortised against income on a time profile which, it is intended, will broadly match the profile of the underlying emergence of profit from the contracts. The recoverable amount is estimated at each balance sheet date. If the recoverable amount is less than the carrying amount, an impairmen t loss is recognised in the Consolidated Statement of Comprehensive Income and the carrying amount is reduced to its recoverable amount. Under IFRS 17, the difference between the fair value of insurance contracts and the fulfilment cash flows pertaining to those contracts is recognised as the CSM under IFRS 17. This has been applied retrospectively in these financial statements and therefore the asset held on the balance sheet for the acquired value of in-force business is in respect of investment contracts only. (ii) Acquired value of customer relationships The acquired value of customer relationships arising from business combinations is measured at fair value at the time of acquisition. This comprises the discounted cash flows relating to new insurance and investment contracts which are expected to arise from existing customer relationships. These are carried gross of tax, are amortised in accordance with the expected emergence of profit from the new contracts and are tested periodically for recoverability. (iii) Software assets An intangible asset in respect of internal development software costs is only recognised if all of the following conditions are met: (i) an asset is created that can be identified; (ii) it is probable that the asset created will generate future economic benefits; and (iii) the development costs of the asset can be measured reliably. Where no internally generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred . Software assets, including internally developed software, are amortised on a straight-line basis over their estimated useful life, which typically varies between 3 and 5 years. CHESNARAANNUALREPORTANDACCOUNTS2023159 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION A – GENERAL INFORMATION AND ACCOUNTING POLICIES AND JUDGEMENTS A5 Significant accounting policies (continued) (i) Property and equipment Items of property and equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation is charged to the Consolidated Statement of Comprehensive Income on a straight-line basis over the estimated useful economic lives of the property and equipment on the following basis: Computers and similar equipment 3 to 5 years Fixtures and other equipment 5 years Assets held under leases, as right-of-use assets, are depreciated over their useful economic lives on the same basis as owned assets, or where shorter, over the term of the relevant lease. These include office buildings, office and IT equipment and motor vehicles. (j) Investment properties Investment properties consist of properties held in the Unit-Linked Property Investment Fund and SIPP Commercial Property (Directly Held) in our UK division, as described below. Unit-Linked Property Investment Fund The properties held in the unit-linked property fund are valued on a monthly basis by Jones Lang Lasalle (JLL), an independent property valuer, on an open-market basis. Their valuation is prepared in accordance with the Practice Statements in the RICS Appraisal and Valuation Standards (5th Edition). The properties are measured initially at cost. The carrying amount includes the cost of replacing part of an existing property at the time that cost is incurred if the recognition criteria are met; and excludes the costs of day-to-day servicing of a property. Subsequent to initial recognition, properties are stated at fair value, which reflects market conditions at the reporting date. Gains or losses arising from changes in the fair values of properties are included within investment income in the Statement of Comprehensive Income in the year in which they arise. Fair value is 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. Fair value is understood as the value of a property estimated without regard to costs of sale or purchase, and without offset for any associated taxes. All such valuations are prepared and expressed exclusive of VAT payments, unless otherwise stated. The properties are derecognised either when they have been disposed of, or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognised within investment income in the Statement of Comprehensive Income in the year of retirement or disposal. SIPP Commercial Property (Directly Held) The self-invested fund properties are initially recorded at purchase price and then valued triennially, by an independent professional valuer, on an open market basis, using valuation models in accordance with the Practice Statements in the RICS Appraisal and Valuation Standards (5th Edition). The portfolio is revalued annually using an index valuation on each property. Any funds in receipt of the sale of the property are for the benefit of the respective pension fund members. (k) Financial investments, assets and liabilities The fair values reflect market values at the balance sheet date, being the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. Any gain or loss arising from a change in fair value is recognised in the profit and loss. Rental income from investment property is accounted for as described in Accounting Policy (l). IFRS 9 requires financial investments to be classified into measurement categories using the ‘business model’ test and the ‘solely payment of principal and interest’ test. The measurement categories under IFRS 9 are: (i) Amortised Cost (AC); (ii) Fair Value Through Other Comprehensive Income (FVOCI); and (iii) Fair Value Through Profit or Loss (FVTPL). IFRS 9 also permits the application of a ‘fair value option’ whereby the outcome of the business model and SPPI tests would lead to a classification of financial assets that would result in an accounting mismatch with the corresponding liabilities. The group has accordingly classified all financial assets held for investment purposes and derivative financial instruments as FVTPL either mandatorily as a result of the business model and SPPI tests or has designated as FVTPL as permitted by the ‘fair value option’. The fair values of financial assets quoted in an active market are their bid prices at the balance sheet date. Asset groups to which the fair value option has been applied are debt securities, the mortgage loan portfolio and cash and cash equivalents. The present value of the insurance liabilities associated with the mortgage loan and debt securities are strongly dependent on discount rates sourced from market data and therefore a classification of AC for these assets would lead to a large mismatch with the insurance liability. Investments in subsidiaries are carried in the Company Balance Sheet at cost less impairment and all short-term receivables are classified as AC. Financial assets are derecognised when contractual rights to receive cash flows from the financial assets expire, or where the financial assets have been transferred together with substantially all the risks and rewards of ownership. Financial liabilities ‘Investment contract liabilities’ and ‘Liabilities relating to policyholder funds held by the group’ are designated as FVTPL, since the liabilities are managed together with the investment assets on a fair value basis as part of the documented risk management strategy. Purchases and sales of ‘regular way’ financial assets are recognised on the trade date, which is when the group commits to purchase, or sell, the assets. Borrowings and short-term payables are classified as AC. 160 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS (l) Impairment and Expected Credit Loss provisioning IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking Expected Credit Loss (ECL) model. The new impairment model applies to financial assets measured at amortised cost, debt investments at FVOCI and lease receivables. As stated above, for the group all financial assets held for investment purposes are classified as FVTPL. Financial assets that are subject to ECL provisioning are limited to short-term receivables only. The simplified approach under IFRS 9 has been applied in assessing full lifetime loss provisions for these assets. Due to the short-term nature of these instruments and the minimal historical losses on these asset classes, the resulting provisions that would be required are not considered to be material and therefore no provision is made. ( m) Policyholders’ funds held by the group and liabilities relating to policyholders’ funds held by the group Policyholders’ funds held by the group and liabilities relating to policyholders’ funds held by the group are recognised at fair value. (i) Policyholders’ funds held by the group The policyholders’ funds held by the group represent the assets associated with an investment product in the Swedish business, where the assets are held on behalf of the policyholder and where all the risks and rewards associated with the assets are the policyholders’ not the groups. The policyholders’ funds held by the group are held for investment purposes on behalf of the policyholders and are designated as at fair value through profit or loss. The fair values of the policyholders’ funds held by the group are the accumulation of the bid prices of the underlying assets at the balance sheet date. Transactions in these financial assets are recognised on the trade date, which is when the group commits (on behalf of the policyholder) to purchase or sell the assets. (ii) Liabilities relating to policyholders’ funds held by the group The liability relating to policyholders’ funds held by the group represents the liability that matches the asset policyholders’ funds held by the group. As stated previously, the risk and rewards associated with the investment product (and its underlying assets and matching liability) lie with the policyholders, not the group . (n) Derivative financial instruments Derivative financial instruments are recognised at fair value. The gain or loss on re-measurement to fair value is recognised immediately in profit or loss. Hedge accounting has not been applied. The fair value of interest rate swaps is the estimated amount that the group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties. The fair value of forward exchange contracts is their quoted marke t price at the balance sheet date, being the present value of the quoted forward price. Embedded derivatives which are not closely related to their host contracts, and which meet the definition of a derivative are separated and fair valued through profit or loss. (o) Other assets ‘Other assets’ comprise receivables arising from investment contracts and other receivables such as accrued interest, receivables from fund management companies and income tax balances. Financial assets classified as ‘other assets’ are stated at amortised cost less impairment losses. A provision for the impairment of loans and receivables is established when there is objective evidence that the group will not be able to collect all the amounts due according to the original contract terms after the date of the initial recognition of the asset and when the impact on the estimated cash flows of the financial asset can be reliably measured. Prepayments are held at cost and are amortised over the relevant time period. (p) Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks and other short-term highly liquid investments. Highly liquid is defined as having a short maturity of 3 months or less at their acquisition. Operating activities cash flows include loans and financial investments. The purchases are funded from cash flows associated with the origination of insurance and investment contracts, net of payments of related benefits and claims. This is due to the cash receipts and payments made on behalf of the customers for which their funds are held by the entity. Dividends and interest received from the financial investments are captured within the operating activities. Investing activities cash flows include cash payments to acquire property, plant and equipment, intangibles, and other long-term assets. These payments include those relating to capitalised development costs. Financing activities cash flows include cash proceeds from issuing share capital, cash payments to owners to acquire or redeem the entity’s shares, cash repayments of amounts borrowed, cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease, dividends paid out to shareholders, and interest paid on the borrowings. (q) Other provisions Provisions are recognised when the group has a present, legal or constructive obligation as a result of past events such that it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Where the effect of the time value of money is material, the amount of the provision is the present value of the expenditure expected to be required to settle the obligation. The group recognises provisions for onerous contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract. CHESNARAANNUALREPORTANDACCOUNTS2023 161 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION A – GENERAL INFORMATION AND ACCOUNTING POLICIES AND JUDGEMENTS A5 Significant accounting policies (continued) (r) Lease contract liabilities The group assesses whether a contract is or contains a lease, at inception of the contract. The group recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets (such as tablets and personal computers, small items of office furniture and telephones). For these leases, the group recognises the lease payments as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the group uses its incremental borrowing rate. Lease payments included in the measurement of the lease liability comprise: – Fixed lease payments – Variable lease payments – The amount expected to be payable by the lessee under residual value guarantees – The exercise price of purchase options – The payments of penalties for terminating the lease, if the lease term reflects the exercise of an option to terminate the lease The lease liability is presented as a separate line in the Consolidated Balance Sheet. The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made. The group re-measures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever: – The lease term has changed or there is a change in the assessment of exercise of a purchase option, in which case the lease liability is re-measured by discounting the revised lease payments using a revised discount rate. – The lease payments change due to changes in an index rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is re-measured by discounting the revised lease payments using the initial discount rate (unless the lease payment change is due to a floating interest rate, in which case a revised discount rate is used). – A lease contract is modified, and the lease modification is not accounted for as a separate lease, in which case the lease liability is measured by discounting the revised lease payments using a revised discount rate. The group did not make any such adjustments during the periods presented. The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses. The right-of-use assets are depreciated over the shorter of the lease term and the useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the group expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease. The group does not have any leases that include purchase options or transfer ownership of the underlying asset. The right-of-use assets are presented within the same line item as that within which the corresponding underlying assets would be presented if these were owned. For the group this is ‘Property and Equipment’. For short-term leases (lease of than 12 months or less) and leases of low-value assets (such as personal computers and office furniture) the group has opted to recognise a lease expense on a straight-line basis as permitted by IFRS 16. This expense is presented within ‘Other operating expenses’ in the Consolidated Income Statement. As a practical expedient, IFRS 16 permits a lessee not to separate non-lease components, and instead account for any lease and associated non-lease components as a single arrangement. The group has not used this practical expedient. The groups’ weighted average incremental borrowing rate applied to lease liabilities during 2022 is 5.2% for the UK division, 2.8% or the Swedish division and 2.0% for the Dutch division. (s) Borrowings Borrowings are recognised initially at fair value, less transaction costs, and are subsequently measured at amortised cost using the effective interest rate method, with interest expense recognised in the Consolidated Statement of Comprehensive Income on an effective yield basis. The effective interest rate method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts future cash payments through the expected life of the financial liability. (t) Deferred income Deferred income is in respect of initial fees that relate to the future provision of services that are deferred and amortised over the anticipated period . (u) Other current liabilities ‘Other current liabilities,’ comprising investment contract payables and other payables, are recognised when due and are measured on initial recognition at the fair value of the consideration paid. Current liabilities in respect of insurance contracts are reported as part of the Liability for Incurred Claims. 162 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS (v) Employee benefits (i) Pension obligations UK businesses Group companies operate defined contribution pension schemes, which are funded through payments to insurance companies, to which group companies pay fixed contributions. There are no legal or constructive obligations on group companies to pay further contributions if the fund does not hold sufficient assets to pay employee benefits relating to service in current and prior periods. Accordingly, group companies have no further payment obligations once the contributions have been paid. Contributions to defined contribution pension schemes are recognised in the Consolidated Statement of Comprehensive Income when due. Swedish business The group participates in a combined defined benefit and defined contribution scheme for the benefit of its employees. However, the Scheme is a multi- employer scheme, with the associated assets and liabilities maintained on a pooled basis. There is limited information available to the group to allow it to account for the Scheme as a defined benefit scheme and, in accordance with IAS 19 Employee Benefits, it is, therefore, accounted for as a defined contribution scheme. Contributions paid to the Scheme are recognised in the Consolidated Statement of Comprehensive Income when due. Dutch business (Waard) Group companies operate defined contribution pension schemes, which are funded through payments to insurance companies, to which group companies pay fixed contributions. There are no legal or constructive obligations on group companies to pay further contributions if the fund does not hold sufficient assets to pay employee benefits relating to service in current and prior periods. Accordingly, group companies have no further payment obligations once the contributions have been paid. Contributions to defined contribution pension schemes are recognised in the Consolidated Statement of Comprehensive Income when due. As a result of the Conservatrix acquisition, Waard Leven assumed the obligations under a defined benefit pension scheme for a small number of former Conservatrix employees. This scheme is closed to new entrants with no further benefits accruing and as such the exposure for Waard Leven is limited to the longevity risk of the contracts. The liability is valued under IAS 19 and reported under ‘Other provisions’ in the balance sheet. Dutch business (Scildon) Scildon had a defined benefit plan which was closed and transferred into a defined contribution pension plan during 2019. The defined benefit pension scheme was administered by Stichting Pensionfonds Legal & General Nederland. The company had agreed to contribute to the premium for the unconditional part of the pension. The company paid a contribution to the Scheme and subsequently had no further financial obligations with respect to this part of the Scheme. During 2019, a new defined contribution pension scheme was established for the benefit of Scildon employees. (ii) Bonus plans The group recognises a liability and an expense for bonuses based on a formula that takes into consideration the profit attributable to the company’s shareholders after certain adjustments. The expense is recognised in the Consolidated Statement of Comprehensive Income on an accruals basis. (w) Share-based payments The value of employee share options and other equity settled share-based payments is calculated at fair value at the grant date using appropriate and recognised option pricing models. Vesting conditions, which comprise service conditions and performance conditions, other than those based upon market conditions, are not taken into account when estimating the fair value of such awards but are taken into account by adjusting the number of equity instruments included in the ultimate measurement of the transaction amount. The value of the awards is recognised as an expense on a systematic basis over the period during which the employment services are provided. Where an award of options is cancelled by an employee, the full value of the award (less any value previously recognised) is recognised at the cancellation date. (x) Share capital and shares held in treasury (i) Share capital Shares are classified as equity when there is no obligation to transfer cash or other assets. Incremental costs directly attributable to the issue of equity instruments are shown in equity as a deduction from the proceeds, net of tax. Incremental costs directly attributable to the issue of equity instruments, as consideration for the acquisition of a business, are included in the cost of acquisition. (ii) Shares held in treasury Where the company purchases its own equity share capital, the consideration paid, including directly attributable costs, is deducted from total shareholders ’ equity and shown separately as ‘treasury shares’ until they are cancelled. Where such shares are subsequently sold, any consideration received is credited to the share premium account. (y) Dividends Dividend distributions to the company’s shareholders are recognised in the period in which the dividends are paid, and, for the final dividend, when approved by the company’s shareholders at the Annual General Meeting. (z) Investment in subsidiaries Investments in subsidiaries are carried in the balance sheet at cost less impairment. The company assesses at each reporting date whether an investment is impaired by assessing whether any indicators of impairment exist. If objective evidence of impairment exists, the company calculates the amount of impairment as the difference between the recoverable amount of the group entity and its carrying value and recognises the amount as an expense in the income statement. The recoverable amount is determined based on the cash flow projections of the underlying entities. CHESNARAANNUALREPORTANDACCOUNTS2023163 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION A – GENERAL INFORMATION AND ACCOUNTING POLICIES AND JUDGEMENTS A5 Significant accounting policies (continued) (aa) Business combinations Acquisitions meeting the definition of a ‘business’ are accounted for under IFRS 3 ‘Business combinations‘. This requires management to perform an assessment of the fair value of the assets and liabilities acquired and consideration paid at the point of acquisition. The acquiree’s identifiable assets, liabilities, and contingent liabilities, are classified according to the relevant accounting standard and are measured initially at their fair values at the acquisition date. Expenses directly attributable to the acquisition are expensed as incurred unless determined to be attributable to future insurance contracts. Gains arising on a bargain purchase, where the net fair value of the identifiable assets acquired and the liabilities and contingent liabilities assumed exceeds the fair value of the consideration for the acquisition, are recognised in the Consolidated Statement of Comprehensive Income. Where the fair value of the consideration exceeds the fair value of the assets and liabilities acquired it is recognised as a goodwill intangible asset on the group balance sheet. The non-controlling interest in the acquiree is initially measured at the non-controlling interest’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. ( ab) Portfolio transfers Where a transaction is not deemed to be a business combination it is accounted for as an asset and liability purchase. In this scenario the group identifies and recognises the individual identifiable assets acquired (including those assets that meet the definition of, and recognition criteria for, intangible assets in IAS 38 Intangible Assets) and liabilities assumed. The cost of the transaction to the group shall be allocated to the individual identifiable assets and liabilities on the basis of their relative fair values at the date of purchase. (ac) Foreign currencies The individual financial statements of each group company are presented in the currency of the primary economic environment in which it operates, being its functional currency. For the purpose of these Consolidated Financial Statements, the results and balance sheet of each group company are expressed in pounds sterling, which is the functional currency of the parent company and the presentation currency of the Consolidated Financial Statements. In preparing the financial statements of the individual companies, transactions in currencies other than the entity’s functional currency, being foreign currencies, are recorded at the rates of exchange prevailing on the dates of the transactions. Income and expense items are translated at the average exchange rates for the year, unless exchange rates fluctuate significantly during the period, in which case the exchange rates at the dates of transactions are used. At each balance sheet date, monetary assets and liabilities which are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date and exchange differences are recognised in profit or loss. Non-monetary items carried at fair value, which are denominated in foreign currencies, are translated at the rates prevailing when the fair value was determined. For the purpose of presenting Consolidated Financial Statements, the assets and liabilities of the group’s foreign operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the year, unless exchange rates fluctuate significantly during the period, in which case the exchange rates at the dates of transactions are used. Exchange differences arising are classified as other comprehensive income and are recognised in the group’s foreign currency translation reserve. Such translation differences are recognised as income or as expense in the year in which the operation is disposed of. Transactions relating to business combinations denominated in foreign currencies are translated into sterling at the exchange rates prevailing on the transaction date. (ad) Climate change In our Climate-related Financial Disclosures on pages 76 and 77 we identify that climate change related risks have the potential to manifest as an ‘Investment and liquidity risk’ (Principal Risk 1) or a ‘Regulatory change risk’ (Principal Risk 2). Whilst climate change risk is one of the most significant challenges facing the world, with Chesnara having its part to play in shaping policies and practices that contribute to managing climate risk challenges, the year end balance sheet does not include any significant judgements that are underpinned by a particular climate change scenario. Consequently, we do not believe that climate change risk is currently a key source of estimation uncertainty. A6 Significant accounting judgements and estimates In preparing the financial statements the group makes judgements and applies estimates and assumptions that affect the application of accounting policies and reported amounts of assets and liabilities, income and expenses. Disclosures of judgements made by the group in applying the accounting policies include those that have the most significant effect on the amounts that are recognised in the Consolidated Financial Statements. Such estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable. With the introduction of IFRS 17 and IFRS 9 the key areas of judgement have been reassessed for insurance and reinsurance contracts and for financial instruments. Details of all critical accounting judgements and estimates are set out in the notes that follow. IFRS 17 significant judgements applied in determining the transition amounts (a) Judgement in applying the IFRS 17 fair value approach at transition Where it is practical to do so, the group has applied the full retrospective approach to measure each group of insurance contracts which means IFRS 17 has been applied since acquisition into the group. Where it was impractical to apply the full retrospective approach a fair value approach was used. The transition approach was determined at the level of a group of insurance contracts, however due to the factors under consideration (such as the length of time since acquisition and availability of data) the outcome of the practicability assessment resulted in a transition approach being applied for the operating segment as a whole, with the exception of Movestic . 164 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS Operating segment Transition approach UK – CA Fair value Movestic Fair value * Waard Group Full retrospective Scildon Full retrospective Other group activities N/A For PAA contracts in Movestic the group has concluded that it is practicable to apply the full retrospective approach and hence this was applied. However, it was concluded that the full retrospective approach could not be applied to the majority of the pension benefits in scope of IFRS 17, and hence the fair value approach has been applied to all of the pension savings benefits on the grounds of materiality. The group determined that it would be impracticable to apply the full retrospective approach where the following applied: (i) Historical cash flow information was unavailable at the required level of aggregation (ii) Historical actuarial models were unavailable (iii) Information relating to historical assumptions that reflected the conditions existing at the relevant date was unavailable or not possible to create without the use of hindsight Chesnara has been able to apply the full retrospective approach to all material business acquired or written since 2016 when SII was introduced. In addition the full retrospective approach has been applied to all of the contracts within Waard, which includes business acquired in 2015. In applying the fair value approach, the group determined the CSM to be the difference between the fair value of a group of insurance contracts, measured in accordance with IFRS 13, ‘Fair Value Measurement’ (IFRS 13), and its FCF at the transition date. The fair value of an insurance liability is the price that a market participant would be willing to pay to assume the obligation and the remaining risks of the in-force contracts as at the transition date. In the absence of recent market transactions for similar contracts, a present value technique was used to determine the fair value of the groups of contracts. IFRS 13 defines fair value accounting techniques according to the inputs used. The lack of observable market prices for the liabilities under consideration and hence the reliance on significant judgement to determine a market participant’s view results in the present value technique being considered a Level 3 technique. The significant judgements to determine a market participant’s view include: (a) a market participant’s view of the expected future cash flows and risk allowances would align to Chesnara’s view; (b) only future cash flows within the boundaries of the insurance contracts were included in the market participant’s fair value estimation; (c) a market participant would require a compensation for the cost of holding capital in respect of the liabilities which has been determined based on market rates; and (d) a market participant would determine the compensation for the cost of holding capital based on a buffer in excess of the SII regulatory capital requirements. The buffer assumed is in the range of 130% -140% reflecting the specifics of the underlying business. A number of specific modifications are permitted when using the fair value approach. The group has adopted the following modifications: (i) Level of aggregation – to use information at the transition date to identify groups of insurance contracts; (ii) Level of aggregation – to group annual cohorts of business; (iii) Level of aggregation – the assessment for profitability was made at the transition date; and (iv) Measurement model – to use information at the transition date to assess eligibility for the VFA. Fulfilment cash flows were estimated prospectively at the transition date and discount rates were determined at the transition date. IFRS 17 significant accounting judgements (b) Separation of contracts and classification Judgement has been exercised across the group in determining whether contracts issued contain significant insurance risk and whether contracts including investment components and insurance components can be separated. Once any investment components are separated, the group assesses whether the contract should be separated into several insurance components that, in substance, should be treated as separate contracts to reflect the substance of the transaction. To determine whether insurance components should be recognised and measured separately, the group considers whether there is an interdependency between the different risks covered, whether components can lapse independently of each other and whether the components can be priced and sold separately. When the group enters into one legal contract with different insurance components operating independently of each other, insurance components are recognised and measured separately applying IFRS 17. Generally, the contracts identified as insurance contracts under IFRS 17 are the same as those under IFRS 4. However, there are some contracts, in the Swedish business, where under IFRS 17 the investment and insurance components can no longer be separated resulting in certain pension benefits becoming in scope of IFRS 17. No contracts have been switched from insurance to investment contracts. Many contracts issued include ‘rider’ benefits in addition to the base policy, however having considered the facts and circumstances of these products it has been determined that these components should not be separated and that the contract is measured as one contract. The assessment as to whether insurance contracts have direct participating features qualify for the VFA requires an element of judgement to determine whether the proportion of the underlying item to be paid to the policyholder is substantial and whether the policyholder liability varies substantially with the movement in the fair value of the underlying item. CHESNARAANNUALREPORTANDACCOUNTS2023165 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION A – GENERAL INFORMATION AND ACCOUNTING POLICIES AND JUDGEMENTS A6 Significant accounting judgements and estimates (continued) IFRS 17 significant accounting judgements (continued) (c) Level of aggregation Judgement is required in applying the requirement to group portfolios that have similar risks and are managed together. The group has considered the following factors (to the extent that they are relevant for the entity) in order to group contracts by similar risks and those that are managed together: principal insurance risk, product type, tax status, legacy book/outsource provider and measurement model. Further judgement is required in determining the profitability grouping that applies to portfolios of contracts. For the new business cohorts in Scildon, a policy level test is applied and contracts are allocated to the relevant profitability group. To date, this has not resulted in any contracts being classified as ‘no significant risk of becoming onerous’. Where portfolios of contracts are acquired in a business combination or a portfolio transfer, the purchase terms have been such that to date all contracts have been allocated to the ‘other’ profitable cohort. (d) Discount rates Cash flows are discounted using currency-specific, risk-free yield curves adjusted for the characteristics of the cash flows and the liquidity of the insurance contracts. The group applies a ‘bottom-up’ approach to determining discount rates and follows the methodology used by the PRA and EIOPA to determine risk-free yield curves and ultimate forward rates for regulatory solvency calculations. To reflect the liquidity or otherwise of the insurance contracts, the risk-free yield curves are adjusted by an illiquidity premium. For certain Dutch ‘savings mortgage’ products, there is a direct connection to the policyholder’s mortgage loan and the premiums to repay the loan in that the crediting rate is set such that the account value will be equal to the balance on the loan at maturity. For this product, the cash flows are discounted using the same curve used to value the corresponding mortgage assets which itself is derived from mortgage rates available in the market. When the present value of future cash flows is estimated using stochastic modelling, the cash flows are discounted at scenario-specific rates calibrated, on average, to be the risk free rates as adjusted for illiquidity. Inflation rates mainly relate to expense inflation. The assumptions in respect of expense inflation reflect the group’s best estimate view incorporating market consistent data such as earnings indices and central bank inflation targets. The yield curves that were used to discount the estimates of future cash flows that were modelled deterministically are shown in the table below: 2023 2022 Yield curve Broad product category Currency 1 yr 5 yrs 10 yrs 20 yrs 30 yrs 1 yr 5 yrs 10 yrs 20 yrs 30 yrs RFR Unit-linked/index-linked/with-profits – VFA EUR 3.36% 2.32% 2.39% 2.41% 2.53% 3.18% 3.13% 3.09% 2.77% 2.73% Unit-linked/index-linked/with-profits – GMM GBP 4.74% 3.36% 3.28% 3.43% 3.36% 4.46% 4.06% 3.71% 3.54% 3.35% (with high liquidity) Short-term protection SEK 3.03% 2.26% 2.25% 2.76% 2.99% 3.47% 3.16% 3.01% 3.18% 3.27% RFR + VA Immediate annuities EUR 3.56% 2.52% 2.59% 2.61% 2.70% 3.37% 3.32% 3.28% 2.96% 2.89% Term assurance and other non-linked Unit-linked/index-linked/with-profits – GMM GBP 5.05% 3.67% 3.59% 3.74% 3.67% 4.75% 4.35% 4.00% 3.83% 3.64% (with medium liquidity) Market Waard Savings Mortgage EUR 4.77% 3.73% 3.80% 3.82% 3.94% 4.23% 4.18% 4.14% 3.82% 3.78% Mortgage Rates The sensitivity of the income statement and balance sheet to movements in the yield curve is shown in Note B3(a)(ii). (e) Methods used to measure the risk adjustment for non-financial risk The group calculates the risk adjustment using a Cost of Capital (CoC) methodology similar to the PRA and EIOPA Solvency II Risk Margin approach. The differences between the Solvency II Risk Margin and the IFRS 17 risk adjustment for non-financial risk include: (a) the risk adjustment for non-financial risk only includes risks within the IFRS 17 contract boundary which may differ to the contract boundary assumed in Solvency II; (b) the Solvency II risk margin makes allowance for counterparty default risk and operational risk, but these are not required in the risk adjustment for non-financial risk. In determining the risk adjustment for non-financial risk each entity allows for diversification between the risks in a consistent manner to that applied in the Solvency II risk margin. Diversification is allowed for within each entity, but not across the entities, and is allocated to groups of insurance contracts in proportion to the undiversified risk capital amounts. The risk adjustment is then determined by applying a CoC rate to the amount of capital required for each future reporting date and discounting the result using the appropriate portfolio level 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. 166 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS Over a 1 year time horizon and on a net of reinsurance basis, this risk adjustment corresponds to a confidence level of 75.9% (2022: 74.6%). This is equivalent to estimating that the probability that any changes in best estimate liabilities from non-financial risk over the next year exceed the amount of the risk adjustment is less than 24.1%. Using statistical approximations, the 1 year figure can be transformed into an equivalent confidence level over the expected lifetime of in-force policies of 61.9% (2022: 61%). (f) Expense allocations Expenses cash flows are assessed as to whether they are attributable to the fulfilment or acquisition of insurance contracts. Where estimates of expenses-related cash flows are determined at the portfolio level or higher, they are allocated to groups of contracts on a systematic basis, such as activity-based costing method. The group has determined that this method results in a systematic and rational allocation. (g) Coverage period and units Judgement is required in determining the expected coverage period over which the CSM is allocated into profit or loss for the services provided or received. For contracts issued, the group determines the coverage period for the CSM recognition as follows: (a) for non-participating contracts, the coverage period corresponds to the policy coverage for mortality and/or morbidity risk and investment return services; (b) for contracts with direct participating features, the coverage period corresponds to the period in which insurance or investment related services are expected to be provided. The coverage period for reinsurance contracts is determined based on the coverage period of all underlying contracts whose cash flows are included in the reinsurance contract boundary. 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 includes insurance, investment return and investment-related services and hence the coverage unit 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. The following table provides details of the coverage units applied for the broad product categories: Product category Typical coverage unit Immediate annuities Annuity face amount Term assurance and other non-linked Term assurance: Sum insured Other non-linked: Higher of death and maturity benefit Unit-linked/index-linked/with-profits – GMM Higher of death benefit, account value and maturity benefit Unit-linked/index-linked/with-profits – VFA Higher of death benefit, account value and maturity benefit Short-term protection N/A Notes F2 to F5 provide information regarding the timing of the future release of the CSM to the profit and loss account, based on the CSM at the balance sheet date. (h) Non-distinct investment components Insurance revenue and insurance service expenses exclude any NDIC. 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. Where the required information for the actual NDIC is unavailable at a policy level the group applies estimation techniques based on expected data. Typical non-distinct investment components are outlined in Note A5(a)(xiv). Other accounting judgements (i) Mortgage asset valuation The mortgage savings assets within the Waard Group, previously valued at amortised cost under IAS 39, are now designated as FVTPL and valued at fair value in order to avoid an accounting mismatch with the corresponding liability valued under IFRS 17. The mortgage portfolio acquired by Waard Leven as part of the Argenta acquisition in 2020 contains both a savings element and risk element. For the savings part of the mortgage, the asset cash flows are projected to the mortgage end date and discounted using a risk free rate plus a spread. The expected future cash flows are determined from the product characteristics and best estimate actuarial assumptions with the credit spread being sourced primarily from a weighted average of mortgage rates available in the market at each duration. In principle, the spread should only be applied to the future investment-related part of the cash flows but since this is impracticable the group has applied a spread to all cash flows. This results in a close approximation to the corresponding liability and reflects the true economic offset of asset and liability. (j) Acquired value of in-force business (CASLP) The group applies accounting estimates and judgements in determining the fair value, amortisation and recoverability of acquired in-force business, which following the introduction of IFRS 17 relates to investment contracts only. The AVIF previously recognised in respect of insurance contracts has now been derecognised in these financial statements. In the initial determination of the acquired value of in-force business, the group uses actuarial models to determine the expected net cash flows (on a discounted basis) of the policies acquired. The key assumptions applied in the models are driven by the expected behaviour of policyholders on termination rates, expenses of management and age of individual contract holders as well as global estimates of investment growth, based on recent experience at the date of acquisition. The assumptions applied within the models are considered against historical experience of each of the relevant factors. Refer to accounting policy Note A5(h). CHESNARAANNUALREPORTANDACCOUNTS2023167 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION A – GENERAL INFORMATION AND ACCOUNTING POLICIES AND JUDGEMENTS A6 Significant accounting judgements and estimates (continued) Other accounting judgements (continued) (j) Acquired value of in-force business (CASLP) (continued) The acquired value of in-force business is amortised on a basis that reflects the expected profit stream arising from the investment contracts acquired at the date of acquisition. Acquired value of in-force business is tested for recoverability by reference to expected future income and expense levels. Such impairment testing requires a degree of estimation and judgement. In particular, the value is sensitive to the rate at which future cash flows are discounted and to the rates of return on invested assets, based on applying a range of discount rates, which have been determined with reference to our review of the current market assessment of the true value of money and the risks specific to the asset for which the cash flows have not been adjusted. The rates used for the purpose of the impairment testing range from 4% to 12% and the actual rate applied was 11.45% (31 December 2022: 8%). The AVIF for CASLP has been tested for recoverability as at 31 December 2023 and as a result of that test an impairment of £21.0m has been applied (£6.1m net of tax). The carrying value of the AVIF in CASLP following the impairment and net of amortisation is £21.9m at 31 December 2023 (31 December 2022: £49.6m). A 400 bps increase in the effective discount rate would reduce the underlying value of in-force business in CASLP by £3.7m (31 December 2022: £11.3m). A 10% fall in projected future profits would reduce the underlying value of in-force business in CASLP by £2.2m (31 December 2022: £5.7m). (k) Investment in subsidiary CA The group applies accounting estimates and judgements in determining the holding value and recoverability of its investment in subsidiaries, in particular that of Countrywide Assured plc. An annual impairment test is performed which requires a degree of estimation and judgement, and for which management has determined that the reported EcV of the UK business is appropriate to be used as a proxy for the IAS 36 ‘value in use’ assessment, as this value takes into account the future cash flows and hence future profitability of the business. This assessment showed that as at the balance sheet date, there was a deficit of £14.4m against the carrying value of the investment in subsidiary value and hence the carrying value has been impaired by this amount, thereby impacting the parent company income statement and balance sheet but no impact to the group Consolidated Financial Statements. A 400 bps increase in interest rates would reduce the EcV, and hence the carrying value, by £5.4m (31 December 2022: £14.6m). A 10% fall in equity values would reduce the carrying value by £7.9m (31 December 2022: £8.2m). A 10% mass lapse of policyholders would reduce the carrying value by £11.1m (31 December 2022: £6.1m). Significant accounting estimates and assumptions (l) Mortality/Longevity/Morbidity Best estimate assumptions about mortality, longevity and morbidity used in estimating future cash flows are developed for homogeneous product types and groups of policyholders at a local entity level. 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. Note B2 provides more information on mortality rates used and the sensitivity of the income statement and balance sheet to changes in mortality and morbidity assumptions. (m) Persistency Best estimate assumptions about policyholder behaviour, such as surrenders and lapses, used in estimating future cash flows, are developed for homogeneous product types and groups of policyholders at a local entity level. Assumptions are generally based on a combination of the local entity’s recent experience and 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. Surrenders and lapses depend on the product and policy duration in force. Note B2 provides more information on lapse rates and the sensitivity of the income statement and balance sheet to changes in persistency assumptions. (n) Future expenses Best estimate assumptions regarding expenses used in the estimation of future cash flows are set at a level that reflects the group’s 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 net of any new business. Transition costs and major project expenses are reviewed on a case-by-case basis as to whether they should be treated as non-attributable. Costs which are borne centrally for group-wide projects, such as IFRS 17 implementation for example, have been considered non-attributable. Expenses pertaining to investment costs on assets backing liabilities where no investment related service is provided to policyholders, generally term assurance and annuities, are also excluded. Note B2 provides more information on the sensitivity of the income statement and balance sheet to changes in future expense assumptions. (o) Time value of options and guarantees The group has offered guaranteed annuity options within certain contracts. Estimates have been made of the number of contract holders who will exercise these options, in order to measure their value. Changes in investment conditions could result in significantly more contract holders exercising their options than the group has assumed in determining the liabilities arising from these contracts. UK with-profits contracts contain a Discretionary Participation Feature (DPF) which entitles the holder to receive, as a supplement to guaranteed benefits, additional benefits or bonuses. The terms and conditions of these contracts, together with UK regulations, set out the bases for the determination of the amounts on which the additional discretionary benefits are based and within which the group may exercise its discretion as to the quantum and timing of their payment to contract holders. (p) Non-performance of reinsurers Where appropriate, reinsurance cash flows are adjusted for the possibility of loss due to reinsurer default using an approach equivalent to the PRA and EIOPA methodology for the Solvency II Credit Default Adjustment. 168 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS SECTION B – RISK AND CAPITAL MANAGEMENT B1 Risk Management Framework The group’s board of directors has overall responsibility for the adequacy of the design and implementation of the group’s Risk Management Framework and its consistent application across divisions. The group and its divisions operate within a defined risk strategy and supporting Risk Appetite Framework. Risk preferences are approved by the board of directors and the risk position of the business is monitored against these preferences. The group’s risk management policies are established to identify and analyse the risks faced by the group, set appropriate risk limits and controls, and monitor adherence to risk limits. The risk management policies are reviewed regularly to reflect changes in market conditions and the group’s activities whilst the board of directors approves the review, updates and attestation of these policies at least annually. Risk is managed at local entity level where the business is transacted, based on the principles and policies established at group level. The Group Audit & Risk Committee oversees how management monitors compliance with the group’s risk management policies and procedures, and reviews the adequacy of the Risk Management Framework in relation to the risks faced by the group. It is assisted in its oversight role by internal audit, which undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Group Audit & Risk Committee. The group issues insurance contracts and investment contracts. The nature and extent of the underwriting and financial risks arising from these contracts are determined by the contract design. The risks are evaluated for risk management purposes in conjunction with the risks mitigated by related reinsurance contracts and the risks arising from financial assets held to fund the settlement of the liabilities. B2 Underwriting risk General Underwriting risk consists of insurance risk, persistency risk (together demographic experience risk) and expense risk: – Insurance risk: the risk transferred from the policyholder to the group, other than financial risk. Insurance risk arises from uncertainty regarding the occurrence, timing and amount of future claims. – Persistency (or lapse) risk: the risk that a policyholder will cancel a contract, increase or reduce premiums, withdraw deposits or annuitise a contract earlier or later than expected. – Expense risk: the risk of unexpected increases in the administrative costs of servicing contracts. The group is exposed to different aspects of insurance risk for life insurance policies issued: – Mortality risk – the risk of losses arising from death of life insurance policyholders being earlier than expected – Morbidity risk – the risk of medical claims arising from the diagnosis of illness being higher than expected – Longevity risk – the risk of losses due to policyholders living longer than expected The group’s management of insurance risk is a critical aspect of its business. The primary insurance activity carried out by the group comprises the assumption of the risk of loss from persons that are directly subject to the risk. As such, the group is exposed to the uncertainty surrounding the timing and severity of claims under the related contracts. The principal risk is that the frequency and severity of claims is greater than expected. The theory of probability is applied to the pricing and provisioning for a portfolio of insurance contracts. Insured events are, by their nature, random, and the actual number and size of events during any 1 year may vary from those estimated using established statistical techniques. It is noted that the annuity policies give exposure to longevity risk, which provides a partial natural hedge to the exposure to mortality risk. The group manages its insurance risk through adoption of underwriting strategies, the aim of which is to avoid undue concentration of risk, approval procedures for new products, pricing guidelines and adoption of reinsurance strategies, the aim of which is to reinforce the underwriting strategy by avoiding the retention of undue concentration of risk. Notwithstanding that the group pursues common overarching objectives and employs similar techniques in managing these risks, the range of product characteristics and the differing market and regulatory environments of the UK, Swedish and Dutch businesses are such that insurance risk is managed separately for the separate operating segments and concentration of insurance risk is mitigated. The UK segment consists of largely closed legacy books of business that are in run-off. Within the Dutch business, the Waard Group operates as an acquisitive vehicle with a number of acquisitions of closed books in recent years whereas Scildon is a writer of new business. The Swedish segment, Movestic, also writes new business however this predominantly comprises of investment contracts valued under IFRS 9. Accordingly, the information which follows (and also the quantitative disclosures in Section F of the notes to the financial statements) differentiates these segments and sets out for each the key risks arising from insurance contracts and how those risks are measured and managed. (a) UK business The main insurance contract portfolios within the UK and the associated risks that have a material effect on the amount, timing and uncertainty of future cash flows arising from the insurance contracts issued are as follows: (i) Immediate annuities Immediate annuities provide regular income payments generally during the outstanding life of the policyholder, and in some cases that of a surviving spouse or partner. In certain cases, payments may be guaranteed for a minimum period. These contracts expose the business to longevity risk. CHESNARAANNUALREPORTANDACCOUNTS2023169 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION B – RISK AND CAPITAL MANAGEMENT B2 Underwriting risk (continued) (a) UK business (continued) (ii) Term assurances and other non-linked The principal insurance risk for these portfolios is mortality risk with some morbidity risk arising from critical illness benefits. The policies generally provide fixed and guaranteed benefits and have fixed future premiums. (iii) Unit-linked/Index-linked/With-profits – GMM The contracts in these portfolios are with-profits or unit-linked pensions and savings products which, due to the presence of in the money guarantees or the charges applied, did not meet the criteria for measurement under VFA. The with-profits policies comprise a guaranteed sum assured payable on death or at maturity, to which may be added a discretionary terminal bonus. The unit-linked policies include guarantees in excess of the unit fund. The principal insurance risk for these contracts is mortality risk however some contracts also contain morbidity risk. (iv) Unit-linked/Index-linked/With-profits – VFA These portfolios contain unit-linked pensions, endowments and whole of life contracts and a small number of with-profits policies. The contracts passed the criteria for measurements under VFA. The principal insurance risk for these contracts is mortality risk however some contracts also contain morbidity risk. Management of insurance risks The risk at outset of a contract is managed through the pricing basis. Thereafter the risks associated with these products are managed by reinsurance and, in some cases, by the ability to charge the policyholder for the mortality benefits provided. For unit-linked contracts there is exposure to insurance risk only insofar as the value of the unit-linked fund is lower than the guaranteed minimum death benefit. The with-profits business which is measured using the VFA is reinsured to ReAssure Limited and hence the only risk retained for this business is the risk of default by the reinsurer and some expense risk. The following table shows the breakdown of insurance and reinsurance contract values by major product type for contracts in the UK: 31 December Type of contracts 2023 2022 Gross Reinsurance Total Gross Reinsurance Total £m £m £m £m £m £m Immediate annuities 113.4 (48.8 ) 64.6 118.1 (50.7 ) 67.4 Term assurance and other non-linked 92.7 (68.0 ) 24.7 106.1 (73.2 ) 32.9 Unit-linked/Index-linked/With-profits – GMM 223.3 (0.2 ) 223.1 229.1 (0.2 ) 228.9 Unit-linked/Index-linked/With-profits – VFA 949.7 (47.7 ) 902.0 994.3 (48.5 ) 945.8 Total 1,379.1 (164.7 ) 1,214.4 1,447.6 (172.6 ) 1,275.0 Concentration of insurance risk The UK does not underwrite group insurance covers which tends to naturally limit geographic concentrations. Exposures to material insurance risks, on individual cases, are avoided through the use of quota share and surplus reinsurance and retained sums assured on any one life are generally under £250,000. Mortality assumptions A base mortality table is selected which is most appropriate for each type of contract taking into account historical experience and where appropriate, reinsurers rates. The mortality rates reflected in these tables are periodically adjusted, allowing for emerging experience. The mortality assumptions used on the blocks of business most sensitive to changes in mortality assumptions are disclosed below. Term assurance ex-Protection Life, Life Business: 65% TMN00 select (2022: 65%) and 65% TFN00 select (non-smokers) (2022: 65%), 65% TMS00 select (2022: 65%) and 65% TFS00 select (smokers) (2022: 65%). Annuitant mortality (CA): 104% PMA08 table (2022: 104%) and 104% PFA08 table (2022: 104%), with 100% CMI_2022 improvements (with zero weighting to 2020, 2021 and 2022 data) with a 1.5% long-term convergence rate from 31 December 2023 (2022: 1.5%). Annuitant mortality (CASLP conventional annuities): 120% PMA08 table (2022: 120%) and 120% PFA08 table (2022: 120%), with 100% CMI_2022 improvements (with zero weighting to 2020, 2021 and 2022 data) with a 1.5% long-term convergence rate from 31 December 2023 (2022: 2%). Other underwriting risks on insurance contracts Expense risk The UK business outsources the majority of operational activities to third party administrators in order to reduce the expense inefficiencies that would arise with fixed and semi-fixed costs on a reducing policy base, although this is mitigated by acquisitions of business. There are, however, risks associated with the use of outsourcing. In particular, there will be a need for periodic renegotiations of the terms of the outsourcing arrangements as the existing agreements expire, the outcome of which could potentially impact ongoing maintenance expenses and involve transition costs. There is also a risk that, at some point in the future, third party administrators could default on their obligations. The UK business monitors the financial soundness of third-party administrators and has retained step-in rights on the more significant of these agreements. There are also contractual arrangements in place which provide for financial penalties in the event of default by the administration service provider. Persistency risk Persistency risk is the risk that the investor cancels the contract or discontinues paying new premiums into the contract, thereby exposing the UK business to the risk of a reduction in profits. Persistency experience is actively monitored to allow early identification of trends. In addition, reinsurance is in place to limit the impact arising from a mass lapse event on the long-term contracts. 170 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS (b) Swedish business The Movestic business is focused predominantly on unit-linked savings and pensions in the local Swedish market. IFRS 17 requires that contracts are separated according to the benefits selected. The majority of the benefits in Movestic are classified as investment contracts, with no significant insurance risk, and are therefore measured under IFRS 9, however some of the savings benefits do however fall within the scope of IFRS 17 ‘Insurance Contracts’. In addition, there is some short-term protection business, measured under PAA. (i) Unit-linked/Index-linked/With-profits – VFA The insurance benefits within scope of IFRS 17 are unit-linked pension savings contracts where the policyholder has selected to receive a payment on survival to a specified date but there are no payments to beneficiaries on death before this date, with invested amounts instead becoming the property of Movestic. To compensate the insured for this risk, Movestic allocates inheritance gains on a monthly basis to surviving policyholders such that the gains broadly match the long-term average values retained due to death. At the individual beneficiary level there is insurance risk as significant additional amounts are paid to the beneficiary on survival compared to receiving no payment on death. (ii) Short-term protection These portfolios primarily include insurance contracts providing: – Life cover on an individual or group contract basis – Accident and sickness cover for group contracts – Income protection benefits separated from group pension schemes – Waiver of premium separated from group pension schemes The principal risk for the life cover is mortality risk and the principal risk for the remaining products is morbidity risk. The above are 1-year contracts as Movestic has the practical ability to re-price all benefits within 1 year. Management of insurance risks For linked contracts the investment risk is borne by the policyholder and there is limited exposure to insurance risk. In addition, the allocation of inheritance gains are reviewed regularly and are subject to change in order that the inheritance gains allocated broadly equals the amount paid to Movestic on death, thereby reducing the risk to Movestic. For the contracts measured under the PAA the key risks are managed through appropriate product design and pricing of the policies to ensure that the potential cost to Movestic of these events (and associated expenses of underwriting and administration) are reflected in the price charged to the policyholder. These contracts are either 1-year contracts or Movestic has the practical ability to re-price all benefits within 1 year, which allows Movestic to manage its risk exposure. In addition, risk is further mitigated by the use of reinsurance. The following table shows the breakdown of insurance and reinsurance contract values by major product type for contracts in Sweden: 31 December Type of contracts 2023 2022 Gross Reinsurance Total Gross Reinsurance Total £m £m £m £m £m £m Long-term with direct participating features 131.5 – 131.5 117.0 – 117.0 Short-term protection 40.3 (14.5 ) 25.8 42.0 (15.8 ) 26.2 Total 171.8 (14.5 ) 157.3 159.0 (15.8 ) 143.2 Concentration of insurance risk Regarding benefits assured for individual contracts, the combined effect of reinsurance and the fact that the vast majority of the total benefit assured relates to numerous small value contracts limits the level of concentration risk. The use of reinsurance means that exposures to material insurance risks on individual cases are avoided, with 97.5% of the business having retained sums assured of less than £250,000. In respect of group contracts, the business is exposed to multiple employees of the same organisation being involved in a single loss event. Movestic forecasts that its maximum loss would be of the order of SEK 614m (approximately £48.0m) gross of reinsurance and SEK 15m (approximately £1.2m) after reinsurance. The equivalent retention for 2022 was SEK 5m (approximately £0.4m). Mortality assumptions These are not material for the long-term Swedish contracts as the inheritance gains allocated by Movestic to the surviving policyholders are such that they broadly match the long-term average of the amounts retained on death. Mortality assumptions are not material to the protection products due to the short-term nature of these contracts. Other underwriting risks on insurance contracts Expense risk Expense risk is the risk that expenses are higher than expected hence leading to a reduction in profits. Expenses are actively monitored and managed to reduce this risk. Persistency risk Persistency risk is the risk that the investor cancels the contract or discontinues paying new premiums into the contract, thereby exposing the Swedish business to the risk of a reduction in profits. Persistency experience is actively monitored to allow early identification of trends. In addition, reinsurance is in place to limit the impact arising from a mass lapse event on the long-term contracts . CHESNARAANNUALREPORTANDACCOUNTS2023 171 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION B – RISK AND CAPITAL MANAGEMENT B2 Underwriting risk (continued) (c) Waard Group The Waard Group comprises the original business acquired by the Chesnara group in 2015 and the subsequent acquisitions of portfolios of business made by the Waard Group from 2019 onwards (see Note C1 for details). With the recent acquisitions there is now a mix of protection and savings business in the Waard Group and both the GMM and VFA measurement models are applied. The acquisition of Conservatrix on 1 January 2023 also contained contracts where no significant insurance risk remained at the date of acquisition and these contracts have consequently been classified as investment contacts. (i) Immediate annuities The acquisitions of Robein and Conservatrix contain immediate annuities, where the risk is longevity. (ii) Term assurance and other non-linked Waard’s original business includes term assurances, with further contracts added in subsequent acquisitions most significantly for Argenta and Brand New Day. These portfolios are exposed to mortality risk. The portfolio acquired from Monuta contained endowment and savings business, some with-profit sharing conditions however there are separate portfolios for mortality and longevity risk depending on which is considered to be the predominant risk. The Robein acquisition also included term assurance business. The Conservatrix acquisition also included pension, endowment and funeral plans all of which are exposed to mortality risk. (iii) Unit-linked/Index-linked/With-profits – GMM The Argenta acquisition included a significant amount of mortgage savings which contain mortality risk. The Robein acquisition contains unit-linked savings products with death cover as a percentage of fund value. A significant amount of these policies had no insurance risk on acquisition (as over time the death cover moves to 100% of the fund value) however as the acquisition was before the effective date of IFRS 17, the scope is determined at inception of the contract. For those policies with insurance risk, the predominant risk is considered to be longevity risk. The unit-linked savings products have been allocated to two portfolios as only certain types of policy (execution only) passed all criteria of the VFA eligibility test. The Conservatrix acquisition includes ‘Natural Guarantee Plans’ which provide varying degrees of death benefit cover, ranging from 0% to 110%. These policies have been split between those with mortality risk (where the death cover exceeds the fund value) and those with longevity risk (where the death cover is lower than fund value). In addition Conservatrix also includes unit-linked products with mortality being the predominant risk. (iv) Unit-linked/Index-linked/With-profits – VFA As noted above the acquisition of Robein contains unit-linked savings contracts, for which the criteria for measurement under VFA are met. The principal insurance risk for these contracts is longevity risk. Management of insurance risks The portfolio is closed to new business and is in run-off and hence no significant underwriting occurs. For the existing portfolio, the division entered into an excess of loss and catastrophe (Life) and quota share (Health) reinsurance agreement to mitigate the risk in excess of risk appetite for mortality, disability and unemployment. The following table shows the breakdown of insurance and reinsurance contract values by major product type for contracts in the Waard Group: 31 December Type of contracts 2023 2022 Gross Reinsurance Total Gross Reinsurance Total £m £m £m £m £m £m Immediate annuities 67.8 – 67.8 4.4 – 4.4 Term assurance and other non-linked 153.7 (4.4 ) 149.3 75.2 (3.5 ) 71.7 Unit-linked/Index-linked/With-profits – GMM 496.9 – 496.9 305.5 – 305.5 Unit-linked/Index-linked/With-profits – VFA 67.0 – 67.0 78.6 – 78.6 Total 785.4 (4.4 ) 781.0 463.7 (3.5 ) 460.2 Concentration of insurance risk The Waard portfolios do not include group contracts and hence do not have the concentration of risk which may be presented by these contracts. For individual life contracts an excess of loss limit of €100,000 is applied for life risk, hence concentration risk is limited. Mortality assumptions Different assumptions are used for each portfolio. As an example, the most material portfolio (Argenta Savings Mortgages) uses the following mortality assumptions: 80% of the generational prognosis table AG2018. The assumptions are subject to regular review to ensure that the assumption reflects the experience incurred on the specific book. Persistency and expense risk The Waard portfolio is small relative to the group which limits the risks presented to the group. To mitigate the expense risk, management actively monitors the expenses incurred to keep costs to an appropriate level. In addition, management will continue with the current acquisition strategy to maintain expenses efficiencies. Persistency levels are moderate and largely depend on investment performance. 172 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS (d) Scildon Scildon contains a mixture of unit-linked and traditional savings contracts with life cover, term assurance, annuities and group pension business. (i) Immediate annuities Immediate annuities provide regular income payments for either the outstanding lifetime of the policyholder and in some cases the outstanding lifetime of a surviving spouse or partner or for the fixed term chosen by the policyholder. Payments are guaranteed for a minimum period. These contracts expose the business to longevity risk. (ii) Term assurance and other non-linked Scildon mainly writes term life contracts, sold as a regular premium policy. The current mass market product has no surrender value or profit sharing. The most significant factors that could increase risk are epidemics and changes in lifestyle leading to higher mortality. There are also older traditional policies with-profit sharing conditions (before 2011) that allow for a surrender value at lapse or profit sharing at maturity. These are split into separate portfolios reflecting the principal risks of mortality or longevity. (iii) Unit-linked/Index-linked/With-profits – GMM Scildon writes unit-linked and index-linked business, with most policies paying out 0%, 90% or 110% of the unit-value at death of the policyholder and 100% at maturity. When the death benefit is greater than 100% of the unit fund value the principal risk is mortality and if the death benefit is less than 100% of the unit fund value the principal risk is longevity. These are allocated to two portfolios as only policies allocating the majority of premiums to unit-linked holdings passed the criteria of the VFA eligibility test. (iv) Unit-linked/Index-linked/With-profits – VFA As noted above, Scildon contains unit-linked and index-linked savings contracts, for which the criteria for measurement under VFA are met. The group pension contracts are also unit-linked in nature and pass the VFA eligibility criteria. The principal risk for these contracts is mortality risk. Management of insurance risks Term assurances are the main new business product type and significant underwriting occurs. For linked contracts the investment risk is borne by the policyholder, therefore there is exposure to insurance risk only insofar as the value of the unit-linked fund is lower than any guaranteed benefits. Quota share reinsurance agreements are in place with a maximum retention per policy, to mitigate the risk in excess of risk appetite for mortality at the moment of underwriting. Catastrophe reinsurance is in place to mitigate the loss arising from a catastrophe risk event. The following table shows the breakdown of insurance and reinsurance contract values by major product type for contracts in Scildon: 31 December Type of contracts 2023 2022 Gross Reinsurance Total Gross Reinsurance Total £m £m £m £m £m £m Immediate annuities 146.7 – 146.7 129.0 – 129.0 Term assurance and other non-linked 173.3 14.9 188.2 167.3 15.2 182.5 Unit-linked/Index-linked/With-profits – GMM 278.8 – 278.8 299.7 – 299.7 Unit-linked/Index-linked/With-profits – VFA 1,264.0 – 1,264.0 1,155.3 – 1,155.3 Total 1,862.8 14.9 1,877.7 1,751.3 15.2 1,766.5 Concentration of insurance risk Scildon does write group pensions contracts with an excess of loss limit of €200,000 per life, hence concentration risk is limited. Regarding benefits assured for individual contracts, the combined effect of reinsurance and the fact that the vast majority of the total benefit assured relates to numerous small value contracts, limit the level of concentration risk. Mortality assumptions The assumptions differ by product type, and there are also different assumptions applied within each product type depending on when the contract was written. The unit-linked contracts are the largest product group and an example of the mortality tables used are the GBM 1976-1980 (males) and the GBV 1976-1980 (females). For annuities, an example of the mortality tables applied are the GBM 1980-1985 (males) and GBV 1980-1985 (females) tables. Persistency and expense risk To mitigate the expense risk, management actively monitor the expenses incurred to keep costs to an appropriate level. Persistency levels are moderate however they are actively monitored to allow early identification of trends . CHESNARAANNUALREPORTANDACCOUNTS2023173 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION B – RISK AND CAPITAL MANAGEMENT B2 Underwriting risk (continued) (e) Sensitivity analysis The following tables show the impact to the CSM, profit or loss after tax and shareholders’ equity if changes in underwriting risk variables that were reasonably possible at the reporting date had occurred. The analysis has been prepared for a change in the stated variable, with all other assumptions remaining constant and presents the impact both before and after reinsurance. 31 December 2023 CSM CSM Profit or Profit or Equity Equity gross net loss gross loss net gross net Variation in/arising from £m £m £m £m £m £m Mortality and morbidity combined – 10% increase (34.8 ) (9.9 ) (19.4 ) (11.9 ) (19.4 ) (11.9 ) Expenses – 10% increase (13. 3 ) (13.9 ) (5.9 ) (5.5 ) (5.9 ) (5.5 ) Lapse – 10% decrease (2.4 ) (3.5 ) (1. 2 ) (0. 5 ) (1.2 ) (0. 5 ) 31 December 2022 CSM CSM Profit or Profit or Equity Equity gross net loss gross loss net gross net Variation in/arising from £m £m £m £m £m £m Mortality and morbidity combined – 10% increase (41.8 ) (12.7 ) (11.5 ) (7.2 ) (11.5 ) (7.2 ) Expenses – 10% increase ( 14.0 ) (14.5 ) (4.5 ) (4.1 ) (4.5 ) (4.1 ) Lapse – 10% decrease (2.0 ) (3.1 ) 1.4 2.1 1.4 2.1 The sensitivities to mortality and morbidity (critical illness) rates shown above are calculated on the assumption that there would be no consequential change in rates to policyholders. In practice, group policy is to pass costs on to policyholders where it is contractually permitted and where it considers that the impact of the change is significant and subject to treating customers fairly. A 10% increase in mortality and morbidity rates in 2023 is expected to result in a greater fall in profits compared to 2022 as Scildon, which has the highest exposure to mortality and morbidity, has a lower CSM in 2023. This means that the CSM would absorb less of the impact of the stress. Some additional risk also comes from the Canada Life policies that CA acquired during 2023. The impact of a 10% increase in expenses has increased from 2022 to 2023 due to an increased cost base following the acquisitions of Conservatrix and policies from Canada Life. The group has increased exposure to a 10% decrease in lapse rates in 2023 following Waard’s acquisition of Conservatrix, which includes some policies with onerous guarantees. If fewer such policies lapse, then the group would incur more guarantee costs, hence the profit and loss impact of a reduction in lapses is worse. Conversely a 10% increase in lapse rates is now lower. B3 Financial risk General The group is exposed to a range of financial risks, principally through its insurance contracts, financial assets, including assets representing shareholder assets, financial liabilities, including investment contracts and borrowings, and its reinsurance assets. These risks are described at a high level in the Risk Management section of the Annual Report and Accounts under ‘PR1 – Investment and Liquidity Risk’. In particular, the key financial risk is that, in the long-term, proceeds from financial assets are not sufficient to fund the obligations arising from its insurance and investment contracts and borrowings. The most important components of this financial risk are market risk (interest rate risk, equity and property price risk and foreign currency exchange risk), liquidity risk and credit risk (including the risk of reinsurer default). The risks related to insurance contracts that have a material effect on the amount, timing and uncertainty of future cash flows arising are set out in Note B2. The group provides two types of investment contract: unit-linked savings and unit-linked pensions predominantly written in the UK and Sweden. (i) Unit-linked savings are single or regular premium contracts, with the premiums invested in a pooled investment fund, where the policyholder’s investment is represented by units or trust accounts where the policyholder decides where to invest. On certain contracts there is a small additional benefit payable on death which is deemed not to transfer significant insurance risk to the business for these contracts. The benefits payable at maturity or surrender of the contracts are the underlying value of the investment in the unit-linked funds or trust accounts, less surrender charges where applicable. (ii) Unit-linked pensions are single or regular premium contracts with features similar to unit-linked savings contracts. Benefits are payable on transfer, retirement or death. (a) Market risk (i) Management of market risk The group businesses manage their market risks within Asset Liability Matching (ALM) frameworks that have been developed to achieve long-term investment returns at least equal to their obligations under insurance and investment contracts, with minimal risk. Within the ALM frameworks the businesses produce quarterly reports at legal entity and asset and liability class level, which are circulated to the businesses’ key management. The principal technique of the ALM frameworks is to match assets to the liabilities arising from insurance and investment contracts by reference to the type of benefits payable to policyholders, with separate portfolios of assets being maintained for linked and non-linked liabilities. For non-unit-linked business, the group’s objective is to match the timing and nature of cash flows from insurance and investment contract liabilities with the timing of cash flows from assets subject to identical or similar risks. By matching the cash flows of liabilities with those of suitable assets, market risk is managed effectively, whilst liquidity risk is minimised. These processes to manage the risks, which the group has not changed from previous periods, ensure that the group is able to meet its obligations under its contractual liabilities as they fall due . 174 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS Unit-linked and index-linked insurance contracts and investment contracts The group matches the financial liabilities relating to these contracts with units in the financial assets of the funds to which the value of the liabilities is linked, such that the policyholders bear the principal market risk (being interest rate, equity price and foreign currency risks) and credit risk. Accordingly, this approach results in the group having no significant direct market or credit risk on these contracts. Its primary exposure to market risk is the risk of volatility in asset-related fees due to the impact of interest rate, equity price and foreign exchange rate movements on the fair value of the assets held in the linked funds, on which asset-related fees are based. There is residual exposure to market risk on certain unit-linked contracts where the group provides to policyholders guarantees as to fund performance or additional benefits which are not dependent on fund performance. This exposure is mitigated to the extent that the group matches the obligations with suitable financial assets external to the unit-linked funds, such that the residual exposure is not considered to be material. With-profits contracts Some non-linked insurance contracts within the UK businesses include discretionary participation features in the form of with-profits policies. For the CA business, where the policyholder benefits comprise a discretionary annual bonus and a discretionary terminal bonus, the with-profits business is wholly reinsured to ReAssure Limited and hence there is no market risk for this class of business. For the CA (S&P) business, the primary investment objective of the with-profits policyholder funds is that the guaranteed minimum benefits of the with-profits policyholders should be met entirely from the policyholder funds. The secondary investment objective is, where possible, to provide a surplus in excess of the guaranteed minimum benefits. The entire surplus in the policyholder fund accrues to the with-profits policyholders. Any deficit in the policyholder fund is ultimately borne by shareholders. Therefore, the group has a significant exposure to market risk in relation to with-profits business should the with-profits policyholder assets be unable to fully meet the cost of guarantees. To achieve the investment objectives, the funds may invest in a range of asset classes including property, equities, fixed interest securities, convertibles, cash and derivatives, both in UK and overseas. Other insurance contracts Other non-linked contracts include contracts which pay guaranteed benefits on insured events, the terms being fixed at the inception of the contract. Exposure to market price risk is minimised by generally investing in fixed-interest debt securities, while interest rate risk is generally managed by closely matching contracts written with financial assets of suitable nature, yield, duration and currency. To the extent that the group is unable to fully match its interest rate risk, it makes provision in respect of assumed shortfalls on guaranteed returns to policyholders. Shareholder funds Shareholder funds at both group parent company and operating subsidiary level, in accordance with corporate objectives and, in some instances, in accordance with local statutory solvency requirements, are invested in order to protect capital and to minimise market and credit risk. Accordingly, they are generally invested in assets of a shorter-term liquid nature, which gives rise to the risk of lower returns on these investments due to changes in short-term interest rates. (ii) Interest rate risk As discussed in the Management of Market Risk section on page 174, the group is exposed to interest rate risks in regards to the assets backing non-linked contracts. The exposure is managed by closely matching contracts written with financial assets of suitable nature, yield, duration and currency. The tables below show the impact of movements in per annum market rates of interest on the CSM, profit or loss after tax and on shareholder equity as at the balance sheet dates. We believe these interest rate risk variables, to which the group results are sensitive, represent the ones that might reasonably occur in the future. 31 December 2023 Increase Decrease Increase Decrease Increase Decrease Profit Profit Shareholder Shareholder Variation in/arising from 100 basis points CSM CSM or loss or loss equity equity in market rate of interest £m £m £m £m £m £m Insurance and reinsurance contracts 1.9 (2.6 ) 84.9 (102.3 ) 84.9 (102.3 ) Financial instruments – – (91.2 ) 101.5 (91.2 ) 101.5 Tota l 1.9 (2.6 ) (6 .3 ) (0 .8 ) (6 .3 ) (0 .8 ) 31 December 2022 Increase Decrease Increase Decrease Increase Decrease Profit Profit Shareholder Shareholder Variation in/arising from 100 basis points CSM CSM or loss or loss equity equity in market rate of interest £m £m £m £m £m £m Insurance and reinsurance contracts 2.5 (2.7 ) 66.6 (78.4 ) 66.6 (78.4 ) Financial instruments – – (78.2 ) 89.0 (78.2 ) 89.0 Tota l 2.5 ( 2.7 ) ( 11. 6 ) 10. 6 ( 11 . 6 ) 10.6 The group’s exposure to interest rate risk principally comes from non-linked liabilities and the assets backing them. The change in exposure from 2022 to 2023 is driven by the Conservatrix acquisition, which has had a more significant effect on liabilities than assets, owing to the very long-term nature of its funeral plan policies. This has subsequently improved the profit and loss impact of a 100 bps rise in interest rates and worsened the profit and loss impact of a 100 bps fall in interest rates. CHESNARAANNUALREPORTANDACCOUNTS2023175 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION B – RISK AND CAPITAL MANAGEMENT B3 Financial risk (continued) (a) Market risk (continued) (iii) Equity price risk As discussed in the Management of Market Risk section on page 174, the group is exposed to equity and property price risks in regards to the asset related fees from the assets backing its unit-linked and index-linked insurance contracts and investment contracts and also in regards to policyholder guarantees for these contracts. The exposure is mitigated somewhat by investing in suitable financial assets outside of the unit-linked and index-linked funds. As also in the Management of Market Risk section on page 174, the group is exposed to equity and property price risks in regards to the UK with-profits. The exposure is mitigated by limiting these investments to back the surplus in the relevant funds and not the guaranteed minimum benefits. The tables below show the impact of movements in equity and property values on the CSM, profit or loss after tax and on shareholder equity as at the balance sheet date. We believe these equity and property risk variables, to which the group results are sensitive, represent the ones that might reasonably occur in the future. 31 December 2023 Increase Decrease Increase Decrease Increase Decrease Profit Profit Shareholder Shareholder Variation in/arising from 10% in equity CSM CSM or loss or loss equity equity and property price £m £m £m £m £m £m Insurance and reinsurance contracts 3.5 (4. 8 ) (14 0.5 ) 141. 3 (14 0.5 ) 141. 3 Financial instruments – – 161.7 (161.7 ) 161.7 (161.7 ) Total 3.5 (4.8 ) 21.2 (20.4 ) 21.2 (20.4 ) 31 December 2022 Increase Decrease Increase Decrease Increase Decrease Profit Profit Shareholder Shareholder Variation in/arising from 10% in equity CSM CSM or loss or loss equity equity and property price £m £m £m £m £m £m Insurance and reinsurance contracts 6.0 (5.9 ) (1 31.8 ) 131.6 (13 1.8 ) 131.6 Financial instruments – – 145.2 (145.2 ) 145.2 (145.2 ) Total 6.0 (5.9 ) 13.4 (13.6 ) 13.4 (13.6 ) A fall in equity and property values reduces policyholder fund values and so reduces the value of charge income. Thus, the profit and loss impact of a 10% decrease in equity and property values is negative. This impact has increased in 2023 due to an increase in equity exposures following strong equity growth. Conversely, a 10% increase in equity and property values is now more positive than before. (iv) Currency risk Currency risk is the risk that the fair value or future cash flows of an asset or liability will change as a result of movements in foreign exchange rates. The group’s exposure to currency risk is minimised to the extent that the risk on investments denominated in foreign currencies which back unit-linked investment and insurance contracts is borne by policyholders. It is, however, exposed to currency risk through: (i) its investment in Movestic, the assets and liabilities of which are principally denominated in Swedish krona; and (ii) its investment in Waard and Scildon, the assets and liabilities of which are principally denominated in euros. The group’s currency risk through its ownership of Movestic, Scildon and Waard Group is reflected in: (i) foreign exchange translation differences arising on the translation into sterling and consolidation of Movestic, Scildon and Waard Group’s financial statements; and (ii) the impact of adverse exchange rate movements on cash flows between Chesnara plc and its foreign subsidiaries: in the short-term these relate to cash flows from Movestic, Scildon and Waard to Chesnara by way of dividend payments. The risk on cash flows is reduced by: (a) the foreign currency hedge held by Chesnara plc which mitigates against adverse exchange rate impacts whilst also providing a dampening effect to a favourable currency movement, and; (b) by closely monitoring exchange rate movements and buying forward foreign exchange contracts, where deemed appropriate . 176 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS The following tables set out the group’s exposure to assets and liabilities denominated in foreign currencies, expressed in sterling, at the respective balance sheet date: 31 December 2023 2022 £m £m Swedish krona Assets 4,507.1 3,935.5 Liabilities (4,442.0 ) (3,841.8 ) Net assets 65.1 93.7 Euro Assets 2,955.9 2,540.4 Liabilities (2,761.6 ) (2,245.7 ) Net assets 194.3 294.7 US dollar Assets 1.1 0.8 Liabilities (0.7 ) (0.4 ) Net assets 0.4 0.4 The tables below show the impact of movements in foreign currency exchange rates on profit before tax for the year under review and on shareholder equity as at the balance sheet date. We believe these currency risk variables, to which the group results are sensitive, represent the ones that are most reasonably possible to occur in the future. 31 December 2023 Favourable Adverse Favourable Adverse Favourable Adverse Profit Profit Shareholder Shareholder Variation in/arising from 10% in SEK: CSM CSM or loss or loss equity equity sterling exchange rate £m £m £m £m £m £m Insurance and reinsurance contracts 0.6 (0.5 ) 0.3 (0.3 ) (17.5 ) 14. 3 Financial instruments – – (7.2 ) 2.2 20.8 (20.0 ) Total 0.6 (0.5 ) (6.9 ) 1.9 3.3 (5.7 ) 31 December 2023 Favourable Adverse Favourable Adverse Favourable Adverse Profit Profit Shareholder Shareholder Variation in/arising from 10% in EUR: CSM CSM or loss or loss equity equity sterling exchange rate £m £m £m £m £m £m Insurance and reinsurance contracts 14.7 (1 2.0 ) (0. 3 ) 0. 3 (295.4 ) 241.7 Financial instruments – – (8.5 ) 7.4 308.2 (251.8 ) Total 14.7 (12.0 ) (8.8 ) 7.7 12.8 (10.1 ) 31 December 2022 Favourable Adverse Favourable Adverse Favourable Adverse Profit Profit Shareholder Shareholder Variation in/arising from 10% in SEK: CSM CSM or loss or loss equity equity sterling exchange rate £m £m £m £m £m £m Insurance and reinsurance contracts 0.5 (0.4 ) 0.6 (0.5 ) (15.9 ) 1 3.0 Financial instruments – – (5.0 ) 4.9 22.5 (17.7 ) Total 0.5 (0.4 ) (4.4 ) 4.4 6.6 (4.7 ) CHESNARAANNUALREPORTANDACCOUNTS2023177 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION B – RISK AND CAPITAL MANAGEMENT B3 Financial risk (continued) (a) Market risk (continued) (iv) Currency risk (continued) 31 December 2022 Favourable Adverse Favourable Adverse Favourable Adverse Profit Profit Shareholder Shareholder Variation in/arising from 10% in EUR: CSM CSM or loss or loss equity equity sterling exchange rate £m £m £m £m £m £m Insurance and reinsurance contracts 8 .8 (7.2 ) 0.3 (0.3 ) (247.4 ) 202.4 Financial instruments – – (8.8 ) 8.5 262.2 (213.5 ) Total 8.8 (7.2 ) (8.5 ) 8.2 14.8 (11.1 ) (b) Credit risk (i) Management of credit risk The group has exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. Key areas where the group is exposed to credit risk are: – Counterparty risk with respect to debt securities and cash deposits; – The mortgage loan portfolio held by Waard with respect to the interest and capital repayments due from the borrowers; – Reinsurers’ share of insurance liabilities; – Amounts deposited with reinsurers in relation to investment contracts; – Amounts due from reinsurers in respect of claims already paid; and – Other short-term receivables. In addition, there will be some exposures to individual policyholders, on amounts due on insurance contracts. These are tightly controlled, with contracts being terminated or benefits amended if amounts owed are outstanding for more than a specified period of time, so that there is no significant risk to the results of the businesses. The group businesses structure the levels of credit risk they accept by placing limits on their exposure to a single counterparty, or group of counterparties. Such risks are subject to at least an annual review, while watch lists are maintained for exposures requiring additional review. Although the businesses hold a significant proportion of their financial assets in debt securities and cash deposits the risk of default on these is mitigated to the extent that any losses arising in respect of unit-linked assets backing the insurance and investment contracts which the businesses issue, would effectively be passed on to policyholders and investors through the unit-linked funds backing the insurance and investment contracts. Reinsurance is used to manage insurance risk in the businesses. This does not, however, discharge the businesses’ liability as primary insurers. If a reinsurer fails to pay a claim for any reason, the businesses remain liable for the payment to the policyholder. The group limits its exposure to reinsurance counterparties with a credit rating lower than BBB- and the creditworthiness of reinsurance exposures is regularly monitored as part of the group’s Risk Framework. (ii) Exposure to credit risk The following table presents the assets of the group which are subject to credit risk and a reconciliation to the balance sheet carrying value of each item: 31 December 2023 2022 Balance Balance Amount sheet Amount sheet Policyholder subject to carrying Policyholder subject to carrying linked credit risk value linked credit risk value £m £m £m £m £m £m Reinsurance contract assets – 185.7 185.7 – 194.0 194.0 Amounts deposited with reinsurers – 32.5 32.5 – 32.8 32.8 Holdings in collective investment schemes 8,025.4 350.8 8,376.2 7,725.1 464.6 8,189.7 Debt securities at fair value through profit or loss 14.8 1,222.3 1,237.1 19.1 915.0 934.1 Policyholders’ funds held by the group 1,281.8 – 1,281.8 986.8 – 986.8 Mortgage loan portfolio 366.8 – 366.8 266.0 – 266.0 Derivative financial instruments 0.1 0.2 0.3 – 0.1 0.1 Other assets 12.6 45.1 57.7 0.8 45.6 46.4 Cash and cash equivalents 78.3 67.7 146.0 81.7 122.9 204.6 Total 9,779.8 1,904.3 11,684.1 9,079.5 1,775.0 10,854.5 The amounts presented above as policyholder linked represent unit-linked assets where the risk is borne by the holders of unit-linked insurance and investment contracts. 178 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS (iii) Credit quality analysis The creditworthiness of major reinsurers is considered on an annual basis by reviewing their financial strength. The group’s exposure to credit risk is summarised as: Credit rating As at 31 December 2023 AAA AA A BBB Below BBB Unrated Total £m £m £m £m £m £m £m Reinsurance contract assets – 138.7 – – – 47.0 185.7 Amounts deposited with reinsurers – 32.5 – – – – 32.5 Holdings in collective investment schemes 310.0 306.7 2,274.8 422.0 1,482.6 3,580.1 8,376.2 Debt securities at fair value through profit or loss 409.6 349.1 338.4 128.2 1.2 10.6 1,237.1 Policyholders’ funds held by the group – 101.9 353.3 167.3 659.7 (0.4 ) 1,281.8 Mortgage loan portfolio – – 10.7 – – 356.1 366.8 Derivative financial instruments – – 0.3 – – – 0.3 Other assets 0.7 0.5 0.5 0.2 – 55.8 57.7 Cash and cash equivalents 0.1 3.2 89.7 41.2 – 11.8 146.0 Total 720.4 932.6 3,067.7 758.9 2,143.5 4,061.0 11,684.1 Credit rating As at 31 December 2022 AAA AA A BBB Below BBB Unrated Total £m £m £m £m £m £m £m Reinsurers share of insurance contract liabilities – 119.2 – 2.9 – 71.9 194.0 Amounts deposited with reinsurers – 32.8 – – – – 32.8 Holdings in collective investment schemes 303.6 190.9 2,297.5 328.1 85.3 4,984.3 8,189.7 Debt securities at fair value through profit or loss 315.8 317.8 173.9 124.7 – 1.9 934.1 Policyholders’ funds held by the group – 71.7 248.4 116.9 86.4 463.4 986.8 Mortgage loan portfolio – – 266.0 – – – 266.0 Derivative financial instruments – – 0.1 – – – 0.1 Other assets 0.9 0.6 0.4 0.1 – 44.4 46.4 Cash and cash equivalents – 17.4 176.6 0.1 – 10.5 204.6 Total 620.3 750.4 3,162.9 572.8 171.7 5,576.4 10,854.5 Included within reinsurers’ share of insurance contract liabilities and amounts deposited with reinsurers (in respect of investment contracts) above, is a total exposure of £71.4m as at 31 December 2023 (31 December 2022: £72.0m) to ReAssure, which has been included within the ‘AA’ rating category. Monument Re makes up £48.7m of the unrated exposure to reinsurers’ share of insurance contract liabilities as at 31 December 2023 (31 December 2022: £50.6m). This is protected through the use of a funds withheld arrangement under which the reinsurer has deposited collateral to CA in respect of the value of expected future reinsured claim payments. The ‘Other assets’ in the credit risk rating table are not held at fair value or managed on a fair value basis. These assets generally consist of short-term receivables and are not considered to have a low credit rating as at 31 December 2023. CHESNARAANNUALREPORTANDACCOUNTS2023179 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION B – RISK AND CAPITAL MANAGEMENT B3 Financial risk (continued) (b) Credit risk (continued) (iv) Concentration of credit risk Debt securities Policyholder Policyholder Non-linked/ linked with-profit shareholder Total As at 31 December 2023 £m £m £m £m Austria – – 24.8 24.8 Belgium – – 37.1 37.1 France 0.7 2.7 200.1 203.5 Germany – 0.4 210.7 211.1 Italy – – 12.3 12.3 Ireland – – 14.4 14.4 Netherlands – 2.5 230.6 233.1 Poland – – 0.4 0.4 Portugal – – 3.3 3.3 Spain – 0.5 37.1 37.6 UK 11.4 25.9 181.9 219.2 Other 2.2 13.4 117.4 133.0 Europe 14.3 45.4 1,070.1 1,129.8 USA 0.5 3.2 82.4 86.1 Other – 1.7 1.4 3.1 North America 0.5 4.9 83.8 89.2 Australia – – 11.3 11.3 Other – – 6.8 6.8 Asia Pacific – – 18.1 18.1 Total 14.8 50.3 1,172.0 1,237.1 Debt securities Policyholder Policyholder Non-linked/ linked with-profit shareholder Total As at 31 December 2022 £m £m £m £m Austria – – 17.9 17.9 Belgium – – 32.9 32.9 France 0.7 5.2 149.4 155.3 Germany – 0.4 104.3 104.7 Italy – – 18.3 18.3 Ireland – – 17.1 17.1 Netherlands 1.9 2.5 123.1 127.5 Poland – – 0.4 0.4 Spain – 0.4 20.9 21.3 UK 13.8 25.9 172.9 212.6 Other 2.2 4.8 107.2 114.2 Europe 18.6 39.2 764.4 822.2 USA 0.5 7.9 81.4 89.8 Other – 1.6 0.6 2.2 North America 0.5 9.5 82.0 92.0 Australia – – 12.5 12.5 Other – – 7.4 7.4 Asia Pacific – – 19.9 19.9 Total 19.1 48.7 866.3 934.1 There are no direct holdings in debt securities within Russia or Ukraine. 180 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS (c) Liquidity risk (i) Management of liquidity risk Liquidity risk is the risk that adequate liquid funds are not available to settle liabilities as they fall due and is managed by forecasting cash requirements and by adjusting investment management strategies to meet those requirements. Liquidity risk is generally mitigated by holding sufficient investments which are readily marketable in sufficiently short timeframes to allow the settlement of liabilities as they fall due. Where liabilities are backed by less marketable assets, for example investment properties, there are provisions in contractual terms which allow deferral of redemptions in times of adverse market conditions. The group’s substantial holdings of money market assets also serve to reduce liquidity risk. (ii) Maturity analysis The tables below present a maturity analysis of the group’s financial liabilities on discounted basis. 31 December 2023 Contractual cash flows (discounted) Carrying values and cash Carrying value <1 yr 1-2 yrs 2-3 yrs 3-4 yrs 4-5 yrs 5-10 yrs >10 yrs Total flows arising from: £m £m £m £m £m £m £m £m £m Insurance contract liabilities 4,203.0 651.2 332.8 294.4 277.8 267.2 872.9 1,222.6 3,918.9 Reinsurance contract liabilities 17.1 3.2 3.6 3.5 3.2 2.9 15.1 24.7 56.2 Total insurance and reinsurance contract liabilities 4,220.1 654.4 336.4 297.9 281.0 270.1 888.0 1,247.3 3,975.1 Investment contract liabilities 5,872.3 5,414.0 40.3 38.0 40.2 47.7 131.0 69.6 5,780.8 Liabilities relating to policyholder’s fund held by the group 1,281.8 1,281.8 – – – – – – 1,281.8 Lease contract liabilities 1.2 1.0 0.2 – – – – – 1.2 Borrowings 207.9 204.2 1.7 0.7 0.3 0.2 0.9 – 208.0 Derivative financial instruments 4.4 4.4 – – – – – – 4.4 Other current liabilities 131.7 131.7 – – – – – – 131.7 Bank overdrafts 0.2 0.2 – – – – – – 0.2 Total financial liabilities 7,499.5 7,037.3 42.2 38.7 40.5 47.9 131.9 69.6 7,408.1 Total 11,719.6 7691.7 378.6 336.6 321.5 318.0 1,019.9 1,316.9 11,383.2 31 December 2022 Contractual cash flows (discounted) Carrying values and cash Carrying value <1 yr 1-2 yrs 2-3 yrs 3-4 yrs 4-5 yrs 5-10 yrs >10 yrs Total flows arising from: £m £m £m £m £m £m £m £m £m Insurance contract liabilities 3,821.6 574.2 295.9 269.0 249.3 284.1 816.9 1,091.9 3,581.3 Reinsurance contract liabilities 17.3 3.6 3.1 3.1 2.8 2.6 14.4 28.0 57.6 Total insurance and reinsurance contract liabilities 3,838.9 577.8 299.0 272.1 252.1 286.7 831.3 1,119.9 3,638.9 Investment contract liabilities 5,660.8 5,660.8 – – – – – – 5,660.8 Liabilities relating to policyholder’s fund held by the group 986.8 986.8 – – – – – – 986.8 Lease contract liabilities 1.2 0.7 0.5 – – – – – 1.2 Borrowings 212.0 212.0 – – – – – – 212.0 Derivative financial instruments 3.8 3.8 – – – – – – 3.8 Other current liabilities 123.3 123.3 – – – – – – 123.3 Bank overdrafts – – – – – – Total financial liabilities 6,987.9 6,987.4 0.5 – – – – – 6,987.9 Total 10,826.8 7,565.2 299.5 272.1 252.1 286.7 831.3 1,119.9 10,626.8 The values reported for insurance contract liabilities and reinsurance contract liabilities exclude the risk adjustment and contractual service margin as these are not considered to be financial liabilities subject to liquidity risk. The carrying values in the table above are the balance sheet values. The maturity analysis for unit-linked investment contracts presents all the liabilities as due in the earliest period in the table because they are repayable or transferable on demand. CHESNARAANNUALREPORTANDACCOUNTS2023 181 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION B – RISK AND CAPITAL MANAGEMENT B3 Financial risk (continued) (c) Liquidity risk (continued) (ii) Maturity analysis (continued) The table that follows shows the amounts from insurance contract assets and liabilities that are payable on demand. In most cases the non-distinct investment component is considered to be appropriate. As per the maturity analysis table above, the amounts presented exclude the risk adjustment and contractual service margin. The carrying amount is the full balance sheet value. 31 December Type of contracts 2023 2022 Payable on Carrying Payable on Carrying demand amount demand amount £m £m £m £m Immediate annuities 2.4 327.9 2.0 251.5 Term assurance and other non-linked 150.3 419.7 144.0 348.7 Unit-linked/Index-linked/With-profits – GMM 882.0 999.0 769.0 834.3 Unit-linked/Index-linked/With-profits – VFA 2,132.5 2,412.1 2,109.3 2,345.2 Short-term protection 36.9 40.3 38.2 42.0 Total 3,204.1 4,199.0 3,062.5 3,821.7 B4 Capital management (a) Regulatory context Solvency II The Chesnara group is required to comply with the Solvency II capital regime. Solvency II came into force on 1 January 2016 and is an EU insurance legislation that aims to unify the EU insurance market and enhance consumer protection. This regime currently remains applicable to the UK post Brexit, albeit the PRA has made some changes to the provision of technical information such as the risk-free yield curve, which is now based on SONIA swap rates, and the volatility adjustment and symmetric adjustment, which are now derived using indices more relevant to the UK. The UK Treasury and EIOPA have both been undertaking a review of SII rules implementation. In the UK this has resulted in a reduction in the SII Risk Margin and similar is expected for the overseas entities from the EIOPA review. The Solvency II regime includes rules over the quantity and quality of capital (known as Own Funds) that insurance companies and groups need in order to meet the regime’s required level of capital (known as the Solvency Capital Requirement). The Chesnara group operates exclusively within the UK and the EU and as a result, the Solvency II regime applies to the group and all regulated insurance companies within the group. The regulators responsible for the supervision of the group and its subsidiaries have been shown in section (c)(i) of this Note. The Solvency II regime has specific rules regarding how Own Funds are recognised and valued. In a number of cases, the IFRS and Solvency II value of an asset and liability are the same, but in some cases there are differences. In particular, liabilities for insurance and investment contracts are valued differently, with insurance contracts now valued according to IFRS 17 and therefore including a contractual service margin and investment contracts valued as per unit value under IFRS 9. In addition, Solvency II has differing treatments for certain intangible assets. A high level reconciliation between the IFRS net assets and Solvency II Own Funds of the group and its subsidiaries has been provided in section (c)(ii) of this Note. Regarding the Solvency Capital Requirement (SCR) of the Chesnara group and its subsidiaries, the group has elected to use the ‘standard formula’ approach for its calculation, which means we are applying the formulae as included in the Solvency II framework. The calculations within the standard formula have been designed such that, on the basis that an insurance company holds Own Funds that are at least equal to its SCR, it will be able to withstand a 1 in 200 year event. An alternative would have been to use an ‘internal model’ but this was not deemed appropriate for the size and complexity of the Chesnara group. Company law As well as complying with the Solvency II regime, each company within the group is required to comply with relevant company law capital and distribution rules. (b) Objectives, policies and processes for managing capital (i) Objectives To manage compliance with the externally imposed capital requirements, the group and its subsidiaries have established capital management policies in place. The objectives of these policies are: – to ensure that capital is managed in a way that is consistent with the business strategy of the group and its subsidiaries, in that they: – promote fair customer outcomes through protecting policyholders; – provide protection to shareholders through ensuring that the business is adequately protected against stress events; and – provide a framework to support the decision making process for returns to shareholders via dividends. – to ensure that capital of the group and its subsidiaries is managed in accordance with the board’s risk appetite, in particular each board’s aversion for Own Funds to fall below the SCR. 182 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS (ii) Policies In light of the objectives for the group’s and its subsidiaries’ capital management policies, the following quantitative limits for managing Own Funds are applied across the group: Waard Region CA Movestic Group Scildon Group Dividend paying limit: Own Funds stated as % of SCR 120% 120% 135% 175% 140% Management actions limit: Own Funds stated as % of SCR 110% 110% 135% 175% 110% Dividend paying limit: This is the point at which a dividend would cease to be paid, until at such time the solvency position was restored above this point. This limit is set by the relevant board in each division with reference to its respective risk appetite, as articulated in each division’s Capital Management Policy. Management actions limit: This is the point at which, should Own Funds fall below this level, additional management actions would be considered to restore Own Funds back above this level. In essence this represents an internal ‘ladder of intervention limit’ that is set by the group and divisional boards. To put the above table and definitions in context, and taking group as an example, this means that the group will not pay a dividend should the payment of the dividend take the group Own Funds to below 140% of its SCR. Should Own Funds fall below 110% of SCR additional management actions will be taken. (iii) Process for management of capital The following key processes and procedures are in place across the group to manage adherence to the capital management policies in place: – Internal solvency reporting: A number of internal reports are produced that focus on the solvency position of the group/company. These include the Own Risk & Solvency Assessment (ORSA) Report, a quarterly actuarial report and a quarterly finance report. All of these are presented to and approved by the board. – Production of projections: On at least an annual basis, solvency projections are produced for the group and its subsidiaries. These projections are included in both the business plans and the ORSA Report and show how management anticipates the solvency position to develop over time. The projections process includes assessing the impact of a number of different stress scenarios to ensure that the sensitivities of the business are understood. Both the ORSA and the business plans are presented to and approved by the board. – Regular review of internal limits in place: On at least an annual basis, the limits described in section (b)(ii) of this Note are reviewed and assessed, having regard to the developments of the business and any other changes that may have affected the group’s/divisions’ risk appetite. – Recovery management protocol: A protocol for management actions has been designed which, in effect, represents an internally set ‘ladder of intervention’. The protocol includes items such as solvency monitoring frequency, what level of escalations are required and what management actions need to be considered. – Monthly solvency monitoring: Full solvency calculations are performed on a quarterly basis. For intra-quarter months, a monthly solvency estimate is produced. Where full estimation routines are not practical intra-valuation solvency can be monitored through trigger monitoring and sensitivity analysis. In addition to the group level indicators, the Chesnara board will remain close to any indications of divisional solvency movements by means of divisional MI and quarterly business reviews. On at least a monthly basis, specific key risk indicators are monitored against pre-defined trigger points. The trigger points are set having regard for the sensitivity of the group to certain scenarios. Trigger points and the list of risk indicators being monitored are assessed at least annually. (iv) Compliance during year The group, and all insurance companies within the group, held Own Funds above their respective Solvency Capital Requirements at all times during the year. (c) Quantitative analysis (i) Group solvency position The unaudited solvency position of the group and its divisions at 31 December 2023, and at 31 December 2022, has been shown in the tables below. They present a view of the solvency position which may differ to the position of the individual insurance company(ies) within that division. 31 December 2023 (unaudited) Other group and Waard consolidation Region UK Movestic Group Scildon adjustments Group £m £m £m £m £m £m Own Funds (pre dividends) 187.5 178.7 105.3 133.7 102.0 707.2 Proposed dividend (35.0 ) (7.8 ) (6 .9 ) – 26. 2 (23.5 ) Own Funds (post dividends) 152.5 170.9 98.4 133.7 128.2 683.7 SCR 102.6 116.7 27.9 72.8 12.7 332.7 Solvency surplus 49.9 54.2 70.5 60.9 n/a 351.0 Solvency ratio 149% 147% 353% 184% n/a 205% Dividend paying limit (% of SCR) 120% 120% 135% 175% n/a 140% Dividend paying limit (£) 123.1 140.0 37.7 127.4 n/a 465.8 Surplus over dividend paying limit 29.4 30.9 60.7 6.2 n/a 217.9 CHESNARAANNUALREPORTANDACCOUNTS2023183 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION B – RISK AND CAPITAL MANAGEMENT B4 Capital management (continued) (c) Quantitative analysis (continued) 31 December 2022 (unaudited) Other group and Waard consolidation Region UK Movestic Group Scildon adjustments Group £m £m £m £m £m £m Own Funds (pre dividends) 194.2 185.4 85.0 132.4 30.9 627.9 Proposed dividend (56.0 ) (12 .0 ) (5.3 ) – 50.5 (22 . 8 ) Own Funds (post dividends) 138.2 173.4 79.7 132.4 81.4 605.1 SCR 99.4 106.9 13.5 70.3 16.6 306.7 Solvency surplus 38.8 66.5 66.2 62.1 n/a 298.4 Solvency ratio 139% 162% 591% 188% n/a 197% Dividend paying limit (% of SCR) 120% 120% 135% 175% n/a 140% Dividend paying limit (£) 119.3 128.3 18.2 123.0 n/a 429.4 Surplus over dividend paying limit 18.9 45.1 61.5 9.4 n/a 175.7 (ii) Reconciliation between Solvency II Own Funds and IFRS net assets (unaudited) The tables below show the key differences between the Solvency II Own Funds reported in section (c)(i) of this Note and the group’s IFRS net assets. 31 December 2023 (unaudited) Other group and Waard consolidation Region UK Movestic Group Scildon adjustments Group £m £m £m £m £m £m Solvency II Own Funds (post dividends) 152.5 171.0 98.4 133.7 128.1 683.7 Add Back: Ring-fenced fund surplus restrictions 0.5 – – – – 0.5 Add Back: Intangible assets 22.1 72.8 – – – 94.9 Add Back: Tier 2 debt and restriction – – 13.7 – (214.3 ) (200.6 ) Add Back: Foreseeable dividends 35.0 7.8 6.9 – (26.2 ) 23.5 Add Back: Difference in valuation of technical provisions (49.0 ) (153.4 ) (27.7 ) (25.6 ) 40.3 (215.4 ) Add Back: Difference in deferred tax (4.7 ) – 16.5 6.5 (10.2 ) 8.1 Add Back: O ther valuation differences (5.7 ) (1.0 ) (28.0 ) (0.2 ) 0.1 (34 .8 ) IFRS net assets 150.7 97.2 79.8 114.4 (82.2 ) 359.9 31 December 2022 (unaudited) Other group and Waard consolidation Region UK Movestic Group Scildon adjustments Group £m £m £m £m £m £m Solvency II own funds (post dividends) 138.2 173.4 79.7 132.4 81.4 605.1 Add Back: Ring-fenced fund surplus restrictions – – – – – – Add Back: Intangible assets 50.5 75.6 – – – 126.1 Add Back: Tier 2 debt and restriction – – – – (153.3 ) (153.3 ) Add Back: Foreseeable dividends 56.0 12.0 5.3 – (50.5 ) 22.8 Add Back: Difference in valuation of technical provisions (34.5 ) (154.2 ) 23.5 (34.4 ) 42.1 (157.5 ) Add Back: Difference in deferred tax (26.4 ) – 7.5 14.7 (9.9 ) (14.1 ) Add Back: O ther valuation differences (1.2 ) (0.6 ) (42.8 ) (1.6 ) 1.2 (45.0 ) IFRS net assets (as restated) 182.6 106.2 73.2 11 1.1 (89.0 ) 384.1 Further information on how the group uses Solvency II, and metrics derived from Solvency II, as Alternative Performance Measures can be found in the Additional Information section of the Annual Report and Accounts on pages 274 to 277. 184 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS SECTION C – SEGMENTAL INFORMATION C1 Composition of 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 31 December 2023 comprise: UK: This segment comprises the UK’s life insurance and pensions business within Countrywide Assured plc (CA), the group’s principal UK operating subsidiary, and Sanlam Life & Pensions UK (SLP), acquired by the group on 28 April 2022 and subsequently renamed to CASLP Limited (CASLP). The majority of the assets and liabilities of CASLP were transferred to CA on 31 December 2023 under a Part VII business transfer. During the year, the group reached an agreement to acquire the onshore individual protection business of Canada Life Limited with the transaction initially in the form of a reinsurance agreement accepted by CA. See Note I8 for further details. Movestic: This segment comprises the group’s Swedish life and pensions business, Movestic Livförsäkring AB (Movestic) and its subsidiary company Movestic Fonder AB (investment fund management company). Movestic is open to new business and primarily comprises unit-linked pension business and also providing some life and health product offerings. Waard Group: This segment represents the group’s closed Dutch life insurance business and comprises a number of acquisitions of closed insurance books of business since the acquisition of the original Waard entities into the group in 2015. The Waard Group comprises a mixture of long-term savings and protection business and also contains some non-life business. During the year, the group acquired the insurance portfolio of Nederlandsche Algemeene Maatschappij van Levensverzekering ‘Conservatrix’ N.V. (Conservatrix), a specialist provider of life insurance products in the Netherlands. See Note I8 for further details. Scildon: This segment represents the group’s open Dutch life insurance business. Scildon’s policy base is predominantly made up of individual protection and savings contracts. It is open to new business and sells protection, individual savings and group pension contracts via a broker-led distribution model. Other group activities: The functions performed by the parent company, Chesnara plc, are defined under the operating segment analysis as other group activities. Also included therein are consolidation and elimination adjustments. The accounting policies of the segments are the same as those for the group as a whole. Any transactions between the business segments are on normal commercial terms in normal market conditions. The group evaluates performance of operating segments on the basis of the profit before tax attributable to shareholders of the reporting segments and the group as a whole. There were no changes to the measurement basis for segment profit during the year ended 31 December 2023. CHESNARAANNUALREPORTANDACCOUNTS2023185 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION C – SEGMENTAL INFORMATION C2 Segmental performance and net assets (a) Segmental income statement for the year ended 31 December 2023 Waard Other group Movestic Group Scildon activities UK (Swe d en ) (Nethe rlands ) (Netherlands ) ( U K ) Tot al £m £m £m £m £m £m Insurance revenue 65.8 11.1 36.1 115.0 – 228.0 Insurance service expense (65.6 ) (7.4 ) (37.8 ) (113.9 ) – (224.7 ) Net expenses from reinsurance contracts held (5.5 ) (0.6 ) 0.4 (2.7 ) – (8.4 ) Se gm e nt a l in s ur an c e se rv ic e re s u l t ( 5.3 ) 3.1 ( 1.3 ) (1 . 6 ) – ( 5.1 ) Net investment return 339.3 432.5 63.2 181.2 7.3 1,023.5 Net finance (expenses)/income from insurance contracts issued (86.4 ) (16.0 ) (49.3 ) (163.2 ) – (314.9 ) Net finance expenses from reinsurance contracts held 9.3 0.7 0.1 (3.4 ) – 6.7 Net change in investment contract liabilities (226.4 ) (299.6 ) (3.6 ) – – (529.6 ) Change in liabilities relating to policyholders’ funds held by the group – (114.0 ) – – – (114.0 ) Segmental investment result 35.8 3.6 10.4 14.6 7.3 71.7 Fee, commission and other operating income 39.8 50.3 2.9 – (3.6 ) 89.4 Segmental revenue, net of investment result 70.3 57.0 12.0 13.0 3.7 156.0 Other operating expenses (39.9 ) (40.0 ) (3.5 ) (5.5 ) (23.1 ) ( 11 2.0 ) Financing costs (0.2 ) (0.5 ) – – (10.3 ) ( 11.0 ) Profit/(loss) before tax and consolidation adjustments 30.2 16.5 8.5 7.5 (29.7 ) 33.0 Other operating expenses: Amortisation and impairment of intangible assets (26.7 ) (11.2 ) – – – (37.9 ) Segmental income less expenses 3.5 5.3 8.5 7.5 (29.7 ) (4.9 ) Post completion gain on portfolio acquisition – – 6.7 – – 6.7 (Loss)/profit before tax 3.5 5.3 15.2 7.5 (29.7 ) 1.8 Income tax credit/(charge) 20.5 – (1.6 ) (1.9 ) (0.1 ) 16.9 (Loss)/profit after tax 24.0 5.3 13.6 5.6 (29.8 ) 18.7 (b) Segmental balance sheet as at 31 December 2023 Waard Other group Movestic Group Scildon activities UK (Swe d en ) (Nethe rlands ) (Netherlands ) ( U K ) Tot al £m £m £m £m £m £m Total assets 4,527.2 4,519.4 946.8 2,009.1 127.3 12,129.8 Total liabilities (4,376.6 ) (4,422.2 ) (867.0 ) (1,894 .6 ) (209.5 ) ( 11,769.9 ) Net assets 150.6 97.2 79.8 114.5 (82.2 ) 359.9 Investment in associates – – – – – – Additions to non-current assets – – – – – – 186 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS (c) Segmental income statement for the year ended 31 December 2022 Waard Other group Movestic Group Scildon activities UK (Swe d en ) (Nethe rlands ) (Netherlands ) ( U K ) Tot al £m £m £m £m £m £m Insurance revenue 65.1 12.6 16.9 130.5 – 225.1 Insurance service expense (58. 2 ) (4.5 ) (17. 8 ) (125.6 ) – (206.1 ) Net expenses from reinsurance contracts held (1.7 ) (2.9 ) (1.6 ) 0.5 – (5.7 ) Segmental insurance service result 5.2 5.2 (2.5 ) 5.4 – 13.3 Net investment return (280.8 ) (876.8 ) (93.3 ) (302.4 ) (3.6 ) ( 1,556.9 ) Net finance (expenses)/income from insurance contracts issued 161.6 20.5 91.0 275.7 – 548.8 Net finance expenses from reinsurance contracts held (24.1 ) (0.5 ) (0.3 ) 11.8 – (13.1 ) Net change in investment contract liabilities 129.5 459.8 – – – 589.3 Change in liabilities relating to policyholders’ funds held by the group – 392.9 – – – 392.9 Se gm e nt a l inve s t m en t re s ul t ( 1 3. 8 ) (4.1 ) ( 2. 6 ) ( 14.9 ) ( 3. 6 ) ( 3 9 . 0 ) Fee, commission and other operating income 16.4 43.1 0.1 – – 59.6 Segmental revenue, net of investment result 7.8 44.2 (5.0 ) (9.5 ) (3.6 ) 33.9 Other operating expenses (30.7 ) (29.7 ) (3.1 ) (5.7 ) (14 .2 ) (83.4 ) Financing costs (0.2 ) (0.8 ) – – (9.5 ) (10.5 ) Profit/(loss) before tax and consolidation adjustments (23.1 ) 13.7 (8.1 ) (15.2 ) (27.3 ) (60.0 ) Other operating expenses: Amortisation of intangible assets (5.3 ) (12.2 ) – – – (17.5 ) Se gm e nt a l in co m e le ss exp en s e s ( 2 8.4 ) 1 .5 (8.1 ) (1 5.2 ) ( 2 7.3 ) (77. 5 ) Post completion gain on portfolio acquisition 9.6 – 5.8 – – 15.4 (L oss)/pro fi t b e f o r e ta x (18 .8 ) 1 .5 ( 2. 3 ) ( 1 5.2 ) (27. 3 ) (6 2.1 ) Income tax credit/(charge) 19.2 – (0.1 ) 3.9 5.4 28.4 (L oss)/pro fi t a fte r ta x 0 .4 1.5 ( 2.4 ) ( 11.3 ) ( 21 .9 ) (33 .7 ) (d) Segmental balance sheet as at 31 December 2022 Waard Other group Movestic Group Scildon activities UK (Swe d en ) (Nethe rlands ) (Netherlands ) ( U K ) Tot al £m £m £m £m £m £m Total assets 4,748.9 3,948.2 542.6 1,902.5 112.7 11,254.9 Total liabilities (4,566 .3 ) (3,842.0 ) (469.4 ) (1,791.4 ) (201.7 ) (10,870.8 ) Net assets 182.6 106.2 73.2 111.1 (89.0 ) 384.1 Investment in associates – – – – – – Additions to non-current assets – 10.4 0.3 – – 10.7 CHESNARAANNUALREPORTANDACCOUNTS2023187 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION D – PERFORMANCE IN THE YEAR D1 Insurance result Year ended 31 December 2023 Waard Movestic Group Scildon UK (Sweden ) (Netherlands ) (Netherlands ) Total Insurance revenue £m £m £m £m £m Contracts not measured under the PAA: Amounts relating to changes in the liability for remaining coverage: Expected incurred claims and other directly attributable expenses 59.1 0.3 28.2 100.1 187.7 Change in risk adjustment for non-financial risk for the risk expired 2.2 0.1 0.9 2.4 5.6 CSM recognised for the services provided 4.5 0.3 7.0 9.0 20.8 Insurance acquisition cash flows recovery – – – 3.5 3.5 Insurance revenue for contracts not measured under the PAA 65.8 0.7 36.1 115.0 217.6 Insurance revenue for contracts measured under the PAA – 10.4 – – 10.4 Total insurance revenue 65.8 11.1 36.1 115.0 228.0 Insurance service expenses Incurred claims and other directly attributable expenses (50.7 ) (11.0 ) (30.4 ) (75.1 ) (167.2 ) Changes that relate to past service – changes in the FCF relating to the LIC – 3.6 – – 3.6 Losses on onerous contracts and reversals of those losses (14.9 ) – (7.4 ) (35.4 ) (57.7 ) Insurance acquisition cash flows amortisation – – – (3.4 ) (3.4 ) Tota l in s u ra nc e s e rvi ce ex p en s e s ( 6 5. 6 ) ( 7.4 ) (3 7.8 ) ( 113. 9 ) ( 2 2 4.7 ) Net income/(expenses) from reinsurance contracts held Reinsurance expenses (allocation of reinsurance premiums paid) – contracts not measured under the PAA Amounts relating to changes in the remaining coverage: Expected amount recoverable for claims and other insurance service expenses (23.8 ) – (5.0 ) (17.7 ) (46.5 ) Change in risk adjustment for non-financial risk for the risk expired (0.7 ) – (0.2 ) (1.3 ) (2.2 ) CSM recognised for the services received (0.5 ) – 2.2 (2.7 ) (1.0 ) Reinsurance expenses (allocation of reinsurance premiums paid) – contracts not measured under the PAA (25.0 ) – (3.0 ) (21.7 ) (49.7 ) Reinsurance expenses (allocation of reinsurance premiums paid) – contracts measured under the PAA – (2.5 ) – – (2.5 ) Amounts recoverable for incurred claims and other incurred insurance service expenses 19.5 3.2 3.4 17.3 43.4 Changes in amounts recoverable that relate to past service – adjustments to incurred claims – (1.3 ) – – (1.3 ) Recoveries of loss on recognition of onerous underlying contracts – – – 0.5 0.5 Recoveries of losses on onerous underlying contracts and reversals of such losses – – – 1.2 1.2 Total net expenses from reinsurance contracts held (5.5 ) (0.6 ) 0.4 (2.7 ) (8.4 ) Tota l in s u ra nc e s e rvi ce r e su l t (5.3 ) 3.1 (1.3 ) (1 . 6 ) (5.1 ) 188 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS Year ended 31 December 2022 Waard Movestic Group Scildon UK (Sweden ) (Netherlands ) (Netherlands ) Total Insurance revenue £m £m £m £m £m Contracts not measured under the PAA: Amounts relating to changes in the liability for remaining coverage: Expected incurred claims and other directly attributable expenses 57.2 0.3 8.3 113.7 179.5 Change in risk adjustment for non-financial risk for the risk expired 2.4 0.1 4.9 3.0 10.4 CSM recognised for the services provided 5.5 0.2 3.7 10.3 19.7 Insurance acquisition cash flows recovery – – – 3.5 3.5 Insurance revenue for contracts not measured under the PAA 65.1 0.6 16.9 130.5 213.1 Insurance revenue for contracts measured under the PAA – 12.0 – – 12.0 Total insurance revenue 65.1 12.6 16.9 130.5 225.1 Insurance service expenses Incurred claims and other directly attributable expenses (58.2 ) (11.5 ) (14.6 ) (92.7 ) (177.0 ) Changes that relate to past service – changes in the FCF relating to the LIC – 7.0 – – 7.0 Losses on onerous contracts and reversals of those losses – – (3.2 ) (29.4 ) (32.6 ) Insurance acquisition cash flows amortisation – – – (3.5 ) (3.5 ) Tota l in s u ra nc e s e rvi ce ex p en s e s ( 5 8.2 ) (4.5 ) ( 1 7.8 ) (125.6 ) ( 20 6.1 ) Net income/(expenses) from reinsurance contracts held Reinsurance expenses (allocation of reinsurance premiums paid) – contracts not measured under the PAA Amounts relating to changes in the remaining coverage: Expected amount recoverable for claims and other insurance service expenses (24.5 ) – (4.4 ) (16.0 ) (44.9 ) Change in risk adjustment for non-financial risk for the risk expired (0.8 ) – (0.2 ) (1.1 ) (2.1 ) CSM recognised for the services received (1.1 ) – (0.9 ) (2.7 ) (4.7 ) Reinsurance expenses (allocation of reinsurance premiums paid) – contracts not measured under the PAA (26.4 ) – (5.5 ) (19.8 ) (51.7 ) Reinsurance expenses (allocation of reinsurance premiums paid) – contracts measured under the PAA – (2.3 ) – – (2.3 ) Amounts recoverable for incurred claims and other incurred insurance service expenses 24.7 2.8 3.9 18.5 49.9 Changes in amounts recoverable that relate to past service – adjustments to incurred claims – (3.4 ) – – (3.4 ) Recoveries of loss on recognition of onerous underlying contracts – – – 1.4 1.4 Recoveries of losses on onerous underlying contracts and reversals of such losses – – – 0.4 0.4 Total net expenses from reinsurance contracts held (1.7 ) (2.9 ) (1.6 ) 0.5 (5.7 ) Total insurance service result 5.2 5.2 (2.5 ) 5.4 13.3 CHESNARAANNUALREPORTANDACCOUNTS2023189 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION D – PERFORMANCE IN THE YEAR D2 Investment result In the tables that follow the investment return on surplus shareholder assets is included in the insurance contracts column. Net fair value gains and losses in respect of holdings in collective investment schemes are included in the line that is most appropriate taking into account the nature of the underlying investments. No amounts included in net fair value gains and losses of financial instruments in 2023 were estimated using a valuation technique (year ended 31 December 2022: £Nil). Year ended 31 December 2023 Investment contracts Insurance contracts (without Chesnara UK Movestic Waard Scildon DPFs ) plc Total Net Investment return £m £m £m £m £m £m £m Interest revenue from financial assets not measured at FVTPL 6.8 0.9 0.5 – – 0.9 9.1 Net gains on financial investments mandatorily measured as FVTPL 63.0 18.1 21.4 129.6 527.7 6.3 766.1 Net gains on financial investments designated as FVTPL 41.9 – 37.6 51.7 115.8 – 247.0 Net gains from fair value adjustments to investment properties 1.2 – – – – – 1.2 Total net investment return 112.9 19.0 59.5 181.3 643.5 7.2 1,023.4 Finance income/(expenses) from insurance contracts issued Change in fair value of underlying assets of contracts measured under the VFA (75.4 ) – (5.1 ) (132.6 ) – – (213.1 ) Interest accreted (18.2 ) – (30.0 ) (19.1 ) – – (67. 3 ) Effect of changes in interest rates and other financial assumptions 2.4 (16.0 ) (21.2 ) (14.2 ) – – (49.0 ) Effect of changes in fulfilment cash flows at current rates when CSM is unlocked at locked in rates 4.7 – 6.9 2.9 – – 14.5 Total finance income from insurance contracts issued (86.5 ) (16.0 ) (49.4 ) (163.0 ) – – (314.9 ) Finance income from reinsurance contracts held Interest accreted 8.8 – 0.1 (1.1 ) – – 7.8 Effect of changes in interest rates and other financial assumptions 1.5 0.7 – (1.6 ) – – 0.6 Effect of changes in fulfilment cash flows at current rates when CSM is unlocked at locked in rates (1.0 ) – – (0.7 ) – – (1.7 ) Total finance expenses from reinsurance contracts held 9.3 0.7 0.1 (3.4 ) – – 6.7 Ne t in s ur an c e fin a nc e exp e n s e s (77.2 ) ( 15 .3 ) (49.3 ) ( 1 66 .4 ) – – (3 08 .2 ) Net change in investment contract liabilities – – – – (529.6 ) – (529.6 ) Change in liabilities relating to policyholder funds held by the group – – – – (113.9 ) – (113.9 ) Net investment result 35.7 3.7 10.2 14.9 – 7.2 71.7 190 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS Year ended 31 December 2022 Investment contracts Insurance contracts (without Chesnara UK Movestic Waard Scildon DPFs ) plc Total Net Investment return £m £m £m £m £m £m £m Interest revenue from financial assets not measured at FVTPL – 0.1 – – – – 0.1 Net gains on financial investments mandatorily measured as FVTPL (110.8 ) (5.8 ) (83.3 ) (207.2 ) (589.3 ) (4.1 ) (1,000.5 ) Net gains on financial investments designated as FVTPL (37.4 ) (18.5 ) (10.0 ) (95.2 ) (392.9 ) 0.5 (553.5 ) Net gains from fair value adjustments to investment properties (3.1 ) – – 0.1 – – (3.0 ) Tota l ne t i nve s t me n t re tu rn ( 1 5 1.3 ) (24.2 ) (93.3 ) (30 2.3 ) (98 2.2 ) (3. 6 ) (1 ,55 6.9 ) Finance income/(expenses) from insurance contracts issued Change in fair value of underlying assets of contracts measured under the VFA 72.3 18.5 3.4 171.8 – – 266.0 Interest accreted 5.6 – (0.5 ) 12.6 – – 17.7 Effect of changes in interest rates and other financial assumptions 78.9 2.0 92.7 92.5 – – 266.1 Effect of changes in fulfilment cash flows at current rates when CSM is unlocked at locked in rates 4.8 – (4.6 ) (1.2 ) – – (1.0 ) Total finance income from insurance contracts issued 161.6 20.5 91.0 275.7 – – 548.8 Finance income from reinsurance contracts held Interest accreted 1.1 – – 0.5 – – 1.6 Effect of changes in interest rates and other financial assumptions (25.2 ) (0.5 ) (0.3 ) 11.0 – – (15.0 ) Effect of changes in fulfilment cash flows at current rates when CSM is unlocked at locked in rates – – – 0.3 – – 0.3 Total finance expenses from reinsurance contracts held (24.1 ) (0.5 ) (0.3 ) 11.8 – – (13.1 ) Net insurance finance expenses 137.5 20.0 90.7 287.5 – – 535.7 Net change in investment contract liabilities – – – – 589.3 – 589.3 Change in liabilities relating to policyholder funds held by the group – – – – 392.9 – 392.9 Ne t inve s t m e nt re s u l t ( 1 3. 8 ) (4 .2 ) (2. 6 ) ( 14.8 ) – (3. 6 ) (39 . 0 ) D3 Fees, commission and other operating income Year ended 31 December 2023 2022 £m £m Policy-based fees 3.2 1.7 Fund management-based fees recognised under IFRS 15 45.5 25.9 Change in deferred income – gross 0.6 1.1 Commission income from investment contracts 20.4 21.4 Fee income from investment managers 1.3 1.4 Charges to policyholder funds for yield tax 17.9 8.3 Other types of operating income 0.5 (0.2 ) Total fee, commission and other operating income 89.4 59.6 CHESNARAANNUALREPORTANDACCOUNTS2023 191 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION D – PERFORMANCE IN THE YEAR D4 Expenses by nature Year ended 31 December 2023 Insurance Other Other acquisition attributable operating cash flows expenses expenses Total Note £m £m £m £m Administrative expenses Personnel-related costs I1 2.2 13.6 25.4 41.2 Investment management fees – 2.3 1.3 3.6 Costs paid to third-party administrators – 9.7 3.9 13.6 Other goods and services 3.3 13.0 28.9 45.2 Depreciation charge on property and equipment 0.1 0.5 0.2 0.8 Depreciation of right-of-use assets – – 0.4 0.4 Amortisation charge on software assets – – 2.0 2.0 Sub-total 5.6 39.1 62.1 106.8 Commission, new business and renewal costs Insurance contracts – 3.5 – 3.5 Investment contracts – – 29.4 29.4 Sub-total – 3.5 29.4 32.9 Amortisation and Impairment of intangible assets Acquired value of in-force business – – 28.6 28.6 Deferred acquisition costs – – 7.6 7.6 Sub-total – – 36.2 36.2 Other expenses Payment of yield tax relating to policyholders funds – – 17.9 17.9 Other – 2.9 4.3 7.2 Sub-total – 2.9 22.2 25.1 Total 5.6 45.5 149.9 201.0 192 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS Year ended 31 December 2022 Insurance Other Other acquisition attributable operating cash flows expenses expenses Total Note £m £m £m £m Administrative expenses Personnel-related costs I1 4.0 12.1 21.8 37.9 Investment management fees – 0.3 1.4 1.7 Costs paid to third-party administrators – 8.0 4.8 12.8 Other goods and services 2.7 9.7 17.0 29.4 Depreciation charge on property and equipment – 0.4 0.3 0.7 Depreciation of right-of-use assets – 0.1 0.6 0.7 Amortisation charge on software assets – – 1.8 1.8 Sub-total 6.7 30.6 47.7 85.0 Commission, new business and renewal costs Insurance contracts – 6.4 – 6.4 Investment contracts – – 29.1 29.1 Sub-total – 6.4 29.1 35.5 Amortisation of intangible assets Acquired value of in-force business – – 7.2 7.2 Deferred acquisition costs – – 8.5 8.5 Sub-total – – 15.7 15.7 Other expenses Payment of yield tax relating to policyholders funds – – 8.3 8.3 Other – 1.9 0.1 2.0 Sub-total – 1.9 8.4 10.3 Total 6.7 38.9 100.9 146.5 I ncluded in other goods and services above are the following amounts payable to the auditor and its associates, exclusive of VAT. Year ended 31 December 2023 2022 £m £m Fees payable to the company’s auditor for the audit of the company’s financial statements 0.6 0.4 Fees payable to the company’s auditor and its associates for other services to the group: The audit of the company’s subsidiaries pursuant to legislation 1.9 1.7 Audit-related assurance services 2.0 1.1 Non-audit services 0.1 – Total 4.6 3.2 Includes £1.6m (2022: £0.6m) audit fees in respect of the Movestic, Waard and Scildon audit in the year performed by EY. **Includes £0.1m (2022: £0.3m) fees related to assurance services in respect of Waard and Scildon in the year performed by EY. CHESNARAANNUALREPORTANDACCOUNTS2023193 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION D – PERFORMANCE IN THE YEAR D5 Financing costs Year ended 31 December 2023 2022 £m £m Interest expense on bank borrowings 0.7 0.6 Interest expense on financial reinsurance 0.5 0.8 Interest expenses on lease liabilities – – Interest expense on Tier 2 debt 9.8 8.9 Other interest – 0.2 Total financing costs 11.0 10.5 Interest expense on bank borrowings and Tier 2 debt is calculated using the effective interest rate method and is the total interest expense for financial liabilities that are not designated at fair value through profit or loss. D6 Income tax Total income tax comprises Year ended 31 December 2023 2022 £m £m CA and other group – net credit 20.4 24.6 Movestic – – Waard Group – net expense (1.6 ) (0.1 ) Scildon – net (expense)/credit (1.9 ) 3.9 Total net credit 16.9 28.4 UK businesses CA and other group activities Year ended 31 December 2023 2022 £m £m Current tax Current year expense – (3.2 ) Overseas tax (0.3 ) – Adjustment to prior years – 1.5 Net expense (0.3 ) (1.7 ) Deferred tax Origination and reversal of temporary differences 20.7 26.3 Total income tax credit 20.4 24.6 194 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS Reconciliation of effective tax rate on profit before tax Year ended 31 December 2023 2022 £m £m Profit/(loss) before tax (26.3 ) (80.7 ) Income tax using the domestic corporation tax rate of 23.5% (2022: 19.0%) 6.2 15.3 Non-taxable profit on acquisition of subsidiary – (4.7 ) Impact of small companies rate (1.5 ) – Other permanent differences (0.6 ) 0.2 Effect of UK tax bases on insurance profits (7.5 ) 7.8 Offset of franked investment income 1.2 – Variation in rate of tax on amortisation of acquired in-force value 13.3 3.3 Foreign tax (0.3 ) – Effect of deferred tax not recognised 10.1 (0.4 ) Effect of change in tax rate (0.2 ) 3.1 Other (0.3 ) – Total income tax credit 20.4 24.6 The Finance Act 2021 increased the rate of corporation tax from 19% to 25% from 1 April 2023. Movestic The current tax and deferred tax for Movestic was £Nil in the year ended 31 December 2023 (31 December 2022: £Nil). Reconciliation of effective tax rate on profit before tax Year ended 31 December 2023 2022 £m £m Profit before tax 5.4 1.5 Income tax using the domestic corporation tax rate of 20.6% (20.6%) (1.1 ) (0.5 ) Non-taxable income in relation to unit-linked business 1.2 1.5 Non-taxable fair value adjustment – – Unrecognised tax recoverable (0.3 ) – Non-deductible expenses 0.2 (0.9 ) Under/(over) provided in prior years – (0.1 ) Total income tax credit/(expense) – – Waard Group Waard Group Year ended 31 December 2023 2022 £m £m Current tax Current year expense (1.7 ) (1.1 ) Adjustment to prior years 4.7 – Net expenses 3.0 (1.1 ) Deferred tax Origination and reversal of temporary differences (4.6 ) 1.0 Total income tax expense (1.6 ) (0.1 ) CHESNARAANNUALREPORTANDACCOUNTS2023195 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION D – PERFORMANCE IN THE YEAR D6 Income tax (continued) Waard Group (continued) Reconciliation of effective tax rate on profit before tax Year ended 31 December 2023 2022 £m £m Loss before tax 14.7 (2.3 ) Income tax using the domestic corporation tax rate of 25% (3.8 ) 0.6 Non-taxable fair value adjustment 1.7 – Temporary differences 1.0 (0.7 ) Reversal of temporary difference (0.5 ) – Total income tax expense (1.6 ) (0.1 ) Scildon Scildon Year ended 31 December 2023 2022 £m £m Current tax 4.8 (4.0 ) Adjustments for prior year – – Net expense 4.8 (4.0 ) Deferred tax Origination and reversal of temporary differences (6.7 ) 7.8 Impact to changes in tax rates – 0.1 Total income tax credit (1.9 ) 3.9 Reconciliation of effective tax rate on profit before tax Year ended 31 December 2023 2022 £m £m Loss before tax 7.5 (15.2 ) Income tax using the domestic corporation tax rate of 25% (1.9 ) 4.0 Permanent differences 0.1 – Temporary differences (0.1 ) (0.1 ) Total income tax credit (1.9 ) 3.9 196 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS SECTION E – BALANCE SHEET ASSETS E1 Intangible assets Year ended 31 December 2023 Software AVIF AVCR assets Total £m £m £m £m Cost: Balance at 1 January 113.9 2.3 29.5 145.7 Additions – – – – Additions – arising on acquisition – – 2.3 2.3 Foreign exchange translation difference (1.6 ) – (0.7 ) (2.3 ) Balance at 31 December 112.3 2.3 31.1 145.7 Balance at 1 January 48.5 2.1 20.2 70.8 Amortisation for the year 7.5 – 2.0 9.5 Impairment for the year 21.0 – – 21.0 Foreign exchange translation difference (0.9 ) – (0.5 ) (1.4 ) Balance at 31 December 76.1 2.1 21.7 99.9 Carrying amounts: At 1 January 65.4 0.2 9.3 74.9 At 31 December 36.3 0.2 9.3 45.8 Year ended 31 December 2022 Software AVIF AVCR assets Total £m £m £m £m Cost: Balance at 1 January 60.6 2.3 27.7 90.6 Additions – – – – Additions – arising on acquisition 54.7 – 2.4 57.1 Foreign exchange translation difference (1.4 ) – (0.6 ) (2.0 ) Balance at 31 December 113.9 2.3 29.5 145.7 Balance at 1 January 42.3 2.1 18.8 63.2 Amortisation for the year 7.2 – 1.8 9.0 Foreign exchange translation difference (1.0 ) – (0.4 ) (1.4 ) Balance at 31 December 48.5 2.1 20.2 70.8 Carrying amounts: At 1 January 18.3 0.2 8.9 27.4 At 31 December 65.4 0.2 9.3 74.9 The amortisation charged to the Consolidated Statement of Comprehensive Income is recognised in other operating expenses (see Note D4). CHESNARAANNUALREPORTANDACCOUNTS2023197 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION E – BALANCE SHEET ASSETS E1 Intangible assets (continued) Deferred acquisition costs Year ended 31 December 2023 2022 £m £m Balance at 1 January 51.2 53.0 Additions 8.3 7.9 Amortisation charged to income (7.6 ) (8.5 ) Foreign exchange translation difference (1.3 ) (1.2 ) Balance at 31 December 50.6 51.2 Current 11.1 11.2 Non-current 39.5 40.0 Total 50.6 51.2 The amortisation charged to income is recognised in other operating expenses (see Note D4) . E2 Property and equipment 31 December 2023 2022 £m £m Cost: Balance at 1 January 19.0 14.5 Additions – Arising on acquisition – 4.4 Additions 1.9 0.4 Disposals (0.3 ) (1.6 ) Revaluation 0.3 0.8 Foreign exchange translation difference (0.3 ) 0.5 Balance at 31 December 20.6 19.0 Amortisation and impairment losses: Balance at 1 January 11.1 6.6 Additions – Arising on acquisition – 4.4 Depreciation charge for the year 0.8 1.4 Disposals – (1.4 ) Foreign exchange translation difference 0.3 0.1 Balance at 31 December 12.2 11.1 Carrying amounts at 31 December 8.4 7.9 The group leases several assets including office buildings, office and IT equipment and motor vehicles. The average lease term is 3 years. Right-of-use assets Non-investment 2023 property Other Total £m £m £m Carrying amounts at 1 January 1.2 0.1 1.3 Additions – 0.8 0.8 Disposals – – – Depreciation charge (0.4 ) (0.4 ) (0.8 ) Foreign exchange translation difference 0.3 (0.3 ) – Carrying amounts at 31 December 1.1 0.2 1.3 198 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS Amount recognised in profit and loss Non-investment 2023 property Other Total £m £m £m Fixed lease expense 0.1 – 0.1 Total cash outflow for leases 0.1 – 0.1 Right-of-use assets Non-investment 2022 property Other Total £m £m £m Carrying amounts at 1 January 1.9 0.1 2.0 Additions 0.1 – 0.1 Disposals (0.2 ) – (0.2 ) Depreciation charge (0.7 ) – (0.7 ) Carrying amounts at 31 December 1.1 0.1 1.2 Amount recognised in profit and loss Non-investment 2022 property Other Total £m £m £m Fixed lease expense 0.6 0.1 0.7 Total cash outflow for leases 0.6 0.1 0.7 E3 Investment properties 31 December 2023 2022 £m £m Balance at 1 January 94.5 1.1 Additions – Arising on acquisition – 103.0 Additions 2.3 0.9 Disposals (6.0 ) (2.9 ) Revaluation (2.7 ) (7.7 ) Foreign exchange translation difference – 0.1 Balance at 31 December 88.1 94.5 Investment properties were bought for investment purposes in line with the investment strategy of the group. The properties are independently valued in accordance with International Valuation Standards on the basis of determining the open market value of the investment properties on an annual basis. The latest valuations were conducted as at 31 December 2022. There is no observable input and therefore its classed as Level 3 totalling £88.1m, see Note E4(b). Both of these amounts are disclosed in net investment return (see Note D2). Expenses incurred in the operation and maintenance of investment properties are disclosed in other operating expenses (see Note D4). CHESNARAANNUALREPORTANDACCOUNTS2023199 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION E – BALANCE SHEET ASSETS E4 Financial investments (a) Financial investments by classification The carrying amounts of the financial investments and other financial assets and liabilities held by the group at the balance sheet date are as follows: 31 December 2023 Amortised FVTPL – FVTPL – cost designated mandatory Total £m £m £m £m Financial investments Equity securities – – 194.2 194.2 Holdings in collective investment schemes – – 8,376.2 8,376.2 Debt securities – government bonds – 716.5 – 716.5 Debt securities – other – 520.6 – 520.6 Policyholder funds help by the group – 1,281.8 – 1,281.8 Mortgage loan portfolio – 366.8 – 366.8 Total – 2,885.7 8,570.4 11,456.1 Derivatives and other financial assets Derivative financial instruments – – 0.3 0.3 Other assets 57.7 – – 57.7 Cash and cash equivalents – 146.0 – 146.0 Total financial investments and financial assets 57.7 3,031.7 8,570.7 11,660.1 Financial liabilities Investment contracts at fair value through profit or loss – 5,872.3 – 5,872.3 Liabilities relating to policyholder funds help by the group – 1,281.8 – 1,281.8 Derivative financial instruments – – 4.4 4.4 Borrowings 207.9 – – 207.9 Other current liabilities 131.7 – – 131.7 Total financial liabilities 339.6 7,154.1 4.4 7,498.1 31 December 2022 Amortised FVTPL – FVTPL – cost designated mandatory Total £m £m £m £m Financial investments Equity securities – – 160.2 160.2 Holdings in collective investment schemes – – 8,189.7 8,189.7 Debt securities – government bonds – 445.1 – 445.1 Debt securities – other – 489.0 – 489.0 Policyholder funds help by the group – – 986.8 986.8 Mortgage loan portfolio – 266.0 – 266.0 Total – 1,200.1 9,336.7 10,536.8 Derivatives and other financial assets Derivative financial instruments – – 0.1 0.1 Other assets 46.4 – – 46.4 Cash and cash equivalents – 204.6 – 204.6 Total financial investments and financial assets 46.4 1,404.7 9,336.8 10,787.9 Financial liabilities Investment contracts at fair value through profit or loss – 5,660.8 – 5,660.8 Liabilities relating to policyholder funds help by the group – 986.8 – 986.8 Derivative financial instruments – – 3.8 3.8 Borrowings 212.0 – – 212.0 Other current liabilities 123.3 – – 123.3 Total financial liabilities 335.3 6,647.6 3.8 6,986.7 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. 200 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS (b) Financial investment fair values Fair value is the amount for which an asset or liability could be exchanged between willing parties in an arm’s length transaction. The tables below show the determination of fair value according to a three-level valuation hierarchy. Fair values are generally determined at prices quoted in active markets (Level 1). However, where such information is not available, the group applies valuation techniques to measure such instruments. These valuation techniques make use of market- observable data for all significant inputs where possible (Level 2), but in some cases it may be necessary to estimate other than market-observable data within a valuation model for significant inputs (Level 3). Fair value measurement at 31 December 2023 Level 1 Level 2 Level 3 Total £m £m £m £m Investment properties – – 88.1 88.1 Financial assets Equities – Listed 194.2 – – 194.2 Holdings in collective investment schemes 8,233.7 – 142.5 8,376.2 Debt securities – government bonds 716.5 – – 716.5 Debt securities – other debt securities 520.6 – – 520.6 Policyholders’ funds held by the group 1,239.4 – 42.4 1,281.8 Mortgage loan portfolio – 366.8 – 366.8 Derivative financial instruments – 0.3 – 0.3 Total 10,904.4 367.1 273.0 11,544.5 Current 9,095.5 Non-current 2,449.0 Total 11,544.5 Financial liabilities Investment contracts at fair value through profit or loss – 5,872.3 – 5,872.3 Liabilities related to policyholders’ funds held by the group 1,281.8 – – 1,281.8 Derivative financial instruments – 4.4 – 4.4 Total 1,281.8 5,876.7 – 7,158.5 Fair value measurement at 31 December 2022 Level 1 Level 2 Level 3 Total £m £m £m £m Investment properties 1.2 – 93.3 94.5 Financial assets Equities – Listed 160.2 – – 160.2 Holdings in collective investment schemes 7,997.8 46.5 145.4 8,189.7 Debt securities – government bonds 420.9 24.2 – 445.1 Debt securities – other debt securities 434.0 55.0 – 489.0 Policyholders’ funds held by the group 951.7 – 35.1 986.8 Mortgage loan portfolio – 266.0 – 266.0 Derivative financial instruments – 0.1 – 0.1 Total 9,965.8 391.8 273.8 10,631.4 Current 5,932.9 Non-current 4,698.5 Total 10,631.4 Financial liabilities Investment contracts at fair value through profit or loss – 5,660.8 – 5,660.8 Liabilities related to policyholders’ funds held by the group 986.8 – – 986.8 Derivative financial instruments – 3.8 – 3.8 Total 986.8 5,664.6 – 6,651.4 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 input s. CHESNARAANNUALREPORTANDACCOUNTS2023201 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION E – BALANCE SHEET ASSETS E4 Financial investments (continued) (b) Financial investment fair values (continued) Holdings in collective investment schemes The fair value of holdings in collective investment schemes classified as Level 2 are related to the UK segment and Scildon. These do not meet the classification as Level 1, as their fair value is determined using valuation techniques with observable market inputs. The holdings classified as Level 3 £142.5m (Dec 2022: £145.4m) also relate to Scildon, and represent investments held in a mortgage fund. These are classified as Level 3 as the fair value is derived from valuation techniques that include inputs that are not based on observable market data. Policyholder funds held by the group There is also a small holding of assets classified as Level 3 £42.4m (Dec 2022: £35.1m) 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 at 2022 and 2023 are traded in active markets with less depth or wider bid-ask spreads. This does not meet the classification as Level 1 inputs. The fair values of debt securities not traded in active markets are determined using broker quotes or valuation techniques with observable market inputs. Financial instruments valued using broker quotes are classified at Level 2, only where there is a sufficient range of available quotes. These assets were valued using counterparty or broker quotes and were periodically validated against third-party models. Derivative financial instruments The derivatives financial instruments include a foreign currency hedge related to the group. This was deemed to manage the exposure to foreign exchange movements between sterling and both the euro and Swedish krona. An uncapped collar which consists of two hedges: – one hedge to protect against the downside (sterling strengthening) (starting at strike A), and one to remove the upside (weakening) (strike B); with the strikes of these coordinated to result in no upfront premium. – the 2nd hedge (strike B) creates an uncapped liquidity requirement when it bites. The capped collar comes with an additional leg which creates value and liquidity when exchange rates move beyond a certain point (strike C). Within derivative financial instruments is a financial reinsurance embedded derivative related to our Movestic operation. The group has entered into a reinsurance contract with a third party that has a section that is deemed to transfer significant insurance risk and a section that is deemed not to transfer significant insurance risk. The element of the contract that does not transfer significant insurance risk has two components and has been accounted for as a financial liability at amortised cost and an embedded derivative asset at fair value. The embedded derivative represents an option to repay the amounts due under the contract early at a discount to the amortised cost, with its fair value being determined by reference to market interest rate at the balance sheet date. It is, accordingly, determined at Level 2 in the three-level fair value determination hierarchy set out above. Further detail can be found in Note E5. Investment contract liabilities The investment contract liabilities in Level 2 of the valuation hierarchy represent the fair value of linked and non-linked liabilities valued using established actuarial techniques utilising market observable data for all significant inputs, such as investment yields. Significant unobservable inputs in Level 3 instruments valuations The Level 3 instruments held in the group are in relation to investments held in an Aegon managed Dutch Mortgage Fund that contains mortgage-backed assets in the Netherlands. The fair value of the mortgage fund is determined by the fund manager on a monthly basis using an in-house valuation model. The valuation model relies on a number of unobservable inputs, the most significant being the assumed conditional prepayment rate, the discount rate and the impairment rate, all of which are applied to the anticipated modelled cash flows to derive the fair value of the underlying asset. The assumed Conditional Prepayment Rate (CPR) is used to calculate the projected prepayment cash flow per individual loan and reflects the anticipated early repayment of mortgage balances. The CPR is based on four variables: – Contract age – The CPR for newly originated mortgage loans will initially be low, after which it increases for a couple of years to its maximum expected value, and subsequently diminishes over time. – Interest rate differential – The difference between the contractual rates and current interest rates are positively correlated with prepayments. When contractual rates are higher than interest rates of newly originated mortgages, we observe more prepayments and the vice versa. – Previous partial repayments – Borrowers who made a partial prepayment in the past, are more likely to do so in the future. – Burnout effect – Borrowers who have not made a prepayment in the past, while their option to prepay was in the money, are less likely to prepay in the future. The projected prepayment cash flows per loan are then combined to derive an average expected lifetime CPR, which is then applied to the outstanding balance of the fund. The CPR used in the valuation of the fund as at 31 December 2023 was 3.2% (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 31 December 2023 this resulted in discounting the cash flows in each mortgage using a range from 4.67% to 4.68% (31 December 2022: 4.29% to 4.92%) . 202 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS An impairment percentage is applied to those loan cash flows which are in arrears, to reflect the chance of the loan actually going into default. For those loans which are 1, 2 or 3 months in arrears, an impairment percentage is applied to reflect the chance of default. This percentage ranges from 0.60% for 1 month in arrears to 13.70% for loans which are 3 months in arrears (31 December 2022: 0.60% for 1 month in arrears to 13.70% for loans which are 3 months in arrears). Loans which are in default receive a 100% reduction in value. The value of the fund has the potential to decrease or increase over time. This can be as a consequence of a periodic reassessment of the conditional prepayment rate and/or the discount rate used in the valuation model. A 1 percent increase in the CPR would reduce the value of the asset by £1.9m (31 December 2022: £1.7m). A 1 percent decrease in the CPR would increase the value of the asset by £2.1m (31 December 2022: £2.1m). A 1 percent increase in the discount rate would reduce the value of the asset by £11.4m (31 December 2022: £9.6m). A 1 percent decrease in the discount rate would increase the value of the asset by £13.3m (31 December 2022: £11.1m). Reconciliation of Level 3 fair value measurements of financial instruments Level 3 movement 31 December 2023 2022 £m £m At start of period 273.8 190.2 Additions – acquisition of subsidiary – 103.0 Total gains and losses recognised in the income statement (8.6 ) (30.0 ) Purchases 22.8 14.7 Settlements (10.8 ) (11.5 ) Exchange rate adjustment (4.2 ) 7.4 At the end of period 273.0 273.8 31 December Carrying amount Fair value 2023 2022 2023 2022 £m £m £m £m Financial liabilities Borrowings 207.9 212.0 155.4 157.0 Borrowings consist of the Tier 2 debt and an amount due in relation to financial reinsurance. The fair value of the Tier 2 debt is calculated using quoted prices in active markets and they are classified as Level 1 in the fair value hierarchy. The amount due in relation to financial reinsurance is fair valued with reference to market interest rates at the balance sheet date. There were no other transfers between Levels 1, 2 and 3 during the year. The group holds no Level 3 liabilities as at the balance sheet date. E5 Derivative financial instruments Chesnara entered into a foreign currency hedge which it rolled forward and slightly expanded in 2023. There are also derivatives held within the unit-linked and with-profits funds, except for an option to repay a financial reinsurance contract early, which comprises an embedded derivative. 31 December 2023 2022 Asset Liability Asset Liability £m £m £m £m Exchange-traded futures 0.2 – 0.1 (0.1 ) Foreign currency hedge – (4.4 ) – (3.5 ) Financial reinsurance embedded derivative 0.1 – – (0.2 ) Total 0.3 (4.4 ) 0.1 (3.8 ) Current 0.3 (4.4 ) 0.1 (3.7 ) Non-current – – – (0.1 ) Total 0.3 (4.4 ) 0.1 (3.8 ) Derivatives within unit-linked funds As part of its investment management strategy, the group purchases derivative financial instruments as part of its investment portfolio for unit-linked investment funds, which match the liabilities arising on its unit-linked insurance and investment business. A variety of equity futures are part of the portfolio matching the unit-linked investment and insurance liabilities. Derivatives are used to facilitate more efficient portfolio management allowing changes in investment strategy to be reflected by futures transactions rather than a high volume of transactions in the underlying assets. CHESNARAANNUALREPORTANDACCOUNTS2023203 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION E – BALANCE SHEET ASSETS E5 Derivative financial instruments (continued) Derivatives within unit-linked funds (continued) All the contracts are exchange-traded futures, with their fair value being the bid price at the balance sheet date. They are, accordingly, determined at Level 1 in the three-level fair value determination hierarchy set out in Note E4(b). Exchange-traded futures (by geographical investment market) 31 December 2023 2022 Asset Liability Asset Liability £m £m £m £m Europe – – – (0.1 ) Japan 0.2 – 0.1 – Total 0.2 – 0.1 (0.1 ) Financial reinsurance embedded derivative In respect of Movestic, the group has a reinsurance contract with a third party that has an element that is deemed to transfer significant insurance risk and an element that is deemed not to transfer significant insurance risk. This assessment has been determined by management based on the contractual terms of the reinsurance agreement. 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 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 rates at the balance sheet date. It is, accordingly, determined at Level 2 in the three-level fair value determination hierarchy set out in Note E4(b). Derivatives within CA (S&P with-profits funds) As part of its investment management strategy, CA enters into a limited range of derivative instruments to manage its exposure to various risks. CA uses equity index futures in order to economically hedge equity market risk in the with-profit funds’ investments. The change in fair value of the futures contracts is intended to offset the change in fair value of the underlying equities being hedged. CA settles the market value of the futures contracts on a daily basis by paying or receiving a variation margin. The futures contracts are not discounted as this daily settlement is equal to the change in fair value of the futures. As a result, there is no additional fair value to recognise in relation to these derivatives on the balance sheet at the year end. CA also purchases exchange rate futures to mitigate exchange rate risk within its with-profits funds. These contracts are exchange-traded contracts in active markets with their fair value being the bid price at the balance sheet date. They are, accordingly, determined at Level 1 in the three-level fair value determination hierarchy set out in Note E4(b). E6 Other assets 31 December 2023 2022 £m £m Receivables arising from investment contracts Reinsurers share of accrued policyholder claims 1.9 0.9 Receivables from policyholders 3.5 3.2 Commission receivables 0.1 0.1 Sub-total 5.5 4.2 Other receivables Accrued interest income 10.2 8.5 Receivables from fund management companies 3.3 1.4 Prepayments 13.7 8.5 Income tax balances 16.4 5.8 Other 8.6 18.0 Sub-total 52.2 42.2 Total 57.7 46.4 Current 54.9 45.6 Non-current 2.8 0.8 Total 57.7 46.4 204 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS E7 Cash and cash equivalents 31 December 2023 2022 £m £m Bank and cash balances 135.7 144.7 Call deposits due within 1 month – 59.9 Call deposits due after 1 month 10.3 – Total cash and cash equivalents 146.0 204.6 Bank overdrafts (0.2 ) – Cash and cash equivalents in the statement of cash flows 145.8 204.6 Short-term bank deposits are subject to a combination of fixed and variable interest rates, with an average maturity of 1 day (2022: 1 day). All deposits included in cash and cash equivalents were due to mature within 1 month of their acquisition. All balances are current and available on demand. Included in cash and cash equivalents held by the group are balances totalling £52.6m (2022: £81.6m) held in unit-linked policyholders’ funds. 31 December Foreign exchange 1 January Financing translation Other 31 December 2023 cash flows differences changes (ii ) 2023 £m £m £m £m £m Tier 2 debt 200.4 – – 0.2 200.6 Financial reinsurance 9.6 (3.9 ) (0.4 ) – 5.3 Lease liabilities 1.2 (0.6 ) (0.1 ) 0.7 1.2 Total 211.2 (4.5 ) (0.5 ) 0.9 207.1 31 December Foreign exchange 1 January Financing translation Other 31 December 2022 cash flows differences changes (ii ) 2022 £m £m £m £m £m Tier 2 debt – 200.0 – 0.4 200.4 Bank loan (i) 31.3 (31.2 ) (0.1 ) – – Financial reinsurance 15.9 (6.0 ) (0.3 ) – 9.6 Lease liabilities 2.0 (0.3 ) (0.5 ) – 1.2 Total 49.2 162.5 (0.9 ) 0.4 211.2 (i) The cash flows from bank loans and other borrowings make up the net amount of proceeds from borrowings and repayments of borrowings in the cash flow statement. (ii) Other changes include interest accruals and payments. CHESNARAANNUALREPORTANDACCOUNTS2023205 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION F – INSURANCE AND REINSURANCE CONTRACTS F1 Insurance and reinsurance contracts The following notes provide a quantitative analysis of the insurance and reinsurance contract assets and liabilities and are disaggregated by the IFRS 8 operating segments. This disaggregation has been chosen for the following notes because it is the groups view that together with the information in the Underwriting Risk section, it provides the most relevant information for assessing the effect that contracts within the scope of IFRS 17 have on the entity’s financial performance and position. (a) Composition of the balance sheet The following tables show the breakdown of the insurance and reinsurance contract assets and liabilities for each of the operating segments within Chesnara. Note A5(a)(i) provides details regarding broad product groups and measurement models. Note B2 provides details for the values of insurance and reinsurance contracts for the broad product groups within each segment. 31 December 2023 Waard Movestic Group Scildon ( UK ) (Swe d en ) (Netherlands ) (Netherlands ) Tot al £m £m £m £m £m Insurance contracts Insurance contract liabilities 1,383.0 171.8 785.3 1,862.9 4,203.0 Insurance contract assets (4.0 ) – – – (4.0 ) Net insurance contract liabilities 1,379.0 171.8 785.3 1,862.9 4,199.0 Reinsurance contracts Reinsurance contract assets 166.8 14.5 4.4 – 185.7 Reinsurance contract liabilities (2.2 ) – – (14.9 ) (17.1 ) Net reinsurance contract assets 164.6 14.5 4.4 (14.9 ) 168.6 Current Non-current Total £m £m £m Insurance contract liabilities 1,801.1 2,401.9 4,203.0 Insurance contract assets – (4.0 ) (4.0 ) Reinsurance contract assets 29.1 156.6 185.7 Reinsurance contract liabilities 2.1 (19.2 ) (17.1 ) 31 December 2022 Waard Movestic Group Scildon ( UK ) (Swe d en ) (Netherlands ) (Netherlands ) Tot al £m £m £m £m £m Insurance contracts Insurance contract liabilities 1,447.6 158.9 463.7 1,751.4 3,821.6 Insurance contract assets – – – – – Net insurance contract liabilities 1,447.6 158.9 463.7 1,751.4 3,821.6 Reinsurance contracts Reinsurance contract assets 174.7 15.8 3.5 – 194.0 Reinsurance contract liabilities (2.1 ) – – (15.2 ) (17.3 ) Net reinsurance contract assets 172.6 15.8 3.5 (15.2 ) 176.7 Current Non-current Total £m £m £m Insurance contract liabilities 651.4 3,170.2 3,821.6 Insurance contract assets – – – Reinsurance contract assets 33.8 160.2 194.0 Reinsurance contract liabilities (2.6 ) (14.7 ) (17.3 ) 206 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS (b) Fair value of underlying items The following table shows the fair value of the underlying items of the group’s direct participating contracts for each reporting segment. Waard Movestic Group Scildon ( UK ) (Swe d en ) (Netherlands ) (Netherlands ) Tot al £m £m £m £m £m Fair value of underlying items as at 31 December 2023 816.9 132.3 65.2 1,238.7 2,253.1 Fair value of underlying items as at 31 December 2022 953.0 118.5 74.4 1,126.0 2,271.9 Composition of underlying items The majority of the fair value of underlying items across the group are held in collective investment schemes. A small proportion is held in equities, debt securities and in cash and deposits. F2 Insurance and reinsurance contracts – quantitative analysis of recognised amounts – UK (a) Insurance contract balances – analysis by remaining coverage and incurred claims Liabilities for remaining coverage Excluding Liabilities loss Loss for incurred component component claims Total £m £m £m £m Insurance contract liabilities as at 1 January 2023 1,382.3 – 65.3 1,447.6 Changes in the statement of profit and loss Insurance revenue Contracts measured under the fair value approach (57.5 ) – – (57.5 ) Contracts measured under the full retrospective approach (8.3 ) – – (8.3 ) Insurance revenue total (65.8 ) – – (65.8 ) Insurance service expenses Incurred claims and other directly attributable expenses – (2.5 ) 53.2 50.7 Losses and reversals of losses on onerous contracts – 14.9 – 14.9 Insurance service expense total – 12.4 53.2 65.6 Insurance service result (65.8 ) 12.4 53.2 (0.2 ) Net finance expenses from insurance contracts 86.5 – – 86.5 Total amounts recognised in comprehensive income 20.7 12.4 53.2 86.3 Investment components (131.0 ) – 131.0 – Cash flows Premiums received 37.5 – – 37.5 Claims and other directly attributable expenses paid – – (183.8 ) (183.8 ) Acquisitions (8.6 ) – – (8.6 ) Total cash flows 28.9 – (183.8 ) (154.9 ) Insurance contract liabilities as at 31 December 2023 1,300.9 12.4 65.7 1,379.0 CHESNARAANNUALREPORTANDACCOUNTS2023207 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION F – INSURANCE AND REINSURANCE CONTRACTS F2 Insurance and reinsurance contracts – quantitative analysis of recognised amounts – UK (continued) (a) Insurance contract balances – analysis by remaining coverage and incurred claims (continued) Liabilities for Liabilities for remaining incurred coverage claims Total £m £m £m Insurance contract liabilities as at 1 January 2022 1,471.7 64.4 1,536.1 Changes in the statement of profit and loss Insurance revenue Contracts measured under the fair value approach (59.1 ) – (59.1 ) Contracts measured under the full retrospective approach (6.0 ) – (6.0 ) Insurance revenue total (65.1 ) – (65.1 ) Insurance service expenses Incurred claims and other directly attributable expenses – 58.2 58.2 Insurance service expense total – 58.2 58.2 Insurance service result (65.1 ) 58.2 (6.9 ) Net finance expenses from insurance contracts (161.6 ) – (161.6 ) Total amounts recognised in comprehensive income (226.7 ) 58.2 (168.5 ) Investment components (128.2 ) 128.2 – Cash flows Premiums received 33.3 – 33.3 Claims and other directly attributable expenses paid – (185.5 ) (185.5 ) Acquisitions 232.2 – 232.2 Total cash flows 265.5 (185.5 ) 80.0 Insurance contract liabilities as at 31 December 2022 1,382.3 65.3 1,447.6 There is no PAA business in the UK segment. Note A6(a) sets out the fair value methodology applied at transition that has been applied for the CA contracts in the UK. 208 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS (b) Insurance contract balances – analysis by measurement component – contracts not measured under PAA CSM (new contracts and CSM Present value contracts (contracts of future Risk measured measured cash flows adjustment under FRA ) under FVA ) Total £m £m £m £m £m Insurance contract liabilities as at 1 January 2023 1,397.1 13.2 1.1 36.2 1,447.6 Changes that relate to current service CSM recognised for services provided – – (1.4 ) (3.1 ) (4.5 ) Change in risk adjustment for non-financial risk for risk expired – (2.2 ) – – (2.2 ) Experience adjustments (8.2 ) – – – (8.2 ) Revenue recognised for incurred policyholder tax expenses (0.1 ) – – – (0.1 ) Total changes that relate to current service (8.3 ) (2.2 ) (1.4 ) (3.1 ) (15.0 ) Changes that relate to future service Contracts initially recognised in the period (12.0 ) 1.1 10.9 – – Changes in estimates that adjust the CSM 9.2 0.5 1.6 (11.3 ) – Changes in estimates that result in losses or reversals of losses on onerous underlying contracts 14.8 – – – 14.8 Total changes that relate to future service 12.0 1.6 12.5 (11.3 ) 14.8 Insurance service result 3.7 (0.6 ) 11.1 (14.4 ) (0.2 ) Net finance expenses from insurance contracts 84.4 0.7 0.7 0.7 86.5 Total amounts recognised in comprehensive income 88.1 0.1 11.8 (13.7 ) 86.3 Cash flows Premiums received 37.5 – – – 37.5 Claims and other directly attributable expenses paid (183.8 ) – – – (183.8 ) Acquisitions (8.6 ) – – – (8.6 ) Total cash flows (154.9 ) – – – (154.9 ) Insurance contract liabilities as at 31 December 2023 1,330.3 13.3 12.9 22.5 1,379.0 The contracts initially recognised in the period relate to the acquisition of the term assurance portfolio from Canada Life. CHESNARAANNUALREPORTANDACCOUNTS2023209 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION F – INSURANCE AND REINSURANCE CONTRACTS F2 Insurance and reinsurance contracts – quantitative analysis of recognised amounts – UK (continued) (b) Insurance contract balances – analysis by measurement component – contracts not measured under PAA (continued) CSM (new contracts and CSM Present value contracts (contracts of future Risk measured measured cash flows adjustment under FRA ) under FVA ) Total £m £m £m £m £m Insurance contract liabilities as at 1 January 2022 1,484.1 16.6 – 35.4 1,536.1 Changes that relate to current service CSM recognised for services provided – – (0.1 ) (5.4 ) (5.5 ) Change in risk adjustment for non-financial risk for risk expired – (2.4 ) – – (2.4 ) Experience adjustments 1.0 – – – 1.0 Total changes that relate to current service 1.0 (2.4 ) (0.1 ) (5.4 ) (6.9 ) Changes that relate to future service Contracts initially recognised in the period (7.1 ) 3.5 3.6 – – Changes in estimates that adjust the CSM (1.2 ) (2.2 ) (2.5 ) 5.9 – Total changes that relate to future service (8.3 ) 1.3 1.1 5.9 – Insurance service result (7.3 ) (1.1 ) 1.0 0.5 (6.9 ) Net finance expenses from insurance contracts (159.7 ) (2.3 ) 0.1 0.3 (161.6 ) Total amounts recognised in comprehensive income (167.0 ) (3.4 ) 1.1 0.8 (168.5 ) Cash flows Premiums received 33.3 – – – 33.3 Claims and other directly attributable expenses paid (185.5 ) – – – (185.5 ) Acquisitions 232.2 – – – 232.2 Total cash flows 80.0 – – – 80.0 Insurance contract liabilities as at 31 December 2022 1,397.1 13.2 1.1 36.2 1,447.6 The contracts initially recognised in the period relates to the acquisition of CASLP. 210 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS (c) Reinsurance contract balances – analysis by remaining coverage and incurred claims Assets for Assets for remaining incurred coverage claims Total £m £m £m Reinsurance contract assets as at 1 January 2023 156.6 16.0 172.6 Reinsurance expenses – allocation of reinsurance premiums paid (25.0 ) – (25.0 ) Amounts recoverable from reinsurers Recoveries of incurred claims and other directly attributable expenses – 19.5 19.5 Net (expenses)/income from reinsurance contracts held (25.0 ) 19.5 (5.5 ) Net finance expenses from reinsurance contracts 9.3 – 9.3 Total amounts recognised in comprehensive income (15.7 ) 19.5 3.8 Investment components (2.6 ) 2.6 – Cash flows Premiums paid 12.5 – 12.5 Recoveries from reinsurance contracts held – (24.3 ) (24.3 ) Total cash flows 12.5 (24.3 ) (11.8 ) Reinsurance contract assets as at 31 December 2023 150.8 13.8 164.6 Assets for Assets for remaining incurred coverage claims Total £m £m £m Reinsurance contract assets as at 1 January 2022 199.9 17.8 217.7 Reinsurance expenses – allocation of reinsurance premiums paid (26.4 ) – (26.4 ) Amounts recoverable from reinsurers Recoveries of incurred claims and other directly attributable expenses – 24.7 24.7 Net (expenses)/income from reinsurance contracts held (26.4 ) 24.7 (1.7 ) Net finance expenses from reinsurance contracts (24.1 ) – (24.1 ) Total amounts recognised in comprehensive income (50.5 ) 24.7 (25.8 ) Investment components (4.0 ) 4.0 – Cash flows Premiums paid 13.7 – 13.7 Recoveries from reinsurance contracts held – (30.5 ) (30.5 ) Acquisitions (2.5 ) – (2.5 ) Total cash flows 11.2 (30.5 ) (19.3 ) Reinsurance contract assets as at 31 December 2022 156.6 16.0 172.6 CHESNARAANNUALREPORTANDACCOUNTS2023 211 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION F – INSURANCE AND REINSURANCE CONTRACTS F2 Insurance and reinsurance contracts – quantitative analysis of recognised amounts – UK (continued) (d) Reinsurance contract balances – analysis by measurement component – contracts not measured under PAA CSM (new contracts and CSM Present value contracts (contracts of future Risk measured measured cash flows adjustment under FRA ) under FVA ) Total £m £m £m £m £m Reinsurance contract assets as at 1 January 2023 161.1 3.1 0.5 7.9 172.6 Changes that relate to current service CSM recognised for services received – – – (0.5 ) (0.5 ) Change in risk adjustment for non-financial risk for risk expired – (0.7 ) – – (0.7 ) Experience adjustments (4.3 ) – – – (4.3 ) Total changes that relate to current service (4.3 ) (0.7 ) – (0.5 ) (5.5 ) Changes that relate to future service Changes in estimates that adjust the CSM 1.5 0.5 (0.1 ) (1.9 ) – Total changes that relate to future service 1.5 0.5 (0.1 ) (1.9 ) – Net (expense)/income from reinsurance contracts held (2.8 ) (0.2 ) (0.1 ) (2.4 ) (5.5 ) Net finance income from reinsurance contracts held 9.1 0.1 – 0.1 9.3 Total amounts recognised in comprehensive income 6.3 (0.1 ) (0.1 ) (2.3 ) 3.8 Cash flows Premiums paid 12.5 – – – 12.5 Recoveries from reinsurance contracts held (24.3 ) – – – (24.3 ) Total cash flows (11.8 ) – – – (11.8 ) Reinsurance contract assets as at 31 December 2023 155.6 3.0 0.4 5.6 164.6 212 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS CSM (new contracts and CSM Present value contracts (contracts of future Risk measured measured cash flows adjustment under FRA ) under FVA ) Total £m £m £m £m £m Reinsurance contract assets as at 1 January 2022 206.0 4.3 – 7.4 217.7 Changes that relate to current service CSM recognised for services received – – – (1.0 ) (1.0 ) Change in risk adjustment for non-financial risk for risk expired – (0.8 ) – – (0.8 ) Experience adjustments 0.1 – – – 0.1 Total changes that relate to current service 0.1 (0.8 ) – (1.0 ) (1.7 ) Changes that relate to future service Contracts initially recognised in the period (0.4 ) 0.2 0.2 – – Changes in estimates that adjust the CSM (1.5 ) (0.2 ) 0.3 1.4 – Total changes that relate to future service (1.9 ) – 0.5 1.4 – Net (expense)/income from reinsurance contracts held (1.8 ) (0.8 ) 0.5 0.4 (1.7 ) Net finance income from reinsurance contracts held (23.8 ) (0.4 ) – 0.1 (24.1 ) Total amounts recognised in comprehensive income (25.6 ) (1.2 ) 0.5 0.5 (25.8 ) Cash flows Premiums paid 13.7 – – – 13.7 Recoveries from reinsurance contracts held (30.5 ) – – – (30.5 ) Acquisitions (2.5 ) – – – (2.5 ) Total cash flows (19.3 ) – – – (19.3 ) Reinsurance contract assets as at 31 December 2022 161.1 3.1 0.5 7.9 172.6 The contracts initially recognised in the period relates to the acquisition of CASLP. (e) Insurance contracts recognised in the period 2023 2022 £m £m Estimates of the present value of future cash inflows (31.5 ) (251.5 ) Estimates of the present value of future cash outflows Claims and other insurance service expenses payable 19.5 244.4 Insurance acquisition cash flows – – Total estimates of the present value of net future cash inflows/(outflows) (12.0 ) (7.1 ) Risk adjustment for non-financial risk 1.1 3.5 CSM 10.9 3.6 Total value of insurance contracts recognised in the period – – Insurance contracts recognised in the period relate to the acquisition of the term assurance portfolio from Canada Life in the current year and CASLP in the prior year. None of the acquired portfolios were onerous at initial recognition. CHESNARAANNUALREPORTANDACCOUNTS2023 213 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION F – INSURANCE AND REINSURANCE CONTRACTS F2 Insurance and reinsurance contracts – quantitative analysis of recognised amounts – UK (continued) (f) Reinsurance contracts recognised in the period 2023 2022 £m £m Estimates of the present value of future cash inflows – 3.2 Estimates of the present value of future cash outflows – (3.6 ) Risk adjustment for non-financial risk – 0.2 CSM – 0.2 Total value of reinsurance contracts recognised in the period – – Reinsurance contracts recognised in the prior year relate to the acquisition of CASLP. All of the portfolios acquired were originally in a net cost position. (g) Expected recognition of CSM In the tables that follow the CSM accrues interest at the locked-in rate for GMM portfolios and at current rates for VFA portfolios from the balance sheet date and is then amortised based on the coverage units of the contract groups to give the timeline of the expected recognition. 31 December 2023 Insurance Reinsurance contracts contracts £m £m Not later than one year 2.5 (0.5 ) Later than one year and not later than two years 2.4 (0.5 ) Later than two years and not later than three years 2.4 (0.5 ) Later than three years and not later than four years 2.2 (0.4 ) Later than four years and not later than five years 2.1 (0.4 ) Later than five years and not later than ten years 7.4 (1.6 ) Later than ten years 16.4 (2.1 ) Total 35.4 (6.0 ) 31 December 2022 Insurance Reinsurance contracts contracts £m £m Not later than one year 3.7 (0.9 ) Later than one year and not later than two years 2.8 (0.8 ) Later than two years and not later than three years 2.7 (0.8 ) Later than three years and not later than four years 2.4 (0.7 ) Later than four years and not later than five years 2.2 (0.7 ) Later than five years and not later than ten years 8.2 (2.3 ) Later than ten years 15.3 (2.2 ) Total 37.3 (8.4 ) 214 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS F3 Insurance and reinsurance contracts – quantitative analysis of recognised amounts – Movestic (a) Insurance contract balances – analysis by remaining coverage and incurred claims Liabilities for incurred claims Contracts under PAA Liabilities for For contracts PV of remaining not under future Risk coverage PAA cash flows adjustment Total £m £m £m £m £m Insurance contract liabilities as at 1 January 2023 119.1 – 38.2 1.6 158.9 Changes in the statement of profit and loss Insurance revenue Contracts measured under the fair value approach (0.7 ) – – – (0.7 ) Contracts measured under the full retrospective approach (10.4 ) – – – (10.4 ) Insurance revenue total (11.1 ) – – – (11.1 ) Insurance service expenses Incurred claims and other directly attributable expenses – 0.6 10.3 0.1 11.0 Adjustments to liabilities for incurred claims – – (3.4 ) (0.2 ) (3.6 ) Insurance service expense total – 0.6 6.9 (0.1 ) 7.4 Insurance service result (11.1 ) 0.6 6.9 (0.1 ) (3.7 ) Net finance expenses from insurance contracts 14.2 – 2.0 (0.2 ) 16.0 Effect of movements in exchange rates (2.8 ) – (1.1 ) (0.1 ) (4.0 ) Total amounts recognised in comprehensive income 0.3 0.6 7.8 (0.4 ) 8.3 Investment components (6.1 ) 6.1 – – – Cash flows Premiums received 20.2 – – – 20.2 Claims and other directly attributable expenses paid – (6.7 ) (8.9 ) – (15.6 ) Total cash flows 20.2 (6.7 ) (8.9 ) – 4.6 Insurance contract liabilities as at 31 December 2023 133.5 – 37.1 1.2 171.8 CHESNARAANNUALREPORTANDACCOUNTS2023 215 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION F – INSURANCE AND REINSURANCE CONTRACTS F3 Insurance and reinsurance contracts – quantitative analysis of recognised amounts – Movestic (continued) (a) Insurance contract balances – analysis by remaining coverage and incurred claims (continued) Liabilities for incurred claims Contracts under PAA Liabilities for For contracts PV of remaining not under future Risk coverage PAA cash flows adjustment Total £m £m £m £m £m Insurance contract liabilities as at 1 January 2022 138.2 – 46.7 2.2 187.1 Changes in the statement of profit and loss Insurance revenue Contracts measured under the fair value approach (0.7 ) – – – (0.7 ) Contracts measured under the full retrospective approach (11.9 ) – – – (11.9 ) Insurance revenue total (12.6 ) – – – (12.6 ) Insurance service expenses Incurred claims and other directly attributable expenses – 0.6 10.8 0.1 11.5 Adjustments to liabilities for incurred claims – – (6.6 ) (0.4 ) (7.0 ) Insurance service expense total – 0.6 4.2 (0.3 ) 4.5 Insurance service result (12.6 ) 0.6 4.2 (0.3 ) (8.1 ) Net finance expenses from insurance contracts (18.5 ) – (1.7 ) (0.3 ) (20.5 ) Effect of movements in exchange rates (3.1 ) – (1.0 ) – (4.1 ) Total amounts recognised in comprehensive income (34.2 ) 0.6 1.5 (0.6 ) (32.7 ) Investment components (6.7 ) 6.7 – – – Cash flows Premiums received 21.7 – – – 21.7 Claims and other directly attributable expenses paid – (7.3 ) (9.9 ) – (17.2 ) Total cash flows 21.7 (7.3 ) (9.9 ) – 4.5 Insurance contract liabilities as at 31 December 2022 119.0 – 38.3 1.6 158.9 The fair value approach was applied to all insurance contracts not measured under PAA in Movestic at transition. Note A6(a) provides further details relating to fair value methodology applied for contracts in Movestic. 216 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS (b) Insurance contract balances – analysis by measurement component – contracts not measured under PAA Present value of future Risk cash flows adjustment CSM Total £m £m £m £m Insurance contract liabilities as at 1 January 2023 111.4 1.1 4.5 117.0 Changes that relate to current service CSM recognised for services provided – – (0.3 ) (0.3 ) Change in risk adjustment for non-financial risk for risk expired – (0.1 ) – (0.1 ) Experience adjustments 0.3 – – 0.3 Total changes that relate to current service 0.3 (0.1 ) (0.3 ) (0.1 ) Changes that relate to future service Changes in estimates that adjust the CSM (0.8 ) 0.1 0.7 – Total changes that relate to future service (0.8 ) 0.1 0.7 – Insurance service result (0.5 ) – 0.4 (0.1 ) Net finance expenses from insurance contracts 14.0 – 0.2 14.2 Effect of movements in exchange rates (2.6 ) – (0.1 ) (2.7 ) Total amounts recognised in comprehensive income 10.9 – 0.5 11.4 Cash flows Premiums received 9.8 – – 9.8 Claims and other directly attributable expenses paid (6.7 ) – – (6.7 ) Total cash flows 3.1 – – 3.1 Insurance contract liabilities as at 31 December 2023 125.4 1.1 5.0 131.5 Present value of future Risk cash flows adjustment CSM Total £m £m £m £m Insurance contract liabilities as at 1 January 2022 129.4 1.4 5.7 136.5 Changes that relate to current service CSM recognised for services provided – – (0.2 ) (0.2 ) Change in risk adjustment for non-financial risk for risk expired – (0.1 ) – (0.1 ) Experience adjustments 0.2 – – 0.2 Total changes that relate to current service 0.2 (0.1 ) (0.2 ) (0.1 ) Changes that relate to future service Changes in estimates that adjust the CSM 1.1 (0.2 ) (0.9 ) – Total changes that relate to future service 1.1 (0.2 ) (0.9 ) – Insurance service result 1.3 (0.3 ) (1.1 ) (0.1 ) Net finance expenses from insurance contracts (18.5 ) – – (18.5 ) Effect of movements in exchange rates (2.9 ) – (0.1 ) (3.0 ) Total amounts recognised in comprehensive income (20.1 ) (0.3 ) (1.2 ) (21.6 ) Cash flows Premiums received 9.3 – – 9.3 Claims and other directly attributable expenses paid (7.2 ) – – (7.2 ) Total cash flows 2.1 – – 2.1 Insurance contract liabilities as at 31 December 2022 111.4 1.1 4.5 117.0 CHESNARAANNUALREPORTANDACCOUNTS2023217 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION F – INSURANCE AND REINSURANCE CONTRACTS F3 Insurance and reinsurance contracts – quantitative analysis of recognised amounts – Movestic (continued) (c) Reinsurance contract balances – analysis by remaining coverage and incurred claims Contracts under PAA Assets for incurred claims Assets for PV of remaining future Risk coverage cash flows adjustment Total £m £m £m £m Reinsurance contract assets as at 1 January 2023 0.3 15.2 0.3 15.8 Reinsurance expenses – allocation of reinsurance (2.5 ) – – (2.5 ) Amounts recoverable from reinsurers Recoveries of incurred claims and other directly attributable expenses – 3.1 0.1 3.2 Changes in the expected recoveries for past claims – (1.2 ) (0.1 ) (1.3 ) Net (expenses)/income from reinsurance contracts held (2.5 ) 1.9 – (0.6 ) Net finance expenses from reinsurance contracts – 0.8 (0.1 ) 0.7 Effect of movements in exchange rates – (0.4 ) – (0.4 ) Total amounts recognised in comprehensive income (2.5 ) 2.3 (0.1 ) (0.3 ) Cash flows Premiums paid net of ceding commission 1.6 – – 1.6 Recoveries from reinsurance contacts held – (2.6 ) – (2.6 ) Total cash flows 1.6 (2.6 ) – (1.0 ) Reinsurance contract assets as at 31 December 2023 (0.6 ) 14.9 0.2 14.5 Contracts under PAA Assets for incurred claims Assets for PV of remaining future Risk coverage cash flows adjustment Total £m £m £m £m Reinsurance contract assets as at 1 January 2022 (0.2 ) 18.6 0.6 19.0 Reinsurance expenses – allocation of reinsurance (2.3 ) – – (2.3 ) Amounts recoverable from reinsurers Recoveries of incurred claims and other directly attributable expenses – 2.7 – 2.7 Changes in the expected recoveries for past claims – (3.1 ) (0.2 ) (3.3 ) Net (expenses)/income from reinsurance contracts held (2.3 ) (0.4 ) (0.2 ) (2.9 ) Net finance expenses from reinsurance contracts – (0.4 ) (0.1 ) (0.5 ) Effect of movements in exchange rates – (0.4 ) – (0.4 ) Total amounts recognised in comprehensive income (2.3 ) (1.2 ) (0.3 ) (3.8 ) Cash flows Premiums paid net of ceding commission 2.8 – – 2.8 Recoveries from reinsurance contracts held – (2.2 ) – (2.2 ) Total cash flows 2.8 (2.2 ) – 0.6 Reinsurance contract assets as at 31 December 2022 0.3 15.2 0.3 15.8 218 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS (d) Reinsurance contract balances – analysis by measurement component – contracts not measured under PAA All Movestic reinsurance is measured as PAA, therefore no table is presented for analysis of reinsurance contracts by measurement component. (e) Insurance contracts recognised in the period There are no material new insurance contracts recognised in the period for Movestic. (f) Reinsurance contracts recognised in the period There are no material new reinsurance contracts recognised in the period for Movestic. (g) Expected recognition of CSM In the tables that follow the CSM accrues interest at the locked-in rate for GMM portfolios and at current rates for VFA portfolios from the balance sheet date and is then amortised based on the coverage units of the contract groups to give the timeline of the expected recognition. 31 December 2023 Insurance Reinsurance contracts contracts £m £m Not later than one year 0.1 – Later than one year and not later than two years 0.2 – Later than two years and not later than three years 0.2 – Later than three years and not later than four years 0.2 – Later than four years and not later than five years 0.2 – Later than five years and not later than ten years 0.9 – Later than ten years 3.2 – Total 5.0 – 31 December 2022 Insurance Reinsurance contracts contracts £m £m Not later than one year 0.1 – Later than one year and not later than two years 0.1 – Later than two years and not later than three years 0.1 – Later than three years and not later than four years 0.1 – Later than four years and not later than five years 0.1 – Later than five years and not later than ten years 0.7 – Later than ten years 3.3 – Total 4.5 – (h) Analysis of claims development Gross of reinsurance 2018 2019 2020 2021 2022 2023 £m £m £m £m £m £m Estimate of ultimates End of accident year – – – 10.2 8.3 9.2 One year later – – 10.0 8.5 7.5 Two years later – 10.0 8.6 9.0 Three years later 14.9 9.7 7.2 Four years later 14.2 9.7 Five years later 13.7 Current estimate of ultimate claims 13.7 9.7 7.2 9.0 7.5 9.2 Cumulative payments (9.7 ) (7.6 ) (5.1 ) (4.1 ) (4.0 ) (2.6 ) In balance sheet 4.0 2.1 2.1 4.9 3.5 6.6 Provision for accident years from 2018 to 2023 23.2 Provision for prior years 19.6 Effect of discounting (5.8 ) Gross liability in balance sheet 37.0 CHESNARAANNUALREPORTANDACCOUNTS2023219 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION F – INSURANCE AND REINSURANCE CONTRACTS F3 Insurance and reinsurance contracts – quantitative analysis of recognised amounts – Movestic (continued) (h) Analysis of claims development (continued) Net of reinsurance 2018 2019 2020 2021 2022 2023 £m £m £m £m £m £m Estimate of ultimates End of accident year – – – – 5.3 5.2 One year later – – – 5.4 4.9 Two years later – – 5.5 5.6 Three years later – 3.8 4.8 Four years later 7.3 3.7 Five years later 7.1 Current estimate of ultimate claims 7.1 3.7 4.8 5.6 4.9 5.2 Cumulative payments (4.3 ) (2.9 ) (3.5 ) (3.0 ) (3.0 ) (1.8 ) In balance sheet 2.8 0.8 1.3 2.6 1.9 3.4 Provision for accident years from 2018 to 2023 12.8 Provision for prior years 13.4 Effect of discounting (3.5 ) Net liability in balance sheet 22.7 The information in the tables above is presented on an undiscounted basis. F4 Insurance and reinsurance contracts – quantitative analysis of recognised amounts – Waard Group (a) Insurance contract balances – analysis by remaining coverage and incurred claims Liabilities for remaining coverage Excluding Liabilities loss Loss for incurred component component claims Total £m £m £m £m Insurance contract liabilities as at 1 January 2023 447.7 7.3 8.7 463.7 Changes in the statement of profit and loss Insurance revenue total (36.1 ) – – (36.1 ) Insurance service expenses Incurred claims and other directly attributable expenses – (2.1 ) 32.5 30.4 Losses and reversals of losses on onerous contracts – 7.4 – 7.4 Insurance service expense total – 5.3 32.5 37.8 Insurance service result (36.1 ) 5.3 32.5 1.7 Net finance expenses from insurance contracts 49.4 – – 49.4 Effect of movements in exchange rates (11.3 ) (0.2 ) (0.2 ) (11.7 ) Total amounts recognised in comprehensive income 2.0 5.1 32.3 39.4 Investment components (62.1 ) – 62.1 – Cash flows Premiums received 37.6 – – 37.6 Claims and other directly attributable expenses paid – – (92.0 ) (92.0 ) Acquisitions 336.6 – – 336.6 Total cash flows 374.2 – (92.0 ) 282.2 Insurance contract liabilities as at 31 December 2023 761.8 12.4 11.1 785.3 220 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS Liabilities for remaining coverage Excluding Liabilities loss Loss for incurred component component claims Total £m £m £m £m Insurance contract liabilities as at 1 January 2022 375.1 4.8 6.4 386.3 Changes in the statement of profit and loss Insurance revenue total (16.9 ) – – (16.9 ) Insurance service expenses Incurred claims and other directly attributable expenses – (1.1 ) 15.7 14.6 Losses and reversals of losses on onerous contracts – 3.2 – 3.2 Insurance service expense total – 2.1 15.7 17.8 Insurance service result (16.9 ) 2.1 15.7 0.9 Net finance expenses from insurance contracts (91.0 ) – – (91.0 ) Effect of movements in exchange rates 23.0 0.4 0.4 23.8 Total amounts recognised in comprehensive income (84.9 ) 2.5 16.1 (66.3 ) Investment components (56.1 ) – 56.1 – Cash flows Premiums received 32.5 – – 32.5 Claims and other directly attributable expenses paid – – (69.9 ) (69.9 ) Acquisitions 181.1 – – 181.1 Total cash flows 213.6 – (69.9 ) 143.7 Insurance contract liabilities as at 31 December 2022 447.7 7.3 8.7 463.7 For the Waard Group, the full retrospective approach at transition has been applied to all insurance contracts. CHESNARAANNUALREPORTANDACCOUNTS2023 221 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION F – INSURANCE AND REINSURANCE CONTRACTS F4 Insurance and reinsurance contracts – quantitative analysis of recognised amounts – Waard Group (continued) (b) Insurance contract balances – analysis by measurement component – contracts not measured under PAA (continued) Present value of future Risk cash flows adjustment CSM Total £m £m £m £m Insurance contract liabilities as at 1 January 2023 439.3 3.2 21.2 463.7 Changes that relate to current service CSM recognised for services provided – – (7.0 ) (7.0 ) Change in risk adjustment for non-financial risk for risk expired – (0.9 ) – (0.9 ) Experience adjustments 2.3 – – 2.3 Total changes that relate to current service 2.3 (0.9 ) (7.0 ) (5.6 ) Changes that relate to future service Contracts initially recognised in the period (52.6 ) 6.4 46.2 – Changes in estimates that adjust the CSM (15.4 ) (2.2 ) 17.6 – Changes in estimates that result in losses or reversals of losses on onerous underlying contracts 6.7 0.6 – 7.3 Total changes that relate to future service (61.3 ) 4.8 63.8 7.3 Insurance service result (59.0 ) 3.9 56.8 1.7 Net finance expenses from insurance contracts 46.6 1.0 1.8 49.4 Effect of movements in exchange rates (9.9 ) (0.2 ) (1.6 ) (11.7 ) Total amounts recognised in comprehensive income (22.3 ) 4.7 57.0 39.4 Cash flows Premiums received 37.6 – – 37.6 Claims and other directly attributable expenses paid (92.0 ) – – (92.0 ) Acquisitions 336.6 – – 336.6 Total cash flows 282.2 – – 282.2 Insurance contract liabilities as at 31 December 2023 699.2 7.9 78.2 785.3 The contracts initially recognised in the period relates to the acquisition of Conservatrix. 222 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS Present value of future Risk cash flows adjustment CSM Total £m £m £m £m Insurance contract liabilities as at 1 January 2022 370.5 3.8 12.0 386.3 Changes that relate to current service CSM recognised for services provided – – (3.7 ) (3.7 ) Change in risk adjustment for non-financial risk for risk expired – (0.6 ) – (0.6 ) Experience adjustments 2.1 – – 2.1 Total changes that relate to current service 2.1 (0.6 ) (3.7 ) (2.2 ) Changes that relate to future service Contracts initially recognised in the period (2.4 ) 0.4 2.1 0.1 Changes in estimates that adjust the CSM (14.8 ) 5.1 9.7 – Changes in estimates that result in losses or reversals of losses on onerous underlying contracts 7.9 (4.9 ) – 3.0 Total changes that relate to future service (9.3 ) 0.6 11.8 3.1 Insurance service result (7.2 ) – 8.1 0.9 Net finance expenses from insurance contracts (90.3 ) (0.8 ) 0.1 (91.0 ) Effect of movements in exchange rates 22.6 0.2 1.0 23.8 Total amounts recognised in comprehensive income (74.9 ) (0.6 ) 9.2 (66.3 ) Cash flows Premiums received 32.5 – – 32.5 Claims and other directly attributable expenses paid (69.9 ) – – (69.9 ) Acquisitions 181.1 – – 181.1 Total cash flows 143.7 – – 143.7 Insurance contract liabilities as at 31 December 2022 439.3 3.2 21.2 463.7 The contracts initially recognised in the period relates to the acquisition of Robein in 2022. (c) Reinsurance contract balances – analysis by remaining coverage and incurred claims Assets for Assets for remaining incurred coverage claims Total £m £m £m Reinsurance contract assets as at 1 January 2023 1.6 1.9 3.5 Reinsurance expenses – allocation of reinsurance premiums paid (3.0 ) – (3.0 ) Amounts recoverable from reinsurers Recoveries of incurred claims and other directly attributable expenses – 3.4 3.4 Net (expenses)/income from reinsurance contracts held (3.0 ) 3.4 0.4 Net finance expenses from reinsurance contracts 0.1 – 0.1 Total amounts recognised in comprehensive income (2.9 ) 3.4 0.5 Cash flows Premiums paid 4.1 – 4.1 Recoveries from reinsurance contracts held – (3.7 ) (3.7 ) Total cash flows 4.1 (3.7 ) 0.4 Reinsurance contract assets as at 31 December 2023 2.8 1.6 4.4 CHESNARAANNUALREPORTANDACCOUNTS2023223 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION F – INSURANCE AND REINSURANCE CONTRACTS F4 Insurance and reinsurance contracts – quantitative analysis of recognised amounts – Waard Group (continued) (c) Reinsurance contract balances – analysis by remaining coverage and incurred claims (continued) Assets for Assets for remaining incurred coverage claims Total £m £m £m Reinsurance contract assets as at 1 January 2022 3.5 2.2 5.7 Reinsurance expenses – allocation of reinsurance premiums paid (5.5 ) – (5.5 ) Amounts recoverable from reinsurers Recoveries of incurred claims and other directly attributable expenses – 3.9 3.9 Net (expenses)/income from reinsurance contracts held (5.5 ) 3.9 (1.6 ) Net finance expenses from reinsurance contracts (0.3 ) – (0.3 ) Effect of movements in exchange rates 0.1 0.1 0.2 Total amounts recognised in comprehensive income (5.7 ) 4.0 (1.7 ) Cash flows Premiums paid 3.8 – 3.8 Recoveries from reinsurance contracts held – (4.3 ) (4.3 ) Total cash flows 3.8 (4.3 ) (0.5 ) Reinsurance contract assets as at 31 December 2022 1.6 1.9 3.5 For the Waard Group, the full retrospective approach at transition has been applied to all reinsurance contracts. (d) Reinsurance contract balances – analysis by measurement component – contracts not measured under PAA Present value of future Risk cash flows adjustment CSM Total £m £m £m £m Reinsurance contract assets as at 1 January 2023 3.6 0.5 (0.6 ) 3.5 Changes that relate to current service CSM recognised for services received – – 2.2 2.2 Change in risk adjustment for non-financial risk for risk expired – (0.2 ) – (0.2 ) Experience adjustments (0.8 ) – – (0.8 ) Total changes that relate to current service (0.8 ) (0.2 ) 2.2 1.2 Changes that relate to future service Changes in estimates that adjust the CSM (0.2 ) (0.1 ) 0.3 – CSM adjustment for income on initial recognition of onerous underlying contracts – – (0.8 ) (0.8 ) Total changes that relate to future service (0.2 ) (0.1 ) (0.5 ) (0.8 ) Net (expense)/income from reinsurance contracts held (1.0 ) (0.3 ) 1.7 0.4 Net finance income from reinsurance contracts held 0.1 – – 0.1 Total amounts recognised in comprehensive income (0.9 ) (0.3 ) 1.7 0.5 Cash flows Premiums paid 4.1 – – 4.1 Recoveries from reinsurance contracts held (3.7 ) – – (3.7 ) Total cash flows 0.4 – – 0.4 Reinsurance contract assets as at 31 December 2023 3.1 0.2 1.1 4.4 224 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS Present value of future Risk cash flows adjustment CSM Total £m £m £m £m Reinsurance contract assets as at 1 January 2022 4.6 0.8 0.3 5.7 Changes that relate to current service CSM recognised for services received – – (0.9 ) (0.9 ) Change in risk adjustment for non-financial risk for risk expired – (0.2 ) – (0.2 ) Experience adjustments (0.5 ) – – (0.5 ) Total changes that relate to current service (0.5 ) (0.2 ) (0.9 ) (1.6 ) Net (expense)/income from reinsurance contracts held (0.5 ) (0.2 ) (0.9 ) (1.6 ) Net finance income from reinsurance contracts held (0.2 ) (0.1 ) – (0.3 ) Effect of movements in exchange rates 0.2 – – 0.2 Total amounts recognised in comprehensive income (0.5 ) (0.3 ) (0.9 ) (1.7 ) Cash flows Premiums paid 3.8 – – 3.8 Recoveries from reinsurance contracts held (4.3 ) – – (4.3 ) Total cash flows (0.5 ) – – (0.5 ) Reinsurance contract assets as at 31 December 2022 3.6 0.5 (0.6 ) 3.5 (e) Insurance contracts recognised in the period In the tables that follow, all insurance and reinsurance contracts recognised in 2023 are in respect of the Conservatrix acquisition. See Note I8 for further details. For 2022, all insurance and reinsurance contracts recognised are from the Robein acquisition. Year Ended 31 December 2023 Non-onerous Onerous contracts contracts Total £m £m £m Estimates of the present value of future cash inflows (346.6 ) – (346.6 ) Estimates of the present value of future cash outflows Claims and other insurance service expenses payable 294.1 – 294.1 Total estimates of the present value of future net outflows (52.5 ) – (52.5 ) Risk adjustment for non-financial risk 6.3 – 6.3 CSM 46.2 – 46.2 Losses recognised on initial recognition – – – CHESNARAANNUALREPORTANDACCOUNTS2023225 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION F – INSURANCE AND REINSURANCE CONTRACTS F4 Insurance and reinsurance contracts – quantitative analysis of recognised amounts – Waard Group (continued) (e) Insurance contracts recognised in the period (continued) Year Ended 31 December 2022 Non-onerous Onerous contracts contracts Total £m £m £m Estimates of the present value of future cash inflows (180.5 ) (0.4 ) (180.9 ) Estimates of the present value of future cash outflows Claims and other insurance service expenses payable 178.0 0.5 178.5 Total estimates of the present value of future net cash outflows (2.5 ) 0.1 (2.4 ) Risk adjustment for non-financial risk 0.4 – 0.4 CSM 2.1 – 2.1 Losses recognised on initial recognition – 0.1 0.1 (f) Reinsurance contracts recognised in the period There are no material new reinsurance contracts recognised in the period for Waard. (g) Expected recognition of CSM In the tables that follow the CSM accrues interest at the locked-in rate for GMM portfolios and at current rates for VFA portfolios from the balance sheet date and is then amortised based on the coverage units of the contract groups to give the timeline of the expected recognition. 31 December 2023 Insurance Reinsurance contracts contracts £m £m Not later than one year 4.9 (1.0 ) Later than one year and not later than two years 4.4 0.6 Later than two years and not later than three years 4.0 (0.2 ) Later than three years and not later than four years 3.7 (0.1 ) Later than four years and not later than five years 3.4 (0.1 ) Later than five years and not later than ten years 13.0 (0.3 ) Later than ten years 44.8 – Total 78.2 (1.1 ) 31 December 2022 Insurance Reinsurance contracts contracts £m £m Not later than one year 3.5 0.1 Later than one year and not later than two years 3.2 0.1 Later than two years and not later than three years 2.6 0.1 Later than three years and not later than four years 2.2 0.1 Later than four years and not later than five years 1.9 0.1 Later than five years and not later than ten years 5.6 0.1 Later than ten years 2.2 – Total 21.2 0.6 226 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS F5 Insurance and reinsurance contracts – quantitative analysis of recognised amounts – Scildon (a) Insurance contract balances – analysis by remaining coverage and incurred claims Liabilities for remaining coverage Excluding Liabilities loss Loss for incurred component component claims Total £m £m £m £m Insurance contract liabilities as at 1 January 2023 1,633.1 76.3 42.0 1,751.4 Changes in the statement of profit and loss Insurance revenue total (115.0 ) – – (115.0 ) Insurance service expenses Incurred claims and other directly attributable expenses – (45.8 ) 120.9 75.1 Losses and reversals of losses on onerous contracts – 35.4 – 35.4 Amortisation of insurance acquisition cash flows 3.4 – – 3.4 Insurance service expense total 3.4 (10.4 ) 120.9 113.9 Insurance service result (111.6 ) (10.4 ) 120.9 (1.1 ) Net finance expenses from insurance contracts 162.6 0.4 – 163.0 Effect of movements in exchange rates (37.5 ) (1.7 ) (0.9 ) (40.1 ) Total amounts recognised in comprehensive income 13.5 (11.7 ) 120.0 121.8 Investment components (110.6 ) – 110.6 – Cash flows Premiums received 231.3 – – 231.3 Claims and other directly attributable expenses paid – – (236.0 ) (236.0 ) Insurance acquisition cash flows (5.6 ) – – (5.6 ) Total cash flows 225.7 – (236.0 ) (10.3 ) Insurance contract liabilities as at 31 December 2023 1,761.7 64.6 36.6 1,862.9 CHESNARAANNUALREPORTANDACCOUNTS2023227 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION F – INSURANCE AND REINSURANCE CONTRACTS F5 Insurance and reinsurance contracts – quantitative analysis of recognised amounts – Scildon (continued) (a) Insurance contract balances – analysis by remaining coverage and incurred claims (continued) Liabilities for remaining coverage Excluding Liabilities loss Loss for incurred component component claims Total £m £m £m £m Insurance contract liabilities as at 1 January 2022 1,820.4 60.9 41.2 1,922.5 Changes in the statement of profit and loss Insurance revenue total (130.5 ) – – (130.5 ) Insurance service expenses Incurred claims and other directly attributable expenses – (18.2 ) 110.9 92.7 Losses and reversals of losses on onerous contracts – 29.4 – 29.4 Amortisation of insurance acquisition cash flows 3.5 – – 3.5 Insurance service expense total 3.5 11.2 110.9 125.6 Insurance service result (127.0 ) 11.2 110.9 (4.9 ) Net finance expenses from insurance contracts (276.0 ) 0.3 – (275.7 ) Effect of movements in exchange rates 90.1 3.9 2.2 96.2 Total amounts recognised in comprehensive income (312.9 ) 15.4 113.1 (184.4 ) Investment components (108.0 ) – 108.0 – Cash flows Premiums received 240.3 – – 240.3 Claims and other directly attributable expenses paid – – (220.3 ) (220.3 ) Insurance acquisition cash flows (6.7 ) – – (6.7 ) Total cash flows 233.6 – (220.3 ) 13.3 Insurance contract liabilities as at 31 December 2022 1,633.1 76.3 42.0 1,751.4 For Scildon, the full retrospective approach at transition has been applied to all insurance contracts. 228 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS (b) Insurance contract balances – analysis by measurement component – contracts not measured under PAA Present value of future Risk cash flows adjustment CSM Total £m £m £m £m Insurance contract liabilities as at 1 January 2023 1,639.5 28.5 83.4 1,751.4 Changes that relate to current service CSM recognised for services provided – – (9.0 ) (9.0 ) Change in risk adjustment for non-financial risk for risk expired – (3.5 ) – (3.5 ) Experience adjustments (24.0 ) – – (24.0 ) Total changes that relate to current service (24.0 ) (3.5 ) (9.0 ) (36.5 ) Changes that relate to future service Contracts initially recognised in the period (11.2 ) 2.6 11.5 2.9 Changes in estimates that adjust the CSM 3.6 1.7 (5.3 ) – Changes in estimates that result in losses or reversals of losses on onerous underlying contracts 33.1 (0.6 ) – 32.5 Total changes that relate to future service 25.5 3.7 6.2 35.4 Insurance service result 1.5 0.2 (2.8 ) (1.1 ) Net finance expenses from insurance contracts 159.9 2.2 0.9 163.0 Effect of movements in exchange rates (37.5 ) (0.7 ) (1.9 ) (40.1 ) Total amounts recognised in comprehensive income 123.9 1.7 (3.8 ) 121.8 Cash flows Premiums received 231.3 – – 231.3 Claims and other directly attributable expenses paid (236.0 ) – – (236.0 ) Insurance acquisition cash flows (5.6 ) – – (5.6 ) Total cash flows (10.3 ) – – (10.3 ) Insurance contract liabilities as at 31 December 2023 1,753.1 30.2 79.6 1,862.9 CHESNARAANNUALREPORTANDACCOUNTS2023229 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION F – INSURANCE AND REINSURANCE CONTRACTS F5 Insurance and reinsurance contracts – quantitative analysis of recognised amounts – Scildon (continued) (b) Insurance contract balances – analysis by measurement component – contracts not measured under PAA (continued) Present value of future Risk cash flows adjustment CSM Total £m £m £m £m Insurance contract liabilities as at 1 January 2022 1,788.2 33.0 101.3 1,922.5 Changes that relate to current service CSM recognised for services provided – – (10.3 ) (10.3 ) Change in risk adjustment for non-financial risk for risk expired – (3.8 ) – (3.8 ) Experience adjustments (20.2 ) – – (20.2 ) Total changes that relate to current service (20.2 ) (3.8 ) (10.3 ) (34.3 ) Changes that relate to future service Contracts initially recognised in the period (11.6 ) 5.2 13.4 7.0 Changes in estimates that adjust the CSM 22.7 3.2 (25.9 ) – Changes in estimates that result in losses or reversals of losses on onerous underlying contracts 22.5 (0.1 ) – 22.4 Total changes that relate to future service 33.6 8.3 (12.5 ) 29.4 Insurance service result 13.4 4.5 (22.8 ) (4.9 ) Net finance expenses from insurance contracts (265.3 ) (10.6 ) 0.2 (275.7 ) Effect of movements in exchange rates 89.9 1.6 4.7 96.2 Total amounts recognised in comprehensive income (162.0 ) (4.5 ) (17.9 ) (184.4 ) Cash flows Premiums received 240.3 – – 240.3 Claims and other directly attributable expenses paid (220.3 ) – – (220.3 ) Insurance acquisition cash flows (6.7 ) – – (6.7 ) Total cash flows 13.3 – – 13.3 Insurance contract liabilities as at 31 December 2022 1,639.5 28.5 83.4 1,751.4 230 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS (c) Reinsurance contract balances – analysis by remaining coverage and incurred claims Assets for remaining coverage Excluding Loss- Assets for loss-recovery recovery incurred component component claims Total £m £m £m £m Reinsurance contract assets as at 1 January 2023 (28.4 ) 4.5 8.7 (15.2 ) Reinsurance expenses – allocation of reinsurance premiums paid (21.8 ) – – (21.8 ) Amounts recoverable from reinsurers Recoveries of incurred claims and other directly attributable expenses – – 17.3 17.3 Changes in the loss-recovery component – 1.8 – 1.8 Net (expenses)/income from reinsurance contracts held (21.8 ) 1.8 17.3 (2.7 ) Net finance expenses from reinsurance contracts (3.4 ) – – (3.4 ) Effect of movements in exchange rates 0.6 (0.1 ) (0.2 ) 0.3 Total amounts recognised in comprehensive income (24.6 ) 1.7 17.1 (5.8 ) Cash flows Premiums paid 24.0 – – 24.0 Recoveries from reinsurance contracts held – – (17.9 ) (17.9 ) Total cash flows 24.0 – (17.9 ) 6.1 Reinsurance contract assets as at 31 December 2023 (29.0 ) 6.2 7.9 (14.9 ) Assets for remaining coverage Excluding Loss- Assets for loss-recovery recovery incurred component component claims Total £m £m £m £m Reinsurance contract assets as at 1 January 2022 (40.8 ) 2.5 5.1 (33.2 ) Reinsurance expenses – allocation of reinsurance premiums paid (19.8 ) – – (19.8 ) Amounts recoverable from reinsurers Recoveries of incurred claims and other directly attributable expenses – – 18.5 18.5 Changes in the loss-recovery component – 1.8 – 1.8 Net (expenses)/income from reinsurance contracts held (19.8 ) 1.8 18.5 0.5 Net finance expenses from reinsurance contracts 11.8 – – 11.8 Effect of movements in exchange rates (1.7 ) 0.2 0.4 (1.1 ) Total amounts recognised in comprehensive income (9.7 ) 2.0 18.9 11.2 Cash flows Premiums paid 22.1 – – 22.1 Recoveries from reinsurance contracts held – – (15.3 ) (15.3 ) Total cash flows 22.1 – (15.3 ) 6.8 Reinsurance contract assets as at 31 December 2022 (28.4 ) 4.5 8.7 (15.2 ) For Scildon, the full retrospective approach at transition has been applied to all reinsurance contracts. CHESNARAANNUALREPORTANDACCOUNTS2023 231 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION F – INSURANCE AND REINSURANCE CONTRACTS F5 Insurance and reinsurance contracts – quantitative analysis of recognised amounts – Scildon (continued) (d) Reinsurance contract balances – analysis by measurement component – contracts not measured under PAA Present value of future Risk cash flows adjustment CSM Total £m £m £m £m Reinsurance contract assets as at 1 January 2023 (52.1 ) 10.7 26.2 (15.2 ) Changes that relate to current service CSM recognised for services received – – (2.7 ) (2.7 ) Change in risk adjustment for non-financial risk for risk expired – (1.3 ) – (1.3 ) Experience adjustments (1.0 ) – – (1.0 ) Total changes that relate to current service (1.0 ) (1.3 ) (2.7 ) (5.0 ) Changes that relate to future service Contracts initially recognised in the period (3.1 ) 0.9 2.2 – Changes in estimates that adjust the CSM 1.5 1.3 (2.8 ) – CSM adjustment for income on initial recognition of onerous underlying contracts – – 0.5 0.5 Changes in recoveries of losses on onerous underlying contracts that adjust the CSM – – 1.8 1.8 Total changes that relate to future service (1.6 ) 2.2 1.7 2.3 Net (expense)/income from reinsurance contracts held (2.6 ) 0.9 (1.0 ) (2.7 ) Net finance income from reinsurance contracts held (4.3 ) 0.6 0.3 (3.4 ) Effect of movements in exchange rates 1.1 (0.2 ) (0.6 ) 0.3 Total amounts recognised in comprehensive income (5.8 ) 1.3 (1.3 ) (5.8 ) Cash flows Premiums paid 24.0 – – 24.0 Recoveries from reinsurance contracts held (17.9 ) – – (17.9 ) Total cash flows 6.1 – – 6.1 Reinsurance contract assets as at 31 December 2023 (51.8 ) 12.0 24.9 (14.9 ) 232 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS Present value of future Risk cash flows adjustment CSM Total £m £m £m £m Reinsurance contract assets as at 1 January 2022 (70.5 ) 10.2 27.1 (33.2 ) Changes that relate to current service CSM recognised for services received – – (2.7 ) (2.7 ) Change in risk adjustment for non-financial risk for risk expired – (1.1 ) – (1.1 ) Experience adjustments 2.8 – – 2.8 Total changes that relate to current service 2.8 (1.1 ) (2.7 ) (1.0 ) Changes that relate to future service Contracts initially recognised in the period (4.9 ) 1.4 3.5 – Changes in estimates that adjust the CSM 2.8 2.0 (4.8 ) – CSM adjustment for income on initial recognition of onerous underlying contracts – – 1.4 1.4 Changes in recoveries of losses on onerous underlying contracts that adjust the CSM – – 0.1 0.1 Total changes that relate to future service (2.1 ) 3.4 0.2 1.5 Net (expense)/income from reinsurance contracts held 0.7 2.3 (2.5 ) 0.5 Net finance income from reinsurance contracts held 14.0 (2.4 ) 0.2 11.8 Effect of movements in exchange rates (3.1 ) 0.6 1.4 (1.1 ) Total amounts recognised in comprehensive income 11.6 0.5 (0.9 ) 11.2 Cash flows Premiums paid 22.1 – – 22.1 Recoveries from reinsurance contracts held (15.3 ) – – (15.3 ) Total cash flows 6.8 – – 6.8 Reinsurance contract assets as at 31 December 2022 (52.1 ) 10.7 26.2 (15.2 ) (e) Insurance contracts recognised in the period Year Ended 31 December 2023 Non-onerous Onerous contracts contracts Total £m £m £m Estimates of the present value of future cash inflows (113.1 ) (46.2 ) (159.3 ) Estimates of the present value of future cash outflows Claims and other insurance service expenses payable 98.3 47.3 145.6 Insurance acquisition cash flows 1.4 1.0 2.4 Total estimates of the present value of future cash outflows 99.7 48.3 148.0 Risk adjustment for non-financial risk 1.9 0.8 2.7 CSM 11.5 – 11.5 Losses recognised on initial recognition – 2.9 2.9 CHESNARAANNUALREPORTANDACCOUNTS2023233 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION F – INSURANCE AND REINSURANCE CONTRACTS F5 Insurance and reinsurance contracts – quantitative analysis of recognised amounts – Scildon (continued) (e) Insurance contracts recognised in the period (continued) Year Ended 31 December 2022 Non-onerous Onerous contracts contracts Total £m £m £m Estimates of the present value of future cash inflows (134.5 ) (98.6 ) (233.1 ) Estimates of the present value of future cash outflows: Claims and other insurance service expenses payable 1.6 1.9 3.5 Insurance acquisition cash flows 116.5 101.5 218.0 Total estimates of the present value of future cash outflows 118.1 103.4 221.5 Risk adjustment for non-financial risk 3.0 2.2 5.2 CSM 13.4 – 13.4 Losses recognised on initial recognition – 7.0 7.0 All insurance contracts above are in respect of new business written. (f) Reinsurance contracts recognised in the period 2023 2022 £m £m Estimates of the present value of future cash inflows 12.5 20.5 Estimates of the present value of future cash outflows (15.6 ) (25.4 ) Risk adjustment for non-financial risk 0.9 1.4 CSM 2.2 3.5 Total value of reinsurance contracts recognised in the period – – All of the portfolios acquired were originally in a net cost position. All reinsurance contracts above are in respect of new business written. (g) Expected recognition of CSM In the tables that follow the CSM accrues interest at the locked-in rate for GMM portfolios and at current rates for VFA portfolios from the balance sheet date and is then amortised based on the coverage units of the contract groups to give the timeline of the expected recognition. 31 December 2023 Insurance Reinsurance contracts contracts £m £m Not later than one year 8.1 (2.3 ) Later than one year and not later than two years 7.5 (2.1 ) Later than two years and not later than three years 6.9 (2.0 ) Later than three years and not later than four years 6.3 (1.9 ) Later than four years and not later than five years 5.7 (1.7 ) Later than five years and not later than ten years 21.1 (6.9 ) Later than ten years 24.0 (8.0 ) Total 79.6 (24.9 ) 234 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS 31 December 2022 Insurance Reinsurance contracts contracts £m £m Not later than one year 8.8 (3.8 ) Later than one year and not later than two years 8.1 (1.1 ) Later than two years and not later than three years 7.4 (2.2 ) Later than three years and not later than four years 6.8 (2.0 ) Later than four years and not later than five years 6.2 (1.9 ) Later than five years and not later than ten years 22.8 (7.2 ) Later than ten years 23.3 (8.0 ) Total 83.4 (26.2 ) SECTION G – BALANCE SHEET LIABILITIES G1 Other provisions 2023 2022 £m £m Balance at I January 8.7 1.7 Additions – Arising on acquisition 12.3 9.8 Charge in the year 7.1 0.2 Amounts utilised during the year (4.8 ) (3.0 ) Foreign exchange translation difference (0.1 ) – Balance at 3I December 23.2 8.7 The increase other provisions during the year is as a result of the following items: (iii) Liabilities acquired as part of the Conservatrix acquisition The contracts acquired in the acquisition of Conservatrix by Waard Leven (see Note I8) included £12.6m of liabilities relating to obligations to former employees of Conservatrix under a now closed defined benefit pension scheme. The liabilities are valued under IAS 19. The pension scheme is closed to new entrants with no further benefits accruing and as such the exposure for Waard Leven is limited to the longevity risk of the contracts. Waard Leven is regulated by De Nederlandsche Bank (DNB) and the Netherlands Authority for financial markets. As such, there is no requirement to hold plan assets against these liabilities, instead the liabilities are assessed as part of the SII requirements and as a result of this assessment there are considered to be sufficient general account assets to meet the obligation related to these pension policies. (iv) Provision established for the costs associated with outsourced UK administration services During 2023, Chesnara initiated a ‘Transition and Transformation’ programme in respect of its UK business. This programme includes activities related to both (i) the integration of the recently acquired CASLP and Canada Life businesses into the standard UK model and (ii) the restructure of the administration outsourcing arrangements for the UK business including the migration of most of the policies onto a new platform architecture with SS&C. An assessment of the proposed project costs has been conducted in accordance with the requirements of IAS 37 and as a result of this assessment a provision of £4.6m was established during the year. There are also provisions at the year end relating to the mis-selling of contracts in the UK £2.7m (31 December 2022: £5.2m). CHESNARAANNUALREPORTANDACCOUNTS2023235 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION G – BALANCE SHEET LIABILITIES G2 Lease liabilities The group leases several assets including office buildings and an immaterial amount of office and IT equipment and motor vehicles. Maturity analysis 31 December 2023 Carrying value 0-1 year 1-2 years 2-5 years Total £m £m £m £m £m Non-investment property 1.2 0.6 0.3 0.3 1.2 Total 1.2 0.6 0.3 0.3 1.2 Current 0.6 Non-current 0.6 Total 1.2 Maturity analysis 31 December 2022 Carrying value 0-1 year 1-2 years 2-5 years Total £m £m £m £m £m Non-investment property 1.2 0.6 0.6 – 1.2 Total 1.2 0.6 0.6 – 1.2 Current 0.6 Non-current 0.6 Total 1.2 G3 Borrowings Group 31 December 2023 2022 £m £m Tier 2 debt 200.6 200.4 Amount due in relation to financial reinsurance 5.3 11.6 Term finance 2.0 – Total 207.9 212.0 Current 203.4 204.3 Non-current 4.5 7.7 Total 207.9 212.0 In 2022, an existing bank loan was fully repaid and replaced by Tier 2 Subordinated Notes Debt. The fair value of amounts due in relation to Tier 2 debt at 31 December 2023 was £148.4m (31 December 2022: £148.0m). The fair value of amounts due in relation to financial reinsurance at 31 December 2023 was £5.1m (31 December 2022: £9.0m). Term finance comprises capital amounts outstanding on mortgage bonds taken out over properties held in the unit-linked policyholder funds in the UK. The mortgage over each such property is negotiated separately, varies in term from 5 to 20 years, and bears interest at fixed or floating rates that are agreed at the time of inception of the mortgage. The fair value of the term finance is not materially different to the carrying value shown above. 236 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS G4 Deferred tax assets and liabilities Deferred tax assets and liabilities comprise: 31 December 2023 2022 £m £m Net deferred tax liabilities: UK and other group activities (8.3 ) (28.9 ) Movestic – (0.2 ) Waard Group 35.0 4.1 Scildon 3.6 4.9 Total 30.3 (20.1 ) Current – (0.1 ) Non-current 30.3 (20.0 ) Total 30.3 (20.1 ) (a) CA and other group activities: Recognised deferred tax assets and liabilities 31 December 2022 Credit/ 2023 Assets/ (charge ) Assets/ (liabilities ) in year (liabilities ) £m £m £m Profit arising on transition to new tax regime – – – Deferred acquisition costs 1.5 (0.5 ) 1.0 Deferred income 0.5 (0.1 ) 0.4 Acquired value in-force (33.6 ) 19.6 (14.0 ) Property, plant and equipment 0.1 – 0.1 Tax losses on pensions business 1.2 (0.1 ) 1.1 Unrealised and deferred investment gains (13.7 ) (9.5 ) (23.2 ) Excess expenses of management 12.5 14.4 26.9 Share-based payments 0.9 0.1 1.0 Right-of-use assets/lease liabilities 0.1 (0.1 ) – Tax losses 4.7 (4.5 ) 0.2 Difference in IFRS 4 and IFRS 17 reserves (3.1 ) 1.3 (1.8 ) Total (28.9 ) 20.6 (8.3 ) Comprising: Net deferred tax liabilities (28.9 ) 20.6 (8.3 ) Total (28.9 ) 20.6 (8.3 ) On 31 December 2023, the long-term business of CASLP, along with the majority of the assets of the company were transferred into CA via a Business Transfer Scheme under Part VII of the Financial Services and Markets Act 2000. Consequently, previously unrecognised losses of CA have been recognised as deferred tax assets at 31 December 2023. This has resulted in a £11.9m additional deferred tax asset being recognised at the balance sheet date. CHESNARAANNUALREPORTANDACCOUNTS2023237 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION G – BALANCE SHEET LIABILITIES G4 Deferred tax assets and liabilities (continued) (a) CA and other group activities: Recognised deferred tax assets and liabilities (continued) 31 December 2021 Credit/ 2022 Assets/ (charge ) Arising on Assets/ (liabilities ) in year acquisition (liabilities ) £m £m £m £m Profit arising on transition to new tax regime (0.3 ) 0.3 – – Deferred acquisition costs (0.2 ) 0.2 1.5 1.5 Deferred income 0.5 – – 0.5 Acquired value in-force – 6.9 (40.5 ) (33.6 ) Property, plant and equipment – – 0.1 0.1 Tax losses on pensions business – 0.5 0.7 1.2 Unrealised and deferred investment gains (15.3 ) 13.8 (12.2 ) (13.7 ) Excess expenses of management 15.3 (2.9 ) 0.1 12.5 Share-based payments 0.7 0.2 – 0.9 Right-of-use assets/lease liabilities – 0.1 – 0.1 Tax losses – 4.7 – 4.7 Difference in IFRS 4 and IFRS 17 reserves (5.6 ) 2.5 – (3.1 ) Total (4.9 ) 26.3 (50.3 ) (28.9 ) Comprising: Net deferred tax liabilities (4.9 ) 26.3 (50.3 ) (28.9 ) Total (4.9 ) 26.3 (50.3 ) (28.9 ) The Finance Act 2021 increased the rate of corporation tax from 19% to 25% from 1 April 2023. The future enacted tax rate of 25% has been used in the calculation of UK deferred tax assets and liabilities where relevant, being the rate of corporation tax that is expected to apply when the majority of those deferred tax balances reverse. Deferred tax balances have been updated to reflect changes to equity on transition to IFRS 17. The tax rate applied is that which is expected at the time of realisation. At 31 December 2022, the rate applied to the transitional tax provisions recognised on transition to IFRS 17 for the UK division reflects the spreading of the profits arising over the following 10 years. At 31 December 2021, these spreading provisions were not enacted so the rates applied did not reflect them. The deferred tax credit to the Consolidated Statement of Comprehensive Income for the year is classified as follows: Year ended 31 December 2023 2022 £m £m Income tax credit 20.7 26.3 (b) CA and other group activities: Items for which no deferred tax asset is recognised 31 December 2023 2022 £m £m Tax losses on pensions business 20.7 17.8 Transitional losses on non-pension business – – Unrelieved expenses – 94.8 Realised and unrealised investment losses – 9.1 BLAGAB trade losses 28.7 2.2 Total 49.4 123.9 A deferred tax asset has not been recognised in respect of unrelieved expenses, because it is not probable that there will be a sufficient level of taxable income arising from income and gains on financial assets, so that the group can utilise the benefits therefrom. The movement in this balance reflects an increase in deferred deemed gains on Collective Investment Schemes in the period, which has decreased the unrelieved expenses at the balance sheet date. There are no aggregate temporary differences arising on the acquisition of subsidiaries or associated undertakings, for which deferred tax has not been recognised. 238 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS (c) Movestic: Recognised deferred tax assets and liabilities As at the balance sheet date, Movestic had a recognised deferred tax liability of £Nil (31 December 2022: £Nil), in respect of fair value adjustments arising upon acquisition. Unrecognised deferred tax assets were £Nil at the balance sheet date in respect of corporation tax recoverable (31 December 2022: £Nil). (d) Waard Group: Recognised deferred tax assets and liabilities 31 December Foreign 2022 Credit/ exchange 2023 Assets/ Arising on (charge ) translation Assets/ (liabilities ) acquisition in year difference (liabilities ) £m £m £m £m £m Fair value adjustments on acquisition 2.1 28.9 (3.8 ) (0.1 ) 27.1 Defined benefit scheme obligations – 1.1 0.1 – 1.2 Valuation differences 2.0 – (0.9 ) (0.1 ) 1.0 Valuation differences on investments – 5.8 (0.1 ) – 5.7 Total 4.1 35.8 (4.7 ) (0.2 ) 35.0 Comprising: Net deferred tax asset 4.1 35.8 0.1 – 40.0 Net deferred tax liabilities – – (4.8 ) (0.2 ) (5.0 ) Total 4.1 35.8 (4.7 ) (0.2 ) 35.0 31 December Foreign 2021 Credit/ exchange 2022 Assets/ Arising on (charge ) translation Assets/ (liabilities ) acquisition in year difference (liabilities ) £m £m £m £m £m Valuation differences 0.2 2.2 1.6 0.1 4.1 Total 0.2 2.2 1.6 0.1 4.1 Comprising: Net deferred tax asset 0.2 2.2 1.6 0.1 4.1 Total 0.2 2.2 1.6 0.1 4. 1 CHESNARAANNUALREPORTANDACCOUNTS2023239 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION G – BALANCE SHEET LIABILITIES G4 Deferred tax assets and liabilities (continued) (e) Scildon: Recognised deferred tax assets and liabilities 31 December Foreign 2022 (Charge)/ exchange 2023 Assets/ credit translation Assets/ (liabilities ) in year difference (liabilities ) £m £m £m £m Deferred acquisition costs 6.1 0.1 (0.1 ) 6.1 LAT reserve (1.8 ) 1.8 – – Revaluation of buildings and investment properties (0.8 ) (0.1 ) 0.2 (0.7 ) Valuation differences on technical provisions (35.5 ) 4.3 0.8 (30.4 ) Valuation differences on investments at fair value through profit and loss 36.9 (13.0 ) (0.9 ) 23.0 Property, plant and equipment – – 5.6 5.6 Total 4.9 (6.9 ) 5.6 3.6 Comprising: Net deferred tax assets 4.9 – 5.6 10.5 Net deferred tax liabilities – (6.9 ) – (6.9 ) Total 4.9 (6.9 ) 5.6 3.6 31 December Foreign 2021 (Charge)/ exchange 2022 Assets/ credit translation Assets/ (liabilities ) in year difference (liabilities ) £m £m £m £m Deferred acquisition costs 5.8 – 0.3 6.1 LAT reserve (3.6 ) 1.9 (0.1 ) (1.8 ) Revaluation of buildings and investment properties (0.6 ) (0.2 ) – (0.8 ) Valuation differences on technical provisions (3.2 ) (30.8 ) (1.5 ) (35.5 ) Valuation differences on investments at fair value through profit and loss (1.5 ) 36.9 1.5 36.9 Total (3.1 ) 7.8 0.2 4.9 Comprising: Net deferred tax liabilities (3.1 ) 7.8 0.2 4.9 Total (3.1 ) 7.8 0.2 4.9 G5 Deferred income 31 December 2023 2022 £m £m Balance at 1 January 3.5 4.5 Release to income (0.6 ) (1.1 ) Foreign exchange translation difference (0.1 ) 0.1 Balance at 31 December 2.8 3.5 Current 0.2 1.8 Non-current 2.6 1.7 Total 2.8 3.5 The release to income is included in fees and commission income (see Note D3). These are initial fees that relate to future provision of services that are deferred and amortised over the anticipated period. 240 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS G6 Other current liabilities 31 December 2023 2022 £m £m Reinsurance payables Payables in respect of investment contracts 0.9 1.2 Liabilities for assets withheld 45.5 47.8 Reinsurers share of deferred acquisition costs and claims deposits 0.1 0.1 Sub-total 46.5 49.1 Payables related to investment contracts Accrued claims 19.9 18.1 Policyholder liabilities 2.6 1.5 Sub-total 22.5 19.6 Other payables Accrued expenses 13.9 13.3 VAT 0.2 1.0 Employee tax 2.1 3.2 Other 27.7 31.8 Sub-total 43.9 49.3 Income taxes 18.8 5.3 Total 131.7 123.3 Current 131.7 123.3 Non-current – – Total 131.7 123.3 The carrying value of other payables is a reasonable approximation of fair value. SECTION H – SHAREHOLDER EQUITY H1 Share capital and share premium Group 31 December 2023 2022 Number Share Number Share of shares capital of shares capital issued £m issued £m Share capital 150,849,587 7.5 150,369,603 7.5 Share Share premium premium £m £m 142.5 142.3 Merger Merger reserve reserve £m £m 36.3 36.3 The number of shares in issue at the balance sheet date included Nil shares held in treasury (31 December 2022: Nil) . CHESNARAANNUALREPORTANDACCOUNTS2023241 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION H – SHAREHOLDER EQUITY H2 Other reserves Group 31 December 2023 2022 £m £m Capital redemption reserve 0.1 0.1 Foreign exchange translation reserve 6.4 14.8 Balance at 31 December 6.5 14.9 H3 Retained earnings Group Year ended 31 December 2023 2022 £m £m Retained earnings attributable to equity holders of the parent company comprise: Balance at 1 January 183.1 250.2 Profit/(loss) for the year 18.7 (33.7 ) Share-based payment 0.7 0.9 Dividends Final approved and paid for 2021 – (22.1 ) Interim approved and paid for 2022 – (12.2 ) Final approved and paid for 2022 (22.8 ) – Interim approved and paid for 2023 (12.6 ) – Balance at 31 December 167.1 183.1 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 parent company in respect of the year ended 31 December 2022 was made at the rate of 23.28p per share. The interim dividend in respect of 2023, approved and paid in 2023, was paid at the rate of 8.36p per share to equity shareholders of the parent company registered at the close of business on 29 September 2023, the dividend record date. A final dividend of 15.16p per share in respect of the year ended 31 December 2023 payable on 28 May 2024 to equity shareholders of the parent company registered at the close of business on 12 April 2024, the dividend record date, was approved by the directors after the balance sheet date. The resulting total final dividend of £23.5m has not been provided for in these financial statements and there are no income tax consequences. The following summarises dividends per share in respect of the year ended 31 December 2022 and 31 December 2023: Year ended 31 December 2023 2022 P P Interim – approved and paid 8.36 8.12 Final – proposed/paid 15.61 15.16 Total 23.97 23.28 242 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS SECTION I – ADDITIONAL DISCLOSURES I1 Employee benefit expense, including directors Year ended 31 December Waard Other group UK Movestic Group Scildon activities 2023 2022 £0m £m £m £m £m £m £m Wages and salaries 3.8 7.8 4.2 8.8 6.4 31.0 28.6 Social security costs 0.5 2.9 0.4 1.1 0.9 5.8 5.1 Pension costs-defined contribution plans 0.3 1.8 0.4 1.3 0.6 4.4 4.2 Pension costs-defined benefit plans – – – – – – – Total 4.6 12.5 5.0 11.2 7.9 41.2 37.9 Monthly average number of employees Company 62 52 Subsidiaries 325 362 Total 387 414 Directors The Directors’ Remuneration Report and Note I2 provides detail of compensation to directors of the company. UK UK-based employees are all employed by Chesnara plc. At the end of May 2005, the group allowed eligible employees to enter a pension scheme known as the Chesnara plc Stakeholder Scheme, on a basis where employer contributions are made to the Scheme at the same rate as would be payable had their membership of their predecessor scheme continued, provided that employee contributions also continued to be made at the same rate. The employee may opt to request the company to pay employer contributions into a personal pension plan, in which instance, employer contributions will be made on the same terms as for the Chesnara plc Stakeholder Scheme. The group has, for the period covered by these financial statements, only made contributions to defined contribution plans to provide pension benefits for employees upon retirement and, otherwise, has no residual obligation or commitments in respect of any defined benefit scheme. The group has established frameworks for approved and unapproved discretionary share option plans which may, at the discretion of the Remuneration Committee, be utilised for granting options to executive directors and to other group employees. Options have been granted to executive directors in the period, in relation to the share-based payment components of the new executive incentive schemes that was introduced under the 2014 terms. Further details can be found in the Directors’ Remuneration Report section and in Note I2 – share-based payments. Waard The Waard business participates in a defined contribution scheme. As a result of the Conservatrix acquisition, Waard Leven assumed the obligations under a defined benefit pension scheme for a small number of former Conservatrix employees. This scheme is closed to new entrants with no further benefits accruing and as such the exposure for Waard Leven is limited to the longevity risk of the contracts. The liability is valued under IAS 19 and reported under ‘Other provisions’ in the balance sheet. Scildon Scildon operated a defined benefit pension scheme for the benefit of its present and past employees. This scheme was closed during 2019 and transferred into a defined contribution scheme. From 1 October 2019, Scildon no longer bears any risks relating to the funding of the plan and all pension assets transferred to another administrator in 2020. Until that point, Scildon continued to bear only the fund administration costs. Under the company’s new defined contribution scheme, Scildon pays a contribution to the scheme and subsequently has no further financial obligations with respect to this part of the scheme. This contribution is recognised as an expense when paid . CHESNARAANNUALREPORTANDACCOUNTS2023243 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION I – ADDITIONAL DISCLOSURES I1 Employee benefit expense, including directors (continued) Movestic The Swedish business participates in a combined defined benefit and defined contribution scheme operated by Försäkringsbranschens Pensionskassa, ‘FPK’. (the Scheme). The Scheme is a multi-employer scheme with participants including other Swedish insurance companies not related to the group. The Scheme provides, for those born in 1971 or earlier, benefits to employees which are linked to their final salary and to the amount of time working for companies which are members of the Scheme. For those employees born in 1972 or later, the Scheme operates on a defined contribution basis. Assets and liabilities are held on a pooled basis and are not allocated by the Trustee to any individual company. Consequently, reliable information is not available to account for the Scheme as a defined benefit scheme and therefore, in accordance with IAS 19 Employee Benefits, the Scheme is accounted for as a defined contribution scheme. Contributions to the Scheme are based on the funding recommendations of the independent qualified actuary: the contributions paid to the Scheme subsequent to the acquisition of the Swedish business on 23 July 2009 and up to 31 December 2022, totalled £5.6m. During 2022 further contributions of £5.2m were made. The employers within the Scheme are collectively responsible for the funding of the Scheme as a whole and therefore in the event that other employers exit from the Scheme, remaining employers would be responsible for the ongoing funding. The collective nature of the Scheme results in all participating entities sharing the actuarial risk associated with the Scheme. Försäkringsbranschens Pensionskassa, ‘FPK’, issues an audited Annual Report (under Swedish law-limited IFRS) each year. The last available published report was as at 31 December 2022. The Annual Report states that the Scheme’s surplus is £339.3m (£408.2m as at 31 December 2021). As at 31 December 2022, the fund had assets under management of £1.3bn (31 December 2021: £1.5bn). During 2022 there have been 95 (97) employer insurance companies participating in the Scheme and 22,000 (31 December 2021: 26,000) insured individuals. From the available information, it cannot be determined with certainty as to whether there would be a change in the required employer funding rate, although there is currently no deficit in the Scheme. I2 Share-based payments The group issues equity-settled share-based payments to the executive directors and members of the senior management team based on the 2014 terms. Equity settled share-based payments are measured at fair value at the date of the grant, and expensed on a straight-line over the vesting period, based on the group’s estimate of shares that will eventually vest. The bonus scheme consists of two components: (a) Short-Term Incentive Scheme (STIS) (b) Long-Term Incentive Plan (LTIP) The STIS is based upon a 1 year performance period measured against cash generation, EcV earnings and strategic group objectives. In relation to 2023, upon meeting the necessary performance targets, the company granted an award in the form of a right to receive a cash amount of up to 100% of the gross salary. In the event that the gross cash payment due is greater than £20,000, a mandatory 35% of the cash award was deferred into shares, which had a vesting period of 3 years. Therefore the award was 65% settled in cash and 35% settled by a share option award, which cannot be exercised for 3 years. Under the LTIP, options are granted with a vesting period of 3 years. These awards are subject to performance conditions tied to the company’s financial performance in respect of growth in EcV, commercial cash generation and Total Shareholder Return (TSR). For schemes with market performance criteria, the number of options expected to invest is adjusted only for expectations of leavers prior to vesting. Fair value of the options is measured by use of the Monte Carlo model at the issuing date. The LTIP also contains a target of EcV growth and commercial cash generation. As these are non-market performance conditions, the number of options expected to vest is recalculated at each balance sheet date based on expectations of performance against target. The movement in cumulative expense since the previous balance sheet date is recognised in the income statement, with a corresponding entry in reserves. If the options remain unexercised after a period of 10 years from the date of grant, the options expire. Furthermore, options are forfeited if the employee leaves the group before options vest and is deemed to be a ‘Bad Leaver’. (a) 2023 award made under the Short-Term Incentive Scheme (STIS) Details of the short-term incentive awards made in the year are as follows: 2023 Short-Term Incentive Scheme (STIS) Awards made in year 2023 2022 £m £m Amount paid as cash bonus through the income statement (65%) 0.5 0.4 Amount deferred into shares for 3 years and subject to forfeiture (35%) 0.3 0.2 Total bonus award for the year 0.8 0.6 Amount of deferred expense recorded in the current year 0.1 0.1 The deferred share award will be made following the end of the performance period by the Remuneration Committee. The deferred amount will be divided by the share price on the award date and the number of share awards will be awarded. The share awards will be accounted for per IFRS 2, under Equity Settled share- based payments. 244 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS (b) 2023 award made under the Long-Term Incentive Plan (LTIP) In 2023, the group granted 571,645 Nil priced share options with a vesting period of 3 years. These awards were subject to performance conditions tied to the company’s financial performance in respect of growth in Economic Value, commercial cash generation and Total Shareholder Return (TSR). The fair value of the non-market base condition was determined to be 154.53p, which was the average weighted share price as at the grant date of the options. Details of the share options outstanding during the year are as follows: 2023 Long-Term Incentive Plan (LTIP) 2023 Weighted average Options exercise number price 000 £ Outstanding at the beginning of the year – – Granted during the year 572 – Lapsed during the year – – Outstanding at the end of the year 572 – The weighted average contractual life is 10 years. The inputs into the Monte Carlo model are as follows: Valuation method Monte Carlo Weighted average share price (pence) 268.00 Weighted average exercise price (pence) Nil Weighted average fair value of options granted (pence) 154.53 Expected volatility 29.39 Expected life 3 years Risk free rate 5.70% Expected dividend yield 0% Expected volatility was determined by calculating the historical volatility of the company’s share price over the previous 10 years. The group recognised total expense of £88,222 related to equity-settled share-based payments transactions in 2023. (c) 2022 award made under the Short-Term Incentive Scheme (STIS) The group has recorded an expense of £59,319 with regards to the 35% element that has been deferred over the vesting period. (d) 2022 award made under the Long-Term Incentive Plan (LTIP) In April 2022, the group granted 253,000 Nil priced share options with a vesting period of 3 years. These awards were subject to performance conditions tied to the company’s financial performance in respect of growth in Economic Value and Total Shareholder Return (TSR). The fair value of the non-market base condition was determined to be 284.00p, which was the share price as at 28 April 2022, the grant date of the options. Details of the share options outstanding during the year are as follows: 2022 Long-Term Incentive Plan (LTIP) 2023 2022 Weighted Weighted average average Options exercise Options exercise number price number price 000 £ 000 £ Outstanding at the beginning of the year 253 – – – Granted during the year – – 253 – Lapsed during the year – – – – Outstanding at the end of the year 253 – 253 – The weighted average contractual life is 10 years. CHESNARAANNUALREPORTANDACCOUNTS2023245 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION I – ADDITIONAL DISCLOSURES I2 Share-based payments (continued) (d) 2022 award made under the Long-Term Incentive Plan (LTIP) (continued) The inputs into the Monte Carlo model are as follows: Valuation method Monte Carlo Weighted average share price (pence) 284.00 Weighted average exercise price (pence) Nil Weighted average fair value of options granted (pence) 162.50 Expected volatility 29.04 Expected life 3 years Risk free rate 2.24% Expected dividend yield 0% Expected volatility was determined by calculating the historical volatility of the company’s share price over the previous 10 years. The group recognised total expense of £55,714 related to equity-settled share-based payments transactions in 2023. (e) 2021 award made under the Short-Term Incentive Scheme (STIS) The group has recorded an expense of £76,913 with regards to the 35% element that has been deferred over the vesting period. (f) 2021 award made under the Long-Term Incentive Plan (LTIP) In April 2021, the group granted 260,000 Nil priced share options with a vesting period of 3 years. These awards were subject to performance conditions tied to the company’s financial performance in respect of growth in Economic Value and Total Shareholder Return (TSR). The fair value of the non-market base condition was determined to be 278.50p, which was the share price as at 28 April 2021, the grant date of the options. Details of the share options outstanding during the year are as follows: 2021 Long-Term Incentive Plan (LTIP) 2023 2022 Weighted Weighted average average Options exercise Options exercise number price number price 000 £ 000 £ Outstanding at the beginning of the year 532 – 702 – Exercised during the year (123 ) 2.78 (99 ) 2.66 Lapsed during the year (67 ) – (71 ) – Outstanding at the end of the year 342 – 532 – The weighted average contractual life is 10 years. The inputs into the Monte Carlo model are as follows: Valuation method Monte Carlo Weighted average share price (pence) 278.50 Weighted average exercise price (pence) Nil Weighted average fair value of options granted (pence) 160.56 Expected volatility 30.01 Expected life 3 years Risk free rate 0.48% Expected dividend yield 0% Expected volatility was determined by calculating the historical volatility of the company’s share price over the previous 10 years. The group recognised total expense of £45,085 related to equity-settled share-based payments transactions in 2023. 246 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS (g) 2020 award made under the Short-Term Incentive Scheme (STIS) The group has recorded an expense of £59,099 with regards to the 35% element that has been deferred over the vesting period. (h) 2020 award made under the Long-Term Incentive Plan (LTIP) In April 2020, the group granted 224,000 Nil priced share options with a vesting period of 3 years. These awards were subject to performance conditions tied to the company’s financial performance in respect of growth in Economic Value and Total Shareholder Return (TSR). The fair value of the non-market base condition was determined to be 323.50p, which was the share price as at 28 April 2020, the grant date of the options. Details of the share options outstanding during the year are as follows: 2020 Long-Term Incentive Plan (LTIP) 2023 2022 Weighted Weighted average average Options exercise Options exercise number price number price 000 £ 000 £ Outstanding at the beginning of the year 192 – 192 – Exercised during the year (28 ) 2.82 – – Lapsed during the year (126 ) – – – Outstanding at the end of the year 38 – 192 – The weighted average contractual life is 10 years. The inputs into the Monte Carlo model are as follows: Valuation method Monte Carlo Weighted average share price (pence) 323.50 Weighted average exercise price (pence) Nil Weighted average fair value of options granted (pence) 184.04 Expected volatility 28.51 Expected life 3 years Risk free rate 0.42% Expected dividend yield 0% Expected volatility was determined by calculating the historical volatility of the company’s share price over the previous 10 years. The group recognised total expense of £18,750 related to equity-settled share-based payments transactions in 2023. (i) 2019 award made under the Short-Term Incentive Scheme (STIS) The group has recorded an expense of £14,289 with regards to the 35% element that has been deferred over the vesting period. (j) 2019 award made under the Long-Term Incentive Plan (LTIP) In April 2019, the group granted 196,000 Nil priced share options with a vesting period of 3 years. These awards were subject to performance conditions tied to the company’s financial performance in respect of growth in Economic Value and Total Shareholder Return (TSR). The fair value of the non-market base condition was determined to be 358.50p, which was the share price as at 28 April 2019, the grant date of the options. Details of the share options outstanding during the year are as follows: 2019 Long-Term Incentive Plan (LTIP) 2023 2022 Weighted Weighted average average Options exercise Options exercise number price number price 000 £ 000 £ Outstanding at the beginning of the year – – 196 – Lapsed during the year – – (196 ) – Outstanding at the end of the year – – – – The weighted average contractual life is 10 years. CHESNARAANNUALREPORTANDACCOUNTS2023247 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION I – ADDITIONAL DISCLOSURES I2 Share-based payments (continued) (j) 2019 award made under the Long-Term Incentive Plan (LTIP) (continued) The inputs into the Monte Carlo model are as follows: Valuation method Monte Carlo Weighted average share price (pence) 358.50 Weighted average exercise price (pence) Nil Weighted average fair value of options granted (pence) 202.74 Expected volatility 25.35 Expected life 3 years Risk free rate 1.110% Expected dividend yield 0% Expected volatility was determined by calculating the historical volatility of the company’s share price over the previous 10 years. The group recognised no expense related to equity-settled share-based payments transactions in 2023. (k) 2018 award made under the Short-Term Incentive Scheme (STIS) The group has recorded no expense with regards to the 35% element that has been deferred over the vesting period. (l) 2018 award made under the Long-Term Incentive Plan (LTIP) In April 2018, the group granted 168,000 Nil priced share options with a vesting period of 3 years. These awards were subject to performance conditions tied to the company’s financial performance in respect of growth in Economic Value and Total Shareholder Return (TSR). The fair value of the non-market base condition was determined to be 410.00p, which was the share price as at 28 April 2018, the grant date of the options. Details of the share options outstanding during the year are as follows: 2018 Long-Term Incentive Plan (LTIP) 2023 2022 Weighted Weighted average average Options exercise Options exercise number price number price 000 £ 000 £ Outstanding at the beginning of the year – – 168 – Lapsed during the year – – (168 ) – Outstanding at the end of the year – – – – The weighted average contractual life is 10 years. The inputs into the Monte Carlo model are as follows: Valuation method Monte Carlo Weighted average share price (pence) 410.00 Weighted average exercise price (pence) Nil Weighted average fair value of options granted (pence) 229.78 Expected volatility 25.77 Expected life 3 years Risk free rate 1.190% Expected dividend yield 0% Expected volatility was determined by calculating the historical volatility of the company’s share price over the previous 10 years. The group recognised no expense related to equity-settled share-based payments transactions in 2023. 248 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS (m) 2017 award made under the Long-Term Incentive Plan (LTIP) In April 2017, the group granted 174,000 Nil priced share options with a vesting period of 3 years. These awards were subject to performance conditions tied to the company’s financial performance in respect of growth in Economic Value and Total Shareholder Return (TSR). The fair value of the non-market base condition was determined to be 382.75p, which was the share price as at 28 April 2017, the grant date of the options. Details of the share options outstanding during the year are as follows: 2017 Long-Term Incentive Plan (LTIP) 2023 2022 Weighted Weighted average average Options exercise Options exercise number price number price 000 £ 000 £ Outstanding at the beginning of the year 26 – 26 – Exercised during the year (26 ) 2.63 – – Outstanding at the end of the year – – 26 – The weighted average contractual life is 10 years. The inputs into the Monte Carlo model are as follows: Valuation method Monte Carlo Weighted average share price (pence) 382.75 Weighted average exercise price (pence) Nil Weighted average fair value of options granted (pence) 211.73 Expected volatility 26.97 Expected life 3 years Risk free rate 0.70% Expected dividend yield 0% Expected volatility was determined by calculating the historical volatility of the company’s share price over the previous 10 years. The group recognised no expense related to equity-settled share-based payments transactions in 2023 and 2022. (n) 2016 award made under the Long-Term Incentive Plan (LTIP) In April 2016, the group granted 255,000 Nil priced share options with a vesting period of three years. These awards were subject to performance conditions tied to the company’s financial performance in respect of growth in Economic Value and Total Shareholder Return (TSR). The fair value of the non-market base condition was determined to be 312.00p, which was the share price as at 28 April 2016, the grant date of the options. Details of the share options outstanding during the year are as follows: 2016 Long-Term Incentive Plan (LTIP) 2023 2022 Weighted Weighted average average Options exercise Options exercise number price number price 000 £ 000 £ Outstanding at the beginning of the year 90 – 90 – Exercised during the year (90 ) 2.63 – – Outstanding at the end of the year – – 90 – The weighted average contractual life is 10 years. CHESNARAANNUALREPORTANDACCOUNTS2023249 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION I – ADDITIONAL DISCLOSURES I2 Share-based payments (continued) (n) 2016 award made under the Long-Term Incentive Plan (LTIP) (continued) The inputs into the Monte Carlo model are as follows: Valuation method Monte Carlo Weighted average share price (pence) 312.00 Weighted average exercise price (pence) Nil Weighted average fair value of options granted (pence) 179.72 Expected volatility 28.07 Expected life 3 years Risk free rate 0.86% Expected dividend yield 0% Expected volatility was determined by calculating the historical volatility of the company’s share price over the previous 10 years. The group recognised no expense related to equity-settled share-based payments transactions in 2023 and 2022. I3 Earnings per share Earnings per share are based on the following: Year ended 31 December 2023 2022 (Loss)/profit for the year attributable to shareholders (£m) 18.7 (33.7 ) Weighted average number of ordinary shares 150,528,597 150,239,599 Basic earnings per share 12.41 p (22.40 )p Diluted earnings per share 12.29 p (21.13 )p The weighted average number of ordinary shares in respect of the year ended 31 December 2023 is based upon 150,849,587 shares. No shares were held in treasury. There were 1,537,582 share options outstanding at 31 December 2023 (2022: 1,815,601). Accordingly, there is dilution of the average number of ordinary shares in issue in respect of 2022 and 2023. I4 Contingencies Past sales The group has made provision for the estimated cost of settling complaints in respect of past sales of endowment mortgages. Although the provisions are regularly reviewed, the final outcome could be different from the provisions established as these costs cannot be calculated with certainty and are influenced by external factors beyond the control of management, including future regulatory actions. In the UK division £2.5m is held in respect of non-pension mis-selling, of which £1.8m is expected to be recoverable under a pecuniary loss cover with Allianz. No complaints reserves are held in Movestic, Scildon or the Waard Group. I5 Capital commitments There were no capital commitments as at 31 December 2023 or as at 31 December 2022 . I6 Related parties (a) Identity of related parties The shares of the company were widely held and no single shareholder exercised significant influence or control over the company. The company has related party relationships with: (i) key management personnel who comprise the directors (including non-executive directors) of the company; (ii) its subsidiary companies; (iii) other companies over which the directors have significant influence; and (iv) transactions with persons related to key management personne l. 250 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS (b) Related party transactions ( i) Transactions with key management personnel. Key management personnel comprise of the directors of the company. This is on the basis that the group’s governance map requires all strategically significant decisions to be approved by the group board. As such, they have the authority and responsibility for planning, directing and controlling the activities of the group. Key management compensation is as follows: 2023 2022 £m £m Short-term employee benefits 2.1 1.2 Post-employment benefits 0.1 0.1 Share-based payments 0.6 0.8 Total 2.8 2.1 The share-based payments charge comprises £0.3m (2022: £0.3m) of Short-Term Incentive Scheme (STIS), and £0.2m (2022: £0.2m) related to Long-Term Incentive Plan (LTIP), which is determined in accordance with IFRS 2 ‘Share-based Payment’. Further details on the share-based payment are disclosed in Note I2. In addition to their salaries the company also provides non-cash benefits to directors and contributes to a post-employment defined contribution pension plan on their behalf, or where regulatory contribution limits are reached, pay an equivalent amount as an addition to base salary. The following amounts were payable to directors in respect of bonuses and incentives: 2023 2022 £m £m Annual bonus scheme (included in the short-term employee benefits above) 0.7 0.5 These amounts have been included in Accrued Expenses as disclosed in Note G6. The amounts payable under the annual bonus scheme were payable within 1 year. The terms and conditions attached to the annual bonus scheme can be found in the Remuneration section of the Corporate Governance section of the Annual Report and Accounts. (ii) Transactions with subsidiaries The company undertakes centralised administration functions, the costs of which it charges back to its operating subsidiaries. The following amounts which effectively comprised a recovery of expenses at no mark-up were credited to the Statement of Comprehensive Income of the company for the respective periods: Year ended 31 December 2023 2022 £m £m Recovery of expenses 5.4 4.8 (iii) Transactions between subsidiaries In the Netherlands, Scildon owns a commercial property that has been occupied by its fellow Dutch subsidiary Waard since October 2022. The following amounts of rental income were received from Waard by Scildon during the respective periods: Year ended 31 December 2023 2022 £m £m Rental income 0.1 – (iv) Transactions with persons related to key management personnel During the year, there were no transactions with persons related to key management personnel (31 December 2022: £Nil). CHESNARAANNUALREPORTANDACCOUNTS2023 251 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION I – ADDITIONAL DISCLOSURES I7 Group entities Control of the group The issued share capital of Chesnara plc, the group parent company, is widely held, with no single party able to control 20% or more of such capital or of the rights which such ownership confers. Group subsidiary companies Country of Ownership interest Ownership interest Functional Name incorporation 31 December 2023 31 December 2022 Currency Countrywide Assured plc United Kingdom 100% of all share capital (1) 100% of all share capital (1) Sterling Countrywide Assured Life Holdings Limited United Kingdom 100% of all share capital 100% of all share capital Sterling Countrywide Assured Services Limited United Kingdom 100% of all share capital (1) 100% of all share capital (1) Sterling Countrywide Assured Trustee Company Limited United Kingdom 100% of all share capital (1) 100% of all share capital (1) Sterling Registered address 2nd Floor, Building 4, West Strand Business Park, West Strand Road, Preston, Lancashire PR1 8UY CASLP Limited United Kingdom 100% of all share capital 100% of all share capital Sterling CASFS Limited United Kingdom 100% of all share capital (2) 100% of all share capital (2) Sterling CASLPTS Limited United Kingdom 100% of all share capital (2) 100% of all share capital (2) Sterling Registered address Third Floor, One Temple Quay, 1 Temple Back East, Bristol, England, BS1 6DZ Movestic Livförsäkring AB Sweden 100% of all share capital 100% of all share capital Swedish krona Movestic Fonder AB Sweden 100% of all share capital (3) 100% of all share capital (3) Swedish krona Registered address Box 7853, S-103 99 Stockholm, Sweden Movestic Fund Management S.A. (6) Luxembourg – – Swedish krona Registered address 12 Rue Gabriel Lippmann, L-5365 Munsbach, Luxembourg Chesnara Holdings B.V. Netherlands 100% of all share capital (4) 100% of all share capital (4) Euro Waard Leven N.V. Netherlands 100% of all share capital 100% of all share capital Euro Waard Schade N.V. Netherlands 100% of all share capital 100% of all share capital Euro Waard Verzekeringen B.V. Netherlands 100% of all share capital (5) 100% of all share capital (5) Euro Robein Leven N.V. Netherlands 100% of all share capital (5) 100% of all share capital (5) Euro Robein Effectendienstveriening N.V. Netherlands 100% of all share capital (5) 100% of all share capital (5) Euro Registered address Geert Scholtenslaan II 1687 CL Wognum, Netherlands Scildon N.V Netherlands 100% of all share capital 100% of all share capital Euro Registered address Laapersveld 68 Hilversum, Netherlands (1) Held indirectly through Countrywide Assured Life Holdings Limited. (2) Held indirectly through CASLP Limited. (3) Held indirectly through Movestic Livförsäkring AB. (4) Company formed on 25 November 2014. (5) Held indirectly through Waard Leven N.V. (6) Company formed in March 2017. It was liquidated on 5 September 2022. 252 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS I8 Business combination and portfolio acquisition 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 as 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 £35m was provided by Chesnara, consisting of a £21.4m contribution from Chesnara and £14m of existing Waard resources. The cash consideration for the acquisition was €1. The acquisition is classed as a Business Combination under IFRS 3 and the fair value of the assets and liabilities recognised on 1 January 2023 are as follows: Fair value £m Assets Financial investments 366.9 Other assets 1.3 Deferred tax asset 36.5 Cash 30.8 Total assets 435.5 Liabilities Insurance contracts 346.2 Other provisions 12.6 Investment contracts 70.0 Total liabilities 428.8 Fair value of net assets 6.7 Net assets acquired 6.7 Total consideration paid – Profit arising on business combination and portfolio acquisitions 6.7 A profit of £6.7m has been recognised on acquisition. This has been recorded as a ‘Profit arising on business combinations and portfolio acquisitions’ on the face of the statement of comprehensive income. This day one gain has arisen 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 £46.2m being recognised as at 1 January 2023. This amount forms part of the CSM value for ‘Contracts initially recognised in the year’ in Note F2(ii) and is included in the ‘insurance contracts’ balance within the table above. 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 IFRS 9. 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. Canada Life On 16 May 2023, Chesnara announced it had reached an agreement to acquire the onshore UK individual protection business of Canada Life Limited, 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 Limited and accepted by CA, with the effective date being 1 January 2023. From this date all risks and rewards relating to the policies were transferred to CA along with the economic benefit of those risks and rewards. The initial commission paid by CA to Canada Life Limited for this reinsurance inwards transaction was £9.0m and was funded from internal group resources. The CSM on initial recognition has been calculated as £11.0m as at 1 January 2023. Customers’ policies are expected to transfer to CA in the future via a Part VII transfer, following Court approval. I9 Post balance sheet event The directors are not aware of any significant post balance sheet events that require disclosure in the financial statements. CHESNARAANNUALREPORTANDACCOUNTS2023253 IFRS FINANCIAL STATEMENTS COMPANY FINANCIAL STATEMENTS COMPANY BALANCE SHEET 31 December 2023 2022 Note £m £m Assets Non-current assets Investments in subsidiaries J1 399.6 414.0 Deferred tax asset 0.9 5.8 Total non-current assets 400.5 419.8 Current assets Property and equipment – 0.1 Financial investments J2 114.6 106.3 Other assets 6.0 4.0 Cash and cash equivalents J4 5.7 1.4 Total current assets 126.3 111.8 Total assets 526.8 531.6 Current liabilities Lease contract liabilities – 0.1 Derivative financial instruments J3 4.4 3.5 Other current liabilities J6 4.4 2.5 Total current liabilities 8.8 6.1 Non-current liabilities Borrowings J5 200.6 200.4 Total non-current liabilities 200.6 200.4 Total liabilities 209.4 206.5 Net assets 317.4 325.1 Shareholders’ equity Share capital J7 7.5 7.5 Share premium J7 142.5 142.3 Other reserves J8 0.1 0.1 Retained earnings J9 167.3 175.2 Total shareholders’ equity 317.4 325.1 The Notes and information on pages 257 to 261 form part of these financial statements. Approved by the board of directors and authorised for issue on 27 March 2024 and signed on its behalf by: Luke Savage Steve Murray Chair Chief Executive Officer Company number: 04947166 In accordance with the exemption allowed by Section 408 of the Companies Act 2006, the company has not presented its own income statement or statement of other comprehensive income. The company reported a profit of £20.8m (2022: loss £16.4m) during the year. The retained profits of the company at 31 December 2023 was £161.3m (31 December 2022: £175.2m). 254 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS COMPANY STATEMENT OF CASH FLOWS Year ended 31 December 2023 2022 £m £m Profit/(loss) for the year 26.8 (16.4 ) Adjustments for: Tax expense/(recovered) 0.2 (5.4 ) Interest expense 10.3 9.5 Share-based payment 0.7 0.9 Dividends receivable (71.3 ) (30.6 ) Depreciation on right-of-use assets 0.1 0.1 Impairment on investment in subsidiary 14.4 25.0 Fair value (gains)/losses on financial assets (7.2 ) (66.6 ) Adjustment total (52.8 ) (67.1 ) Changes in operating assets and liabilities: Increase in other assets (4.0 ) (0.1 ) Decrease/(increase) in prepayments – 0.1 Decrease/(increase) in financial assets and investment properties (1.0 ) – Increase in other current liabilities 9.4 1.7 Net cash (utilised by)/generated from operations (21.6 ) (81.8 ) Income tax paid – 3.9 Net cash (utilised by)/generated from operating activities (21.6 ) (77.9 ) Cash flows from investing activities Business combinations – (37.9 ) Capital contribution paid to subsidiary – (46.5 ) Dividends received from subsidiary companies 71.3 30.6 Net cash (utilised by)/generated from investing activities 71.3 (53.8 ) Cash flows from financing activities Net proceeds from the issue of share capital 0.2 0.3 Proceeds of Tier 2 debt – 196.5 Repayment of borrowings – (31.2 ) Repayment of principal under lease liabilities (0.1 ) (0.1 ) Dividends paid (35.4 ) (34.3 ) Interest paid (10.1 ) (4.8 ) Net cash (utilised by)/generated from financing activities (45.4 ) 126.4 Net decrease in net cash and cash equivalents 4.3 (5.3 ) Net cash and cash equivalents at beginning of period 1.4 6.7 Net cash and cash equivalents at end of the period 5.7 1.4 Note. Net cash and cash equivalents includes overdrafts. The Notes and information on pages 257 to 261 form part of these financial statements. CHESNARAANNUALREPORTANDACCOUNTS2023255 IFRS FINANCIAL STATEMENTS COMPANY FINANCIAL STATEMENTS COMPANY STATEMENT OF CHANGES IN EQUITY Year ended 31 December 2023 Share Share Other Retained capital premium reserves earnings Total £m £m £m £m £m Equity shareholders’ funds at 1 January 2023 7.5 142.3 0.1 175.2 325.1 Profit for the year – – – 26.8 26.8 Issue of share capital – – – – – Issue of share premium – 0.2 – – 0.2 Dividends paid – – – (35.4 ) (35.4 ) Share-based payment – – – 0.7 0.7 Equity shareholders’ funds at 31 December 2023 7.5 142.5 0.1 167.3 317.4 Year ended 31 December 2022 Share Share Other Retained capital premium reserves earnings Total £m £m £m £m £m Equity shareholders’ funds at 1 January 2022 7.5 142.1 0.1 225.0 374.7 Loss for the year – – – (16.4 ) (16.4 ) Issue of share capital – – – – – Issue of share premium – 0.2 – – 0.2 Dividends paid – – – (34.3 ) (34.3 ) Share-based payment – – – 0.9 0.9 Equity shareholders’ funds at 31 December 2022 7.5 142.3 0.1 175.2 325.1 The Notes and information on pages 257 to 261 form part of these financial statements. 256 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS NOTES TO THE COMPANY FINANCIAL STATEMENTS SECTION J – NOTES TO THE FINANCIAL STATEMENTS J1 Investment in subsidiary Company Year ended 31 December 2023 2022 Note £m £m Cost Balance at 1 January 439.0 354.7 Additions – Arising on acquisition I8 – 37.9 Capital contribution – 46.4 Balance at 31 December 439.0 439.0 Impairment Balance at 1 January (25.0 ) – Impairment for the year (14.4 ) (25.0 ) Balance at 31 December (39.4 ) (25.0 ) Carrying amounts At 1 January 414.0 354.7 At 31 December 399.6 414.0 During the year the company carried out a review of the recoverable amount of its subsidiaries and concluded that its investment in Countrywide Assured plc was impaired. As a result an impairment loss of £14.4m (31 December 2022: £25.0m) has been recognised in the year. The impairment, which was expected, has primarily arisen as a result of Countrywide Assured plc’s policy of distributing its surplus capital up to Chesnara plc as it becomes available over time. J2 Financial investments (a) Financial investments by classification The carrying amounts of the financial investments and other financial assets and liabilities held by the group at the balance sheet date are as follows: 31 December 2023 Amortised FVTPL – FVTPL – cost designated mandatory Total £m £m £m £m Financial investments Holdings in collective investment schemes – – 114.6 114.6 Total – – 114.6 114.6 Derivatives and other financial assets Other assets 6.0 – – 6.0 Cash and cash equivalents – 5.7 – 5.7 Total financial investments and financial assets 6.0 5.7 114.6 126.3 Financial liabilities Borrowings 200.6 – – 200.6 Derivative financial instruments – – 4.4 4.4 Other current liabilities 4.4 – – 4.4 Total financial liabilities 205.0 – 4.4 209.4 CHESNARAANNUALREPORTANDACCOUNTS2023257 IFRS FINANCIAL STATEMENTS NOTES TO THE COMPANY FINANCIAL STATEMENTS SECTION J – NOTES TO THE FINANCIAL STATEMENTS J2 Financial investments (continued) (a) Financial investments by classification (continued) 31 December 2022 Amortised FVTPL – FVTPL – cost designated mandatory Total £m £m £m £m Financial investments Holdings in collective investment schemes – – 106.3 106.3 Total – – 106.3 106.3 Derivatives and other financial assets Other assets 4.0 – – 4.0 Cash and cash equivalents – 1.4 – 1.4 Total financial investments and financial assets 4.0 1.4 106.3 111.7 Financial liabilities Borrowings 200.4 – – 200.4 Derivatives – – 3.5 3.5 Other current liabilities 2.5 – – 2.5 Total financial liabilities 202.9 – 3.5 206.4 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. (b) Financial investment fair values Fair value is the amount for which an asset or liability could be exchanged between willing parties in an arm’s length transaction. The tables below show the determination of fair value according to a three-level valuation hierarchy. Fair values are generally determined at prices quoted in active markets (Level 1). However, where such information is not available, the group applies valuation techniques to measure such instruments. These valuation techniques make use of market- observable data for all significant inputs where possible (Level 2), but in some cases it may be necessary to estimate other than market-observable data within a valuation model for significant inputs (Level 3). Fair value measurement at 31 December 2023 Level 1 Level 2 Level 3 Total £m £m £m £m Financial assets Holdings in collective investment schemes 114.6 – – 114.6 Total 114.6 – – 114.6 Current 114.6 – – 114.6 Non-current – – – – Total 114.6 – – 114.6 Financial liabilities Derivative financial instruments – 4.4 – 4.4 Total – 4.4 – 4.4 258 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS Fair value measurement at 31 December 2022 Level 1 Level 2 Level 3 Total £m £m £m £m Financial assets Holdings in collective investment schemes 106.3 – – 106.3 Total 106.3 – – 106.3 Current 106.3 – – 106.3 Non-current – – – – Total 106.3 – – 106.3 Financial liabilities Derivative financial instruments – 3.5 – 3.5 Total – 3.5 – 3.5 J3 Derivative financial instruments Chesnara entered into a foreign currency hedge which was rolled forward and slightly extended in 2023 as noted in the Financial Risk section. 31 December 2023 2022 Asset Liability Asset Liability £m £m £m £m Foreign currency hedge – 4.4 – 3.5 Exchange traded futures – – – – Financial reinsurance embedded derivatives – – – – Total – 4.4 – 3.5 Current – 4.4 – 3.5 Non-current – – – – Total – 4.4 – 3.5 J4 Cash and cash equivalents 31 December 2023 2022 £m £m Bank and cash balances 5.7 1.3 Call deposits due within 1 month – 0.1 Total cash and cash equivalents 5.7 1.4 Cash and cash equivalents in the statement of cash flows 5.7 1.4 Short-term bank deposits are subject to a combination of fixed and variable interest rates, with an average maturity of 1 day (2022: 1 day). All deposits included in cash and cash equivalents were due to mature within 1 month of their acquisition. All balances are current and available on demand. CHESNARAANNUALREPORTANDACCOUNTS2023259 IFRS FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SECTION J – NOTES TO THE FINANCIAL STATEMENTS J5 Borrowings 31 December 2023 2022 £m £m Tier 2 debt 200.6 200.4 Total 200.6 200.4 Current 200.6 200.4 Non-current – – Total 200.6 200.4 In 2022, the bank loan was fully repaid and replaced by Tier 2 Subordinated Notes Debt. The notes have a 10½ year maturity. The fair value of amounts due in relation to Tier 2 debt at 31 December 2023 was £148.4m (31 December 2022: £148.0m). J6 Other current liabilities 31 December 2023 2022 £m £m Other payables Accrued expenses 4.4 2.5 Total 4.4 2.5 Current 4.4 2.5 Non-current – – Total 4.4 2.5 The carrying value of other payables is a reasonable approximation of fair value. J7 Share capital and share premium 31 December 2023 2022 Number Share Number Share of shares capital of shares capital issued £m issued £m Authorised Ordinary shares of 5p each 201,000,000 10.1 201,000,000 10.1 Issued Ordinary shares of 5p each 150,849,587 7.5 150,369,603 7.5 Share Share premium premium £m £m 142.5 142.3 The number of shares in issue at the balance sheet date included Nil shares held in treasury (31 December 2022: Nil). 260 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 IFRS FINANCIAL STATEMENTS J8 Other reserves 31 December 2023 2022 £m £m Capital redemption reserve 0.1 0.1 Balance at 31 December 0.1 0.1 J9 Retained earnings Year ended 31 December 2023 2022 £m £m Retained earnings attributable to equity holders of the parent company comprise: Balance at 1 January 175.2 225.0 Profit/(loss) for the year 26.8 (16.4 ) Share-based payment 0.7 0.9 Dividends Final approved and paid for 2021 – (22.1 ) Interim approved and paid for 2022 – (12.2 ) Final approved and paid for 2022 (22.8 ) – Interim approved and paid for 2023 (12.6 ) – Balance at 31 December 167.3 175.2 CHESNARAANNUALREPORTANDACCOUNTS2023261 ADDITIONAL INFORMATION Amsterdam, Netherlands 262 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 264 Financial calendar 264 Key contacts 265 Notice of the Annual General Meeting 267 Explanatory notes to the Notice of the Annual General Meeting 271 Appendix to AGM Notice 274 Alternative Performance Measures 276 Reconciliation of metrics 278 Glossary 279 Note on terminology 280 Cautionary and forward looking statements CHESNARAANNUALREPORTANDACCOUNTS2023263 ADDITIONAL INFORMATION FINANCIAL CALENDAR KEY CONTACTS 28 March 2024 Registered and head office Joint Stockbrokers and Results for the year ended 2nd Floor, Building 4 Corporate Advisors 31 December 2023 announced West Strand Business Park Panmure Gordon West Strand Road 40 Gracechurch Street Preston London 11 April 2024 Lancashire EC3V 0BT Ex-dividend date PR1 8UY RBC Capital Markets T +44 (0)1772 972050 100 Bishopsgate 12 April 2024 www.chesnara.co.uk London Dividend record date EC2N 4AA Advisors 29 April 2024 Burness Paull LLP Bankers Last date for dividend reinvestment Exchange Plaza National Westminster Bank plc plan elections 50 Lothian Road 135 Bishopsgate Edinburgh London EH3 9WJ EC2M 3UR 14 May 2024 Annual General Meeting Lloyds Bank plc Auditor 3rd Floor, Black Horse House Deloitte LLP Medway Wharf Road 28 May 2024 Statutory Auditor Tonbridge Dividend payment date 4 Brindley Place Kent Birmingham TN9 1QS B1 2HZ September 2024 Half year results for the 6 months Public Relations Consultants ending 30 June 2024 announced Registrars FWD Link Group 15 St Helen’s Place Central Square London 29 Wellington Street EC3A 6DQ Leeds LS1 4DL 264 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 ADDITIONAL INFORMATION NOTICE OF THE ANNUAL GENERAL MEETING This document is important and requires your immediate attention If you are in any doubt as to the action you should take, you should If you have sold or otherwise transferred all of your shares in Chesnara plc, immediately consult your stockbroker, bank manager, solicitor, accountant please pass this document (together with the accompanying proxy form) or other independent professional advisor authorised under the Financial as soon as possible to the purchaser or transferee, or to the person who Services and Markets Act 2000 if you are resident in the United Kingdom or, arranged the sale or transfer so they can pass these documents to the if you reside elsewhere, another appropriately authorised financial advisor. person who now holds the shares. Chesnara plc has a policy of not paying to have access to governance and sustainability analysts’ databases on which voting recommendations and reports are produced. We encourage early, open and timely engagement to ensure the accuracy of the information contained in any analysis and reports issued in respect of Chesnara plc. Company No. 4947166 14. That, from the passing of this Resolution 14 until the earlier of the close of business on 30 June 2025 and the conclusion of the company’s next Annual Notice is given that the 2024 Annual General Meeting of Chesnara plc General Meeting, the company and all companies which are its subsidiaries will be held at the offices of Panmure Gordon, 40 Gracechurch Street, at any time during such period are authorised: London, EC3V 0BT on 14 May 2024 at 11am, for the business set out (a) to make donations to political parties or independent election candidates; below. Shareholders will be kept informed via the Regulatory News System (RNS) should arrangements need to be changed for any reason. (b) to make donations to political organisations other than political parties; and Resolutions 1 to 15 inclusive and 19 will be proposed as ordinary (c) to incur political expenditure up to an aggregate total amount of £50,000, resolutions and Resolutions 16 to 18 inclusive, 20 and 21 will be proposed with the individual amount authorised for each of (a) to (c) above being limited as special resolutions. to £50,000. Any such amounts may comprise sums paid or incurred in one or more currencies. Any sum paid or incurred in a currency other than sterling 1. To receive and adopt the audited accounts for the financial year ended shall be converted into sterling at such rate as the board may decide is 31 December 2023, together with the reports of the directors and appropriate. Terms used in this resolution have, where applicable, the meanings auditor thereon. that they have in Part 14 of the Companies Act 2006. 2. To approve the Directors’ Remuneration Report for the year ended 15. That, from the passing of this resolution until the earlier of the close of business 31 December 2023. on 30 June 2025 and the conclusion of the company’s next Annual General Meeting, the directors be and they are hereby generally and unconditionally 3. To declare a final dividend of 15.61 pence per ordinary share for the authorised in accordance with Section 551 of the Companies Act 2006 (the financial year ended 31 December 2023. Act), to exercise all the powers of the company, to allot shares in the company and/or to grant rights to subscribe for or to convert any security into shares 4. To re-appoint Steve Murray as a director. in the company (Allotment Rights): 5. To re-appoint Carol Hagh as a director. (a) up to an aggregate nominal amount of £2,514,260 such amount to be reduced by the aggregate nominal amount of any equity securities allotted 6. To re-appoint Karin Bergstein as a director. pursuant to the authority in paragraph (b) below in excess of £2,514,260; and 7. To re-appoint Jane Dale as a director. (b) up to an aggregate nominal amount of £5,028,520 (such amount to be reduced by the aggregate nominal amount of any shares allotted or rights 8. To re-appoint Luke Savage as a director. granted pursuant to the authority in paragraph (a) above) in connection with an offer: 9. To re-appoint Mark Hesketh as a director. i) to holders of ordinary shares in proportion (as nearly as may be 10. To re-appoint Eamonn Flanagan as a director. practicable) to their respective holdings; and ii) to holders of other equity securities as required by the rights of those 11. To appoint Tom Howard as a director. securities or as the directors otherwise consider necessary, 12. To reappoint Deloitte LLP as auditor of the company to hold office until but subject to such exclusions or other arrangements as the directors may deem the conclusion of the next general meeting of the company at which necessary or expedient in relation to treasury shares, fractional entitlements, accounts are laid before shareholders. record dates, legal or practical problems in or under the laws of any territory or the requirements of any regulatory body or stock exchange, provided that 13. To authorise the directors to determine the auditor’s remuneration. this authority shall, unless renewed, varied or revoked by the company, expire at the conclusion of the company’s next Annual General Meeting (or, if earlier, at the close of business on 30 June 2025) save that the company may, before such expiry, make offers or agreements which would or might require securities to be allotted or Allotment Rights to be granted after such expiry and the directors may allot securities or grant Allotment Rights in pursuance of such offer or agreement notwithstanding the expiry of the authority conferred by this resolution. CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 265 ADDITIONAL INFORMATION NOTICE OF THE ANNUAL GENERAL MEETING 16. That, subject to the passing of Resolution 15 in this notice, the directors be (d) the authority hereby conferred shall expire at the conclusion of the and are hereby empowered pursuant to Section 570 of the Companies Act company’s next Annual General Meeting (or, if earlier, at the close of 2006 (the Act) to allot equity securities (as defined in Section 560 of the business on 30 June 2025); and Act) for cash, pursuant to the authority conferred on them by Resolution 15 (e) the company may enter into contracts or contracts to purchase ordinary of this notice or by way of a sale of treasury shares as if Section 561 of the shares under the authority hereby conferred prior to the expiry of such Act did not apply to any such allotment, provided that this power is limited to: authority which will or may be completed wholly or partly after the expiry (a) the allotment of equity securities in connection with any rights issue or of such authority, and may make a purchase of ordinary shares in open offer (each as referred to in the Financial Conduct Authority’s pursuance of any such contract or contracts. listing rules) or any other pre-emptive offer that is open for acceptance for a period determined by the directors to the holders of ordinary 19. That, in addition to the authority granted pursuant to Resolution 15 (if passed), shares on the register on any fixed record date in proportion to their the directors be and are hereby generally and unconditionally authorised in holdings of ordinary shares (and, if applicable, to the holders of any accordance with Section 551 of the Companies Act 2006 (the Act), to exercise other class of equity security in accordance with the rights attached all the powers of the company to allot shares in the company and/or grant to such class), subject in each case to such exclusions or other rights to subscribe for or to convert any security into shares in the company: arrangements as the directors may deem necessary or appropriate in (a) up to an aggregate nominal value of £2,514,260 in relation to any issues relation to fractions of such securities, the use of more than one of Restricted Tier 1 (RT1) Instruments where the directors consider that currency for making payments in respect of such offer, any such shares such an issuance of RT1 Instruments would be desirable, including in or other securities being represented by depositary receipts, treasury connection with, or for the purposes of, complying with or maintaining shares, any legal or practical problems in relation to any territory or the compliance with the regulatory requirements or targets applicable to the requirements of any regulatory body or any stock exchange; and company and its subsidiaries from time to time; (b) the allotment of equity securities (other than pursuant to paragraph (a) (b) subject to applicable law and regulation, at such allotment, subscription or above) with an aggregate nominal value of £754,278, conversion prices (or such maximum or minimum allotment, subscription and shall expire on the revocation or expiry (unless renewed) of the or conversion price methodologies) as may be determined by the directors authority conferred on the directors by Resolution 15 of this notice, save from time to time, and unless previously renewed, varied or revoked by that, before the expiry of this power, the company may make any offer the company, this authority shall apply in addition to all other authorities or agreement which would or might require equity securities to be allotted under Section 551 of the Act until the conclusion of the company’s next after such expiry and the directors may allot equity securities under any Annual General Meeting (or, if earlier, at the close of business on 30 June such offer or agreement as if the power had not expired. 2025), save that the company may, before such expiry, make offers or agreements which would, or might, require securities to be allotted or rights 1 7. That, subject to the passing of Resolution 15 of this notice and, in addition to be granted after such expiry and the directors may allot securities or to the power contained in Resolution 16 of this notice, the directors be grant such rights in pursuance of such offer or agreement notwithstanding and are hereby empowered pursuant to Section 570 of the Companies Act the expiry of the authority conferred by this resolution. 2006 (the Act) to allot equity securities (as defined in Section 560 of the Act) for cash, pursuant to the authority conferred on them by Resolution 20. That, subject to the passing of Resolution 19 in this notice, the directors be and 15 of this notice or by way of sale of treasury shares as if Section 561 are hereby generally empowered, pursuant to Section 570 of the Companies of the Act did not apply to any such allotment, provided that this power is: Act 2006 (the Act), to allot equity securities (as defined in Section 560 of the Act and is to be interpreted in accordance with Section 560(2) of the Act) for (a) limited to the allotment of equity securities up to an aggregate nominal cash, pursuant to the authority conferred on them by Resolution 19 of this notice value of £754,278; and up to an aggregate nominal value of £2,514,260 in relation to any issues of (b) used only for the purposes of financing (or refinancing, if the power RT1 Instruments, as if Section 561 of the Act did not apply to any such allotment, is to be exercised within 12 months after the date of the original and shall expire on the revocation or expiry (unless renewed) of the authority transaction) a transaction which the directors determine to be an conferred on the director by Resolution 19 of this notice save that, before the acquisition or other capital investment of a kind contemplated by expiry of this power, the company may make any offer or agreement which the Statement of Principles on Disapplying Pre-Emption Rights most would or might require equity securities to be allotted after such expiry and the recently published by the Pre-Emption Group prior to the date of directors may allot equity securities under any such offer or agreement as if the notice of this meeting, the power had not expired. and shall expire on the revocation or expiry (unless renewed) of the This authority is in addition to the authorities conferred by Resolutions 16 and authority conferred on the directors by Resolution 15 of this notice save 17 in this notice. that, before the expiry of this power, the company may make any offer or agreement which would or might require equity securities to be allotted 21. That a general meeting of the company (other than an Annual General Meeting) after such expiry and the directors may allot equity securities under any may be called on not less than 14 clear days’ notice. such offer or agreement as if the power had not expired. By order of the board 18. That the company be and is hereby generally and unconditionally authorised for the purposes of Section 701 of the Companies Act 2006 (the Act) to make one or more market purchases (as defined in Section 693(4) of the Act) of ordinary shares in the capital of the company, provided that: (a) the maximum aggregate number of ordinary shares hereby authorised to be purchased is £15,058,559; Amanda Wright Group General Counsel and Company Secretary (b) the minimum price (exclusive of expenses) which may be paid for such ordinary shares is its nominal value; 2nd Floor, Building 4 (c) the maximum price (exclusive of expenses) which may be paid for West Strand Business Park such ordinary shares is the maximum price permitted under the West Strand Road Financial Conduct Authority’s listing rules or, in the case of a tender Preston offer (as referred to in those rules), 5% above the average of the Lancashire middle market quotations for those shares (as derived from the Daily PR1 8UY Official List of London Stock Exchange plc) for the 5 business days immediately preceding the date on which the terms of the tender offer 27 March 2024 are announced; 266 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 ADDITIONAL INFORMATION EXPLANATORY NOTES TO THE NOTICE OF THE ANNUAL GENERAL MEETING Arrangements for the 2024 AGM The company is pleased to be able to invite members to attend the AGM in person in May where a presentation on business progress will be given. A results presentation will also be recorded on 28 March 2024 and made available on the corporate website. The company continues to strongly encourage shareholders to vote electronically. Instructions on voting are attached to the Notice of AGM sent out to shareholders and can also be found on the company’s website. Shareholders may also wish to submit questions in advance via email to [email protected]. We will endeavour to respond to questions raised directly, or by publishing responses on our website. 1. Any member who is entitled to attend and vote at this Annual General 4. Proxymity Voting – if you are an institutional investor you may also be able to Meeting is entitled to appoint another person, or two or more persons in appoint a proxy electronically via the Proxymity platform, a process which has respect of different shares held by the shareholder, as their proxy to been agreed by the company and approved by the registrar. For further exercise all or any of their rights to attend and to speak and to vote at the information regarding Proxymity, please go to www.proxymity.io. Your proxy Annual General Meeting. Members who wish to appoint a proxy are must be lodged by 11am on Friday 10 May 2024 in order to be considered encouraged to appoint the Chair of the meeting as their proxy and give your valid or, if the meeting is adjourned, by the time which is 48 hours before the instructions on how you wish the Chair of the meeting to vote on the time of the adjourned meeting. Before you can appoint a proxy via this process proposed resolutions. Appointing the Chair as your proxy will not prevent you will need to have agreed to Proxymity’s associated terms and conditions. you from attending and voting in person at the AGM but will ensure that It is important that you read these carefully as you will be bound by them and your vote is able to be cast in accordance with your wishes should you they will govern the electronic appointment of your proxy. An electronic proxy (or any other person who you might otherwise choose to appoint as your appointment via the Proxymity platform may be revoked completely by sending proxy) be unable to attend for any reason. Members are strongly an authenticated message via the platform instructing the removal of your encouraged to vote electronically. proxy vote. 2. You will not receive a form of proxy for the AGM in the post. Instead, you 5. CREST members who wish to appoint one or more proxies through the will receive instructions to enable you to vote electronically and how to CREST system may do so by using the procedures described in ‘the CREST register to do so. You may request a physical copy proxy form directly from voting service’ section of the CREST Manual. the registrars, Link Group, Central Square, 29 Wellington Street, Leeds, CREST personal members or other CREST sponsored members, and those LS1 4DL (telephone number: 0371 664 0300). If you request a physical copy CREST members who have appointed one or more voting service providers, proxy form, it must be completed in accordance with the instructions should refer to their CREST sponsor or voting service provider(s), who will be that accompany it and then delivered (together with any power of attorney able to take the appropriate action on their behalf. In order for a proxy or other authority under which it is signed, or a certified copy of such appointment or a proxy instruction made using the CREST voting service to be item) to Link Group, Central Square, 29 Wellington Street, Leeds, LS1 4DL valid, the appropriate CREST message (a ‘CREST proxy appointment instruction’) so as to be received by 11am on Friday 10 May 2024. must be properly authenticated in accordance with the specifications of CREST’s operator, Euroclear UK & International Limited (‘Euroclear’), and must 3. Any member wishing to vote at the Annual General Meeting without contain all the relevant information required by the CREST Manual. To be valid, attending in person or (in the case of a corporation) through its duly the message (regardless of whether it constitutes the appointment of a proxy appointed representative, must appoint a proxy to do so. A proxy need not or is an amendment to the instruction given to a previously appointed proxy) be a member of the company, but as noted above members should must be transmitted so as to be received by Link Group (ID RA10), by 11am on appoint the Chair of the meeting as their proxy to ensure that their vote is Friday 10 May 2024, which is acting as the company’s ‘issuer’s agent’. After able to be cast in accordance with their wishes should they (or any other this time, any change of instruction to a proxy appointed through the CREST persons who members might otherwise choose to appoint as their proxy) system should be communicated to the appointee through other means. be unable to attend for any reason. Members may appoint a proxy online The time of the message’s receipt will be taken to be when (as determined by by following the instructions for the electronic appointment of a proxy at the timestamp applied by the CREST Applications Host) the issuer’s agent is www.signalshares.com by entering the company name ‘Chesnara plc’ first able to retrieve it by enquiry through the CREST system in the prescribed and following the on-screen instructions. To be a valid proxy appointment, manner. Euroclear does not make available special procedures in the CREST the member’s electronic message confirming the details of the appointment system for transmitting any particular message. Normal system timings completed in accordance with those instructions must be transmitted and limitations apply in relation to the input of CREST proxy appointment so as to be received by 11am on Friday 10 May 2024. Members who hold instructions. It is the responsibility of the CREST member concerned to take (or, their shares in uncertificated form may also use the ‘CREST’ voting service if the CREST member is a CREST personal member or a CREST sponsored to appoint a proxy electronically, as explained below. member or has appointed any voting service provider(s), to procure that his CREST sponsor or voting service provider(s) take(s)) such action as is necessary to ensure that a message is transmitted by means of the CREST system by any particular time. CREST members and, where applicable, their CREST sponsors or voting service providers should take into account the provisions of the CREST Manual concerning timings as well as its section on ‘Practical limitations of the system’. In certain circumstances, the company may, in accordance with the Uncertificated Securities Regulations 2001 or the CREST Manual, treat a CREST proxy appointment instruction as invalid. CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 267 ADDITIONAL INFORMATION EXPLANATORY NOTES TO THE NOTICE OF THE ANNUAL GENERAL MEETING 6. Copies of (i) directors’ service contracts and letters of appointment; and 12. Under Section 527 of the Companies Act 2006, members meeting the threshold (ii) a copy of the company’s articles of association are available for inspection requirements set out in that section have the right to require the company at the registered office of the company during normal business hours to publish on a website a statement in accordance with Section 528 of the each business day subject to prevailing public health measures. They will Companies Act 2006 setting out any matter relating to (i) the audit of the also be available for inspection at the Annual General Meeting for at least company’s accounts (including the auditor’s report and the conduct of the audit) 15 minutes prior to and during the Annual General Meeting. that are to be laid before the Annual General Meeting or (ii) any circumstances connected with an auditor of the company ceasing to hold office since the 7. The time by which a person must be entered on the register of members previous meeting at which annual accounts and reports were laid in accordance in order to have the right to vote at the Annual General Meeting (and for with Section 437 of the Companies Act 2006. The company may not require the purpose of the determination by the company of the votes they may the members requesting any such website publication to pay its expenses in cast) is close of business on Friday 10 May 2024. Changes to entries on complying with Sections 527 or 528 of the Companies Act 2006. Where the the register of members after that time will be disregarded in determining company is required to place a statement on a website under Section 527 of the right of any person to attend or vote at the Annual General Meeting. the Companies Act 2006, it must forward the statement to the company’s auditor not later than the time when it makes the statement available on the 8. The right to appoint proxies does not apply to persons nominated to website. The business which may be dealt with at the Annual General receive information rights under Section 146 of the Companies Act 2006; Meeting includes any statement that the company has been required under as such rights can only be exercised by the member concerned. Any Section 527 of the Companies Act 2006 to publish on a website. person nominated to enjoy information rights under Section 146 of the Companies Act 2006 who has been sent a copy of this notice of Annual 13. Members meeting the threshold requirements in Sections 338 and 338A of General Meeting is hereby informed, in accordance with Section 149(2) of the Companies Act 2006 have the right to require the company (i) to give to the Companies Act 2006, that they may have a right under an agreement members entitled to receive notice of the meeting notice of a resolution which with the registered member by whom they were nominated to be appointed, may properly be moved and is intended to be moved at the meeting and/or or to have someone else appointed, as a proxy for this Annual General (ii) to include in the business to be dealt with at the meeting any matter (other Meeting. If they have no such right, or do not wish to exercise it, they may than a proposed resolution) which may be properly included in the business. have a right under such an agreement to give instructions to the member A resolution may properly be moved or a matter may properly be included in as to the exercise of voting rights. Nominated persons should contact the the business unless (a) (in the case of a resolution only) it would, if passed, registered member by whom they were nominated in respect of these be ineffective (whether by reason of inconsistency with any enactment or the arrangements. company’s constitution or otherwise), (b) it is defamatory of any person, or (c) it is frivolous or vexatious. Such a request may be in hard copy form or in 9. As at 20 March 2024 (being the last practicable date prior to the publication electronic form, must identify the resolution of which notice is to be given or of this document), the company’s issued share capital consisted of (as applicable) the matter to be included in the business, must be authenticated 150,855,587 ordinary shares, carrying one vote each. No shares were by the person or persons making it, must be received by the company not held by the company in treasury. Therefore, the total voting rights in the later than 11am on 2 April 2024, and (in the case of a matter to be included company as at 20 March 2023 (being the last practicable date prior to the in the business only) must be accompanied by a statement setting out the publication of this document) were 150,855,587. grounds for the request. 10. Information regarding this Annual General Meeting, including information The notes on the following pages give an explanation of the proposed required by Section 311A of the Companies Act 2006, is available at resolutions: www.chesnara.co.uk. Any electronic address provided either in this notice or any related documents may not be used to communicate with the company for any purposes other than those expressly stated. 11. In accordance with Section 319A of the Companies Act 2006, any member attending the Annual General Meeting has the right to ask questions. The company must cause to be answered any such question relating to the business being dealt with at the Annual General Meeting, but no such answer need be given if (a) to do so would interfere unduly with the preparations for the Annual General Meeting or involve the disclosure of confidential information, (b) the answer has already been given on a website in the form of an answer to a question or (c) it is undesirable in the interests of the company or the good order of the Annual General Meeting that the question be answered. The company encourages shareholders to submit their questions electronically in advance of the meeting via [email protected]. 268 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 ADDITIONAL INFORMATION Resolution 1 Resolution 14 Report and Accounts Political donations The Companies Act 2006 requires the directors of a public company to lay It has always been the company’s policy that it does not make political its Annual Report and Accounts before the company in general meeting, giving donations. This remains the company’s policy. shareholders the opportunity to ask questions on the contents. The Annual Part 14 of the Companies Act 2006 (the Act) imposes restrictions on Report and Accounts comprise the audited financial statements, the Auditor’s companies making political donations to any political party or other political Report, the Directors’ Report, the Directors’ Remuneration Report, and the organisation or to any independent election candidate unless they have been Directors’ Strategic Report. authorised to make donations at a general meeting of the company. Whilst the company has no intention of making such political donations, the Act includes Resolution 2 broad and ambiguous definitions of the terms ‘political donation’ and ‘political Approval of the Directors’ Remuneration Report expenditure’ which may apply to some normal business activities which would In accordance with the Companies Act 2006, the company proposes ordinary not generally be considered to be political in nature. Resolution 2 to approve the Directors’ Remuneration Report for the financial The directors therefore consider that, as a purely precautionary measure, it year ended 31 December 2023. The Directors’ Remuneration Report can would be prudent to obtain the approval of the shareholders to make donations be found on pages 105 to 119 of the 2023 Report and Accounts and, for the to political parties, political organisations and independent election candidates purposes of this resolution, does not include the parts of the Directors’ and to incur political expenditure up to the specified limit. The directors intend Remuneration Report containing the Directors’ Remuneration Policy. The vote to seek renewal of this approval at future Annual General Meetings but wish on this resolution is advisory only and the directors’ entitlement to remuneration to emphasise that the proposed resolution is a precautionary measure for the is not conditional on it being passed. The Companies Act 2006 requires the above reason and that they have no intention of making any political donations Directors’ Remuneration Policy to be put to shareholders for approval annually or entering into party political activities. unless the approved policy remains unchanged, in which case it need only be put to shareholders for approval at least every 3 years. The company is not Resolution 15 proposing any changes to the Directors’ Remuneration Policy approved at the Annual General Meeting in 2023. Power to allot shares The Companies Act 2006 provides that the directors may only allot shares if Resolution 3 authorised by shareholders to do so. The directors’ current allotment authority is due to lapse at the 2024 Annual General Meeting. The board is, therefore, Final dividend seeking to renew its authority over shares having an aggregate nominal amount The declaration of the final dividend requires the approval of shareholders in of £2,514,260, representing approximately one-third of the issued ordinary general meeting. If the 2024 Annual General Meeting approves Resolution 3, share capital of the company (excluding treasury shares) as at 20 March 2024 the final dividend of 15.61 pence per share will be paid on 28 May 2024 to (being the latest practicable date prior to the publication of this document). ordinary shareholders who are on the register of members at the close of The board is also seeking authority to allot shares having an aggregate nominal business on 12 April 2024 in respect of each ordinary share. amount of £5,028,520, representing approximately two-thirds of the issued share capital of the company (excluding treasury shares) as at 20 March 2024 Resolutions 4 – 11 inclusive by way of pre-emptive offer to existing shareholders. Appointment and re-appointment of directors The allotment authority sought is in line with the Share Capital Management The company’s Articles of Association provide that all directors retire at each guidelines issued by the Investment Association. For the avoidance of doubt, Annual General Meeting and that those wishing to continue to serve shall the authority sought pursuant to this resolution will give the directors the ability submit themselves for re-appointment or appointment by the shareholders. to allot shares (or grant rights to shares) up to a maximum aggregate nominal In line with this, all directors will be retiring at this year’s AGM and will be amount of £5,028,520. standing for re-appointment, with the exception of David Rimmington who will step down from the board at the end of the AGM. Tom Howard will stand for As at 20 March 2024, the company held no treasury shares. appointment at this year’s AGM, following his appointment as Chief Financial The authority will expire at the earlier of the conclusion of the company’s next Officer, subject to regulatory approval (announced to shareholders on Annual General Meeting and the close of business on 30 June 2025. 7 December 2023). Biographical details of each director detailed in Resolutions 4 to 11 are set out in Appendix 1 to this AGM Notice on pages 271 and 272. Passing Resolution 15 will ensure that the directors have flexibility to take The board is satisfied that the performance of each of the directors proposed advantage of any appropriate opportunities that may arise in pursuit of continues to be effective and important to the company’s long-term sustainable the company’s strategic objective of acquiring life and pensions businesses. success and demonstrates commitment to their responsibilities. This is supported by the annual performance evaluation that was undertaken recently. Resolutions 16 and 17 (special resolution) The board unanimously recommend that each of these directors be appointed Disapplication of statutory pre-emption rights or re-appointed as a director of the company. If the directors wish to allot shares, or grant rights to subscribe for, or convert In accordance with the Code, the board has reviewed the independence of securities into, shares, or sell treasury shares for cash (other than pursuant to an its non-executive directors and has determined that they remain fully employee share scheme) they must first offer them to existing shareholders independent of management. in proportion to their existing shareholdings. In order to give directors flexibility to finance business opportunities by allotting shares without making a pre-emptive Resolutions 12 and 13 offer to existing shareholders and, in accordance with the updated Statement of Principles (PEG Statement of Principles) published by the Pre-Emption Group Re-appointment and remuneration of auditor in November 2022, Resolutions 16 and 17 ask shareholders to grant a limited The company is required to appoint an auditor, at each general meeting before waiver of their pre-emption rights as referenced below. If the directors elect which accounts are laid, to hold office until the end of the next such meeting. to exercise powers granted under Resolutions 16 and 17 in relation to a The board (through its Audit & Risk Committee) has recommended the non-pre-emptive offer, they shall follow the shareholder protections in Part 2B re-appointment of Deloitte LLP and has confirmed that such recommendation of the PEG Statement of Principles. is free from influence by a third party and that no restrictive contractual terms have been imposed on the company. Deloitte LLP has indicated that it is willing Resolutions 16 and 17 will be proposed as special resolutions. to continue to act as the company’s auditor. Resolution 12, therefore, proposes Deloitte’s reappointment as auditor to hold office until the next general meeting at which the company’s accounts are laid before shareholders. Resolution 13 authorises the directors to determine the auditor’s remuneration. CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 269 ADDITIONAL INFORMATION EXPLANATORY NOTES TO THE NOTICE OF THE ANNUAL GENERAL MEETING Resolution 16, if passed, will allow the directors to (a) allot shares in the The directors believe that it is in the best interests of the company to have the company for cash in connection with a rights issue or other pre-emptive offer; flexibility to issue RT1 Instruments from time to time and the authority sought and (b) otherwise allot shares in the company for cash up to a maximum in Resolution 19 may be used if, in the opinion of the directors, at the relevant aggregate nominal value of £754,278, in each case as if the pre-emption rights time, such an issuance of RT1 Instruments would be desirable to improve the of Section 561 of the Companies Act 2006 did not apply. This aggregate capital structure of the company and its subsidiaries. However, the request for nominal amount equates to approximately 10% of the issued ordinary share authority in Resolution 19 should not be taken as an indication that the company capital of the company (excluding treasury shares) as at 20 March 2024 (being will or will not issue any, or any given amount of, RT1 Instruments. the latest practicable date prior to the publication of this Notice of Annual This authority is in addition to the authority proposed in Resolution 15, which General Meeting). is the usual authority sought on an annual basis in line with the guidance issued In line with the PEG Statement of Principles, the company is seeking authority, by the Investment Association. under Resolution 17, to issue up to an additional 10% of its issued ordinary This authority will expire at the earlier of the conclusion of the company’s share capital for cash without pre-emption rights applying. In accordance with next Annual General Meeting and the close of business on 30 June 2025. the Statement of Principles, the company will only allot shares under this The directors may seek a similar authority in the future. additional authority in connection with an acquisition or specific capital investment (within the meaning given in the Statement of Principles) which Resolution 20 (special resolution) is announced contemporaneously with the allotment, or which has taken place in the preceding 12 month period and is disclosed in the announcement Disapplication of pre-emption rights in relation to an issue of the allotment. of Restricted Tier 1 (RT1) Instruments Resolution 20, which will be proposed as a special resolution, proposes that, in The authority granted under Resolutions 16 and 17 will expire at the earlier of addition to any authority conferred by Resolution 16, the directors be empowered the conclusion of the company’s next Annual General Meeting and the close to allot equity securities (as defined in Section 560 of the Companies Act of business on 30 June 2025. 2006) for cash up to a nominal value of £2,514,260 in relation to the issue of RT1 Instruments, which is equivalent to one-third of the issued ordinary Resolution 18 (special resolution) share capital of the company as at 20 March 2024 (being the latest practicable Authority to purchase own shares date prior to the publication of this notice of Annual General Meeting), as if This resolution, which will be proposed as a special resolution, seeks to renew Section 561 of the Companies Act 2006 did not apply to any such allotment. the company’s authority to purchase its own shares. It specifies the maximum Resolution 20, if passed, would permit the company the flexibility necessary number of shares which may be acquired as 10% of the company’s issued to allot equity securities pursuant to any proposal to issue RT1 Instruments ordinary share capital (excluding treasury shares) as at 20 March 2024, being without the need to comply with the pre-emption rights of Section 561 of the the latest practicable date prior to the publication of this document, and Companies Act 2006 did not apply. Resolution 20 is intended to provide the specifies the minimum and maximum prices at which shares may be bought. directors with the continued flexibility to issue RT1 Instruments which may The directors will only use this authority if, in light of market conditions prevailing convert into ordinary shares. This will enhance the company’s ability to manage at the time, they believe that the effect of such purchases will be (where such its capital. Further information on the Restricted Tier 1 Instruments is given shares are to be purchased for cancellation) to increase earnings per share, and in Appendix 2. that taking into account other investment opportunities, purchases will be in This authority will expire at the earlier of the conclusion of the company’s the best interests of the shareholders generally. Any shares purchased in next Annual General Meeting and the close of business on 30 June 2025. accordance with this authority will be cancelled or held in treasury for subsequent The directors may seek a similar authority in the future. transfer to an employee share scheme. The directors have no present intention of exercising this authority, which will expire at the earlier of the conclusion Any exercise of the authorities in Resolutions 15, 16 and 17 (if passed) would of the company’s next Annual General Meeting and the close of business on be separate from and in addition to the exercise of any powers under Resolutions 30 June 2025. 19 and 20 and would also have a dilutive effect on existing shareholdings. The company has options and awards outstanding under existing share schemes Resolution 21 (special resolution) over an aggregate of 1,531,582 ordinary 5p shares, representing 1.02% of the company’s issued ordinary share capital (excluding treasury shares) as at Notice of general meetings 20 March 2024 (the latest practicable date prior to the publication of this The Companies Act 2006 requires the notice period for general meetings of the document). This would represent approximately 1.13% of the company’s issued company to be at least 21 days, but, as a result of a resolution which was share capital (excluding treasury shares) if the proposed authority being passed by the company’s shareholders at last year’s Annual General Meeting, sought at the Annual General Meeting to buy back 15,085,559 ordinary shares the company is currently able to call general meetings (other than an Annual was exercised in full (and all the repurchased ordinary shares were cancelled). General Meeting) on not less than 14 clear days’ notice. In order to preserve this ability, shareholders must once again approve the calling of meetings Resolution 19 on not less than 14 clear days’ notice. Resolution 21 seeks such approval. The approval will be effective until the company’s next Annual General Meeting, Authority to allot new ordinary shares in relation to an issue when it is intended that a similar resolution will be proposed. The company will of Restricted Tier 1 (RT1) Instruments also need to meet the statutory requirements for electronic voting before it Resolution 19, will, if passed, grant authority to directors to allot ordinary can call a general meeting on less than 21 days’ notice. shares in the company or grant rights to subscribe for, or to convert any security into, ordinary shares in the company, in accordance with Section 551 of the The shorter notice period would not be used as a matter of routine for general Companies Act 2006, up to an aggregate nominal amount of £2,514,260 in meetings, but only where the flexibility is merited by the business of the connection with the issue of RT1 Instruments (as defined in Appendix 2) which meeting and is thought to be to the advantage of shareholders as a whole. is, in aggregate, equivalent to approximately one-third of the issued ordinary share capital of the company as at 20 March 2024 (being the latest practicable Directors’ recommendation date prior to the publication of this notice of Annual General Meeting). The directors recommend all shareholders to vote in favour of all of the above resolutions, as the directors intend to do in respect of their own shares (save in respect of those matters in which they are interested), and consider that all resolutions are in the best interests of the company and its shareholders as a whole. 270 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 ADDITIONAL INFORMATION APPENDIX 1 TO AGM NOTICE BOARD KNOWLEDGE, SKILLS AND EXPERIENCE SUMMARY KEY KNOWLEDGE/SKILL/EXPERIENCE SUMMARY A Chesnara company knowledge • • • • • • • • B Industry knowledge – UK • • • • • • • C Industry knowledge – Sweden/Netherlands • • • • • • • • D Governance – actuarial • • • • • • • • E Governance – financial • • • • • • • • F Audit and risk management • • • • • • • • G Investment management • • • • • • H M&A and business development • • • • • • • • I Commercial management • • • • • • • • J Operational change management • • • • • • • • K Customer operational/management • • • • • • • L Information technology • • • • • • M Environmental, social and governance (ESG) • • • • • • • Annual assessment confirms that our board continues to hold significant experience in the insurance sector and also have a range of specialisms which ensure all aspects of our competency profile are well covered. LUKE SAVAGE STEVE MURRAY CHAIR GROUP CHIEF EXECUTIVE OFFICER Non-executive Chair of the board, Luke is responsible for the leadership Appointment to the board: Appointed as a director of Chesnara on of the board, setting the agenda and ensuring the board’s effectiveness 2 August 2021 and as Group CEO on 19 October 2021. in all aspects of its role. Career, skills and experience: Steve joined Chesnara from Royal London Appointment to the board: Appointed to the board and as Chair in where, as part of their Group Executive Committee, he was Chief February 2020. Commercial Officer with group-wide accountability for M&A and Strategy, Transformation and Analytics & Insight, as well as accountability for its Committee membership: Nomination & Governance (Chair to legacy business and the take to market activity across the UK insurance 31 December 2021) and a member of the Remuneration Committee and savings business. He was also a director of Royal London Asset (from February 2020). Attends the Audit & Risk Committee Management. Prior to that he spent 15 years at Standard Life across by invitation. a variety of roles, seeing it through demutualisation and IPO before leading Group M&A and strategy. He then worked in Standard Life’s UK & Current directorships/business interests: European insurance business initially as CEO of 1825 financial planning – Numis Corporation plc, Chair before becoming MD Commercial & Strategy. After leading the first phase of the separation of the UK & European insurance business to Phoenix, Skills and experience: ABCDEFGHIJLM he was appointed as Deputy Head of the Private Market division in Aberdeen Standard Investments. Steve started his career with EY. Current directorships/business interests: – Countrywide Assured Services Ltd – CASFS Ltd – Countrywide Assured Life Holdings Limited – Movestic Livförsäkring AB – Scildon NV Supervisory Board – Waard Group Supervisory Board – Cattanach – a private charity (Chair) Skills and experience: ABCDEFGHIJKLM CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 271 ADDITIONAL INFORMATION APPENDIX 1 TO AGM NOTICE JANE DALE TOM HOWARD SENIOR INDEPENDENT NON-EXECUTIVE DIRECTOR CHIEF FINANCIAL OFFICER DESIGNATE AND CHAIR OF THE AUDIT & RISK COMMITTEE (subject to regulatory approval) from April 2024 Appointment to the board: Appointed to the Chesnara plc board Appointment to the board: Not yet appointed to the board. in May 2016 and as Chair of the Audit & Risk Committee in December 2016. Appointed as the board’s Senior Independent Career, skills and experience: Tom is a highly experienced CFO with Non-Executive Director in October 2018. over 25 years of industry experience, most recently as CFO of Aviva Investors, the asset management division of Aviva plc. Over a 14-year Committee membership: Audit & Risk (Chair) and Nomination period, he has held a variety of senior roles within Aviva plc, including & Governance. Director of Mergers & Acquisitions for Aviva Group and CFO for Aviva’s Life and General Insurance business in Ireland. He brings an extensive Current directorships/business interests: leadership track-record in strategy, M&A, capital management – Countrywide Assured plc, Chair of the Audit & Risk Committee and financial reporting in UK and European insurance businesses. Tom is a fellow of the Institute and Faculty of Actuaries. – CASLP Ltd, Chair of the Audit & Risk Committee – Covea Insurance plc and Covea Life Limited, NED and Chair Skills and experience: ABCDEFGHIJKLM of the Audit Committee – Novia Financial plc, NED and Chair of the Audit Committee; and Novia Financial Holdings Limited, NED EAMONN FLANAGAN – Brown & Brown (Europe) Holdco Limited, NED and Brown & Brown INDEPENDENT NON-EXECUTIVE DIRECTOR AND (Europe) Limited, NED and Chair of the Risk & Compliance Committee CHAIR OF THE REMUNERATION COMMITTEE and Chair of the Remuneration Committee. Appointment to the board: Appointed to the Chesnara plc board Skills and experience: ABCDEFGHIJKM in July 2020 and as Chair of the Remuneration Committee in January 2022. KARIN BERGSTEIN Committee membership: Audit & Risk and Remuneration (Chair). INDEPENDENT NON-EXECUTIVE DIRECTOR Current directorships/business interests: Appointment to the board: Appointed to the Chesnara plc board – Movestic Livförsäkring AB, NED and Chair of the Audit & Risk Committee on 14 February 2022. – Movestic Fonder AB. Chair – AJ Bell, NED Committee membership: Nomination & Governance and – Randall & Quilter Investment Holdings Ltd (Bermuda), NED Audit & Risk. Skills and experience: ABCDEFGHIJKLM Current directorships/business interests: – Movestic Livförsäkring AB, NED – Van Lanschot Kempen N.V., NED MARK HESKETH – Bank Nederlandse Gemeenten N.V., NED INDEPENDENT NON-EXECUTIVE DIRECTOR AND CHAIR – University Medical Center Groningen, NED OF THE NOMINATION & GOVERNANCE COMMITTEE – Bergstein Advies B.V., General Manager Appointment to the board: Appointed to the Chesnara plc board – Foundation for Continuity of NN Group, NED in December 2018 and as Chair of the Nomination & Governance – Foundation for Preference Shares Wereldhaven, NED Committee in January 2022. Skills and experience: ACDEFHIJKLM Committee membership: Nomination & Governance (Chair) and Audit & Risk. CAROL HAGH Current directorships/business interests: NON-EXECUTIVE DIRECTOR – Countrywide Assured plc, NED AND DESIGNATED WORKFORCE NED – CASLP Ltd, NED – Bethany Christian Trust, Treasurer and NED Appointment to the board: Appointed to the Chesnara plc board on 14 February 2022. – Bethany Enterprises Ltd, NED Committee membership: Nomination & Governance Skills and experience: ABCDEFGHIJK and Remuneration. Current directorships/business interests: – Countrywide Assured plc, NED – CASLP Ltd, NED – Old Game New Rules Ltd, Director and Founder – Direct Line Insurance Group plc, NED (with effect from 1 April 2024) Skills and experience: ABCDEFHIJKLM 272 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 ADDITIONAL INFORMATION APPENDIX 2 TO AGM NOTICE Further information on restricted Tier 1 instruments What are ‘Restricted Tier 1 Instruments’? How can the issue of Restricted Tier 1 Instruments provide Solvency II-compliant Restricted Tier 1 Instruments, structured as contingent a more efficient capital structure? convertible securities, the terms of which will provide that, upon the occurrence The group can satisfy its Tier 1 Capital requirements through, among other of certain trigger events, the securities will be irrevocably converted into things, the issue of ordinary shares, retention of profits and the issue of ordinary shares. Restricted Tier 1 Instruments. Satisfying the group’s Tier 1 Capital requirements in part through the issue of Restricted Tier 1 Instruments could be a cost- Why is the company seeking authorities in connection with effective means of raising capital, therefore enabling the group to reduce its the issuance of Restricted Tier 1 Instruments? overall cost of capital. This would, in turn, be expected to be more beneficial The group is subject to the Solvency II regulatory framework which came into for existing shareholders than if the group were to satisfy its Tier 1 Capital force on 1 January 2016 and which has been retained in the United Kingdom requirements through the issue of ordinary shares or the retention of following the end of the Brexit implementation period on 31 December 2020. profits alone. Under Solvency II, the group is required to hold sufficient capital to absorb losses in periods of stress and to provide a buffer to increase resilience against At what price will Restricted Tier 1 Instruments be converted unexpected losses, thereby protecting the interests of policyholders. At least into or exchanged for ordinary shares? half of the group’s overall capital requirements may only be met with certain The terms and conditions of any Restricted Tier 1 Instruments issued will types of high-quality capital (referred to as ‘Tier 1 Capital’), including share specify a conversion price or a mechanism for setting a conversion price, which capital, retained profits and, for up to 20% of Tier 1 Capital, instruments that are is the rate at which the Restricted Tier 1 Instruments will be exchanged into written down, or, in the case of Restricted Tier 1 Instruments, instruments ordinary shares. The resolutions enable the directors to set the specific terms that are converted into ordinary shares, in the event that the group’s capital and conditions of the Restricted Tier 1 Instruments (including a conversion position falls below defined levels (referred to as a ‘Trigger Event’). The group price or mechanism for setting a conversion price) after considering market may issue Restricted Tier 1 Instruments to satisfy part of its Tier 1 Capital conditions at the time of issuance. Given the nature of the Trigger Events and requirements. Any issue of Restricted Tier 1 Instruments would form part of the the implications on the group’s business at the time any Trigger Event occurs, group’s overall strategy to maintain a strong capital base from which it can the group’s expectation is that the conversion price at the time of conversion achieve its objectives. would exceed the market price of the ordinary shares at such time. What is a ‘Trigger Event’ and what will happen if a Trigger Event occurs? How have you calculated the size of the authorities you are seeking? A Trigger Event will occur if the group determines, in consultation with the These authorities are set at a level which, based on the share price of Prudential Regulation Authority, that it has ceased to comply with its capital the group as at 20 March 2024 (being the latest practicable date prior to the requirements under Solvency II in a significant way. This may occur if the publication of this document) corresponds approximately to the group’s amount of capital held by the group falls below 75% of its capital requirements, regulatory headroom for Restricted Tier 1 Instruments as at the same date if the group fails to comply with its capital requirements for a continuous (limited to 20% of Tier 1 Capital). period of 3 months or more or if the group fails to comply with other minimum capital requirements applicable to it. Only if a Trigger Event occurs (and not under any other circumstances) will any Restricted Tier 1 Instruments issued by the group convert into new ordinary shares. The holders of any Restricted Tier 1 Instruments will not have the option to require conversion of the Restricted Tier 1 Instruments at their discretion. The group may, if permitted by law and regulation and if considered appropriate at the relevant time, issue Restricted Tier 1 Instruments that include in their terms and conditions a mechanism through which the group may elect to give existing shareholders the opportunity to purchase the ordinary shares issued on conversion of the Restricted Tier 1 Instruments in proportion to their existing shareholdings in the company (subject to legal, regulatory or practical restrictions). What steps can the group take on or before a Trigger Event? If the group’s capital position were to deteriorate, a number of steps are available to the group to improve its capital position before the occurrence of a Trigger Event. These could include reducing the group’s liabilities or raising extra share capital from investors by way of a rights issue. If the company were, in the future, to launch a rights issue, the company’s existing shareholders would be offered the opportunity to acquire new ordinary shares in proportion to their existing shareholding. CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 273 ADDITIONAL INFORMATION ALTERNATIVE PERFORMANCE MEASURES Throughout our Report and Accounts 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. Further information can be found throughout the Overview section, with detailed reference within the Financial Review on pages 48 to 58. APM WHAT IS IT? WHY DO WE USE IT? REF Group cash Cash generation is used by the group as a measure Cash generation is a key measure, because it is the net See cash generation generation of assessing how much dividend potential has cash flows to Chesnara from its life and pensions on page 50 and been generated, subject to ensuring other constraints businesses which support Chesnara’s dividend-paying reconciliation on are managed. capacity and acquisition strategy. Cash generation page 277 can be a strong indicator of how we are performing Group cash generation is calculated as the movement against our stated objective of ‘maximising value in the group’s surplus Own Funds above the group’s from existing business’. internally required capital, as determined by applying the group’s Capital Management Policy, which has Solvency II rules at its heart. Divisional cash Cash generation is used by the group as a measure It is an important indicator of the operating See cash generation generation of assessing how much dividend potential has performance of the business before on page 50 been generated, subject to ensuring other constraints the impact of group level operations and are managed. consolidation adjustments. Divisional cash generation represents the movement in surplus Own Funds above local capital management policies within the three operating divisions of Chesnara. Divisional cash generation is used as a measure of how much dividend potential a division has generated, subject to ensuring other constraints are managed. Commercial Cash generation is used by the group as a measure Commercial cash generation aims to provide See cash generation cash generation of assessing how much dividend potential has stakeholders with enhanced insight into cash on page 51 been generated, subject to ensuring other constraints generation, drawing out components of the result are managed. relating to technical complexities or exceptional items. The result is deemed to better reflect the Commercial cash generation excludes the impact group’s view of commercial performance, of technical adjustments, modelling changes and showing key drivers within that. corporate acquisition activity; representing the inherent commercial cash generated by the business. Economic Value EcV is a financial metric that is derived from EcV aims to reflect the market-related value of See EcV analysis on (EcV) Solvency II Own Funds. It provides a market consistent in-force business and net assets of the non-insurance page 53 assessment of the value of existing insurance business and hence is an important reference point businesses, plus adjusted net asset value of the by which to assess Chesnara’s value. A life and pensions non-insurance business within the group. group may typically be characterised as trading at a discount or premium to its Economic Value. Analysis We define EcV as being the Own Funds adjusted for of EcV provides additional insight into the development contract boundaries, risk margin and restricted of the business over time. The EcV development of with-profit surpluses. As such, EcV and Own Funds the Chesnara group over time can be a strong indicator have many common characteristics and tend to of how we have delivered to our strategic objectives. be impacted by the same factors. 274 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 ADDITIONAL INFORMATION APM WHAT IS IT? WHY DO WE USE IT? REF Economic Value The principal underlying components of the By recognising the market-related value of in-force See EcV earnings (EcV) earnings EcV earnings are: business (in-force value), a different perspective is analysis on page 52 – The expected return from existing business provided in the performance of the group and on the (being the effect of the unwind of the rates used valuation of the business. EcV earnings are an to discount the value in-force); important KPI as they provide a longer-term measure – Value added by the writing of new business; of the value generated during a period. The EcV earnings of the group can be a strong indicator of – Variations in actual experience from that assumed how we have delivered against all three of our in the opening valuation; core strategic objectives. – The impact of restating assumptions underlying the determination of expected cash flows; and – The impact of acquisitions. EcV operating This is the element of EcV earnings (see above) EcV operating earnings are important as they provide See EcV Earnings earnings that are generated from the company’s ongoing core an indication of the underlying value generated by Analysis on page 52 business operations, excluding any profit earned the business. It can help identify profitable activities from investment market conditions in the period and and also inefficient processes and potential any economic assumption changes in the future. management actions. EcV economic This is the element of EcV earnings (see above) that EcV economic earnings are important in order See EcV Earnings earnings are derived from investment market conditions in to measure the additional value generated from Analysis on page 52 the period and any economic assumption changes investment market factors. in the future. Commercial A more commercially relevant measure of new This provides a fair commercial reflection of the value See Business Review new business business profit than that recognised directly under added by new business operations and is more section on pages 40 profit the Solvency II regime, allowing for a modest level comparable with how new business is reported by to 43 of return, over and above risk-free, and exclusion of our peers, improving market consistency. the incremental risk margin Solvency II assigns to new business. Solvency Solvency is a fundamental financial measure Solvency gives policyholders comfort regarding See Capital which is of paramount importance to investors and the security of their provider. This is also the case Management section policyholders. It represents the relationship for investors together with giving them a sense on pages 45 to 47 between the value of the business as measured on of the level of potential surplus available to invest in a Solvency II basis and the capital the business is the business or distribute as dividends, subject to required to hold – the Solvency Capital Requirement other considerations and approvals. (SCR). Solvency can be reported as an absolute surplus value or as a ratio. Funds Under FuM reflects the value of the financial assets that FuM is important as it provides an indication of the See Consolidated Management the business manages, as reported in the IFRS scale of the business, and the potential future Balance Sheet on (FuM) Consolidated Balance Sheet. returns that can be generated from the assets that page 143 are being managed. Acquisition Acquisition value gains reflect the incremental The EcV gain from acquisition will be net of any value gain Economic Value added by a transaction, exclusive of associated increase in risk margin. The risk margin (incremental any additional risk margin associated with absorbing is a temporary Solvency II dynamic which will run value) the additional business. off over time. Leverage/ A financial measure that demonstrates the degree It is an important measure as it indicates the overall See IFRS gearing to which the company is funded by debt financing level of indebtedness of Chesnara, and it is also a Balance Sheet versus equity capital, presented as a ratio. It is key component of the bank covenant arrangements on page 56 defined as debt divided by debt plus equity, with the held by Chesnara. equity denominator adding back the net of tax CSM liability, as measured under IFRS. IFRS capital base This is the IFRS net equity for the group plus the It is a better measure of the value of the business See IFRS Income consolidated CSM net of reinsurance and tax. than net equity as it takes into account the store of Statement on deferred profits held in the balance sheet, as page 57 represented by the CSM, including those as yet unrecognised profits from writing new business and acquisitions. Policies/policy Policy count is the number of policies that the group This is important to show the scale of the business, See Introduction to count manages on behalf of customers. particularly to provide context to the rate at which the Chesnara page 7 closed book business is maturing. In our open businesses, the policy count shows the net impact of new business versus policy attrition. CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 275 ADDITIONAL INFORMATION RECONCILIATION OF METRICS The diagram below shows the interaction between the IFRS metrics and the Alternative Performance Measures used by the group. FINANCIAL STATEMENTS ADDITIONAL METRICS I Solvency II valuation IFRS net assets Capital requirements (Own Funds) R (£359.9m) (£683.7m) Solvency Capital SCR plus Requirement management buffer I P R IFRS profits Economic Value Solvency I B Balance sheet Earnings Percentage Absolute Stakeholder focus: P Policyholders I Investors II R Regulators New business Cash generation B B Business partners EcV Commercial GroupDivisional Key performance indicators As shown above, the key interaction between our statutory reporting rules under IFRS and the Alternative Performance Measures is with the Solvency II valuation and the Own Funds balance. A reconciliation from IFRS net assets to Solvency II Own Funds is shown below: £m 31 Dec 31 Dec Rationale 2023 2022 Group IFRS net assets 359.9 333.1 Intangible assets that cannot be sold separately have no intrinsic value under Removal of intangible assets; AVIF, DAC and DIL (94.9) (166.3) Solvency II rules. Removal of IFRS reserves, net of reinsurance 11,071.0 10,316.0Actuarial reserves are calculated differently between the two methodologies and hence IFRS reserves are replaced with Solvency II technical provisions. The main Inclusion of SII technical provisions, net of reinsurance (10,853.3) (10,020.3) differences in methodology are discussed further below. Other valuation differences 0.4 2.2 Other immaterial valuation differences. Mortgage loan valuation difference 32.3 – Valuation difference of the Mortgage debt between IFRS and SII. Deferred tax valuation differences (8.1) 9.9 These are the deferred tax impacts as a result of the adjustments above. Under Solvency II rules, future ‘foreseeable dividends’ are required to be recognised Foreseeable dividends (23.5) (22.8) within Own Funds. Under IFRS rules, dividends are recognised when paid. Tier 2 debt valuation differences 52.2 – Valuation difference of Tier 2 debt between IFRS and SII. Tier 2 debt under SII 148.4 200.0 Tier 2 capital plus the restriction placed on the subordinated debt within Own Funds under Solvency II requirements. Tier 2/3 restrictions (0.3) (46.7) Solvency II requires that Own Funds are reduced by any surpluses that are restricted. Ring-fenced surpluses (0.5) – For Chesnara this relates to surpluses within the two S&P with-profits funds, which are temporarily restricted. These restrictions are removed through periodic Group SII Own Funds 683.7 605.1 capital transfers. The main differences between the two methodologies for calculating actuarial reserves are as follows: – Under IFRS 9 the value of investment contracts is taken as the unit liability whilst under Solvency II a non-unit reserve and Risk Margin are required. – Best estimate assumptions are used for both IFRS 17 and Solvency II, however the former requires the CSM to be held for which there is no equivalent under Solvency II. – Both bases require a margin for adverse deviation, respectively the Risk Adjustment and the Risk Margin, but whilst the approach used is very similar the cost of capital applied is different. – For the most part the yield curves adopted for discounting under IFRS 17 are very similar to those used in Solvency II, the exception being that for certain Dutch ‘savings mortgage’ products the IFRS 17 liabilities use a yield curve derived from mortgage rates available in the market. – The reserve for future expenses held in Chesnara plc under Solvency II is not permitted under IFRS. – Other valuation differences relate to the definition of contract boundary and the allowability, or otherwise, of certain expenses such as investment management expenses on products where no investment service is provided. 276 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 ADDITIONAL INFORMATION Solvency II position Solvency II is the solvency regime that applies to the group. Over and above IFRS, Solvency II imposes a capital requirement on the group. A summary of the solvency position of the group at 31 December 2023 and 31 December 2022 is as follows: £m 31 Dec 2023 31 Dec 2022 Group SII Own Funds (OF) 665.7 605.1 Solvency Capital Requirement (SCR) 332.7 306.7 Solvency surplus 351.0 298.4 Solvency ratio 205% 197% Cash generation Cash generation is used by the group as a measure of assessing how much dividend potential has been generated, subject to ensuring other constraints are managed. Group cash generation is calculated as the movement in the group’s surplus Own Funds above the group’s internally required capital, as determined by applying the group’s Capital Management Policy, which has Solvency II rules at its heart. For further information on cash generation please refer to page 274 and the Financial Review section. Cash generation can be derived from the opening and closing solvency positions as follows: £m Opening Solvency II surplus: Own Funds – 31 Dec 2022 605.1 Remove Tier 2 impact on Own Funds (153.3 ) SCR – 31 Dec 2022 (306.7 ) Add back Own Funds Restriction – Additional capital to meet normal internal operating range (40% of SCR) (122.7 ) Surplus available for distribution – 31 Dec 2022 22.4 Closing Solvency II surplus: Own Funds – 31 Dec 2023 683.7 Remove Tier 2 debt at book value (200.0 ) SCR – 31 Dec 2023 (332.7 ) Add back Own Funds Restriction 0.5 Additional capital to meet normal internal operating range (40% of SCR) (133.1 ) Surplus available for distribution – 31 Dec 2023 18.4 The closing Solvency II position at 31 December 2023 reflects the payment of an interim dividend of £12.6m paid during the year and reflects a foreseeable dividend of £23.5m due to be paid in 2024. As these are distributions to shareholders, akin to IFRS profit reporting, these do not form part of the cash generation metric and should be excluded. Consequently, group cash generation can be derived as follows: £m Closing surplus available for distribution less opening available surplus for distribution (4.1 ) Add back: Movement in Tier 3 asset and restrictions – Add back: Interim dividend paid 12.6 Add back: Foreseeable year end dividend 23.5 Add back: acquisition impact 0.6 Group cash generation 32.5 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 277 ADDITIONAL INFORMATION GLOSSARY AGM Annual General Meeting. KPI Key Performance Indicator. ALM Asset Liability Management – management of risks that arise due LACDT Loss Absorbing Capacity of Deferred Tax. to mismatches between assets and liabilities. Leverage A financial measure that demonstrates the degree to which the APE Annual Premium Equivalent – an industry wide measure that (gearing) company is funded by debt financing versus equity capital, is used for measuring the annual equivalent of regular and single usually presented as a ratio, defined as debt divided by debt plus premium policies. equity, with the equity denominator adding back the net of tax CSM liability, as measured under IFRS. BAU cash This represents divisional cash generation plus the impact of generation non-exceptional group activity. London Stock London Stock Exchange plc. Exchange BLAGAB Basic life assurance and general annuity business. LTIP Long-Term Incentive Plan – A reward system designed to CA Countrywide Assured plc. incentivise executive directors’ long-term performance. CALH Countrywide Assured Life Holdings Limited and its Movestic Movestic Livförsäkring AB. subsidiary companies. Modernac Modernac SA, a previously associated company 49% owned CASLP Sanlam Life & Pensions UK by Movestic. Cash This represents the operational cash that has been generated in New business The present value of the expected future cash inflows arising generation the period. The cash generating capacity of the group is largely a from business written in the reporting period. function of the movement in the solvency position of the insurance subsidiaries within the group and takes account of the buffers Official List The Official List of the Financial Conduct Authority. that management has set to hold over and above the solvency Operating profit A measure of the pre-tax profit earned from a company’s ongoing requirements imposed by our regulators. Cash generation is core business operations, excluding any profit earned from reported at a group level and also at an underlying divisional level investment market conditions in the period and any economic reflective of the collective performance of each of the divisions assumption changes in the future (alternative performance prior to any group level activity. metric – APM). Commercial Cash generation excluding the impact of technical adjustments, Ordinary shares Ordinary shares of 5 pence each in the capital of the company. cash generation modelling changes and exceptional corporate activity; ORSA Own Risk and Solvency Assessment. the inherent commercial cash generated by the business. Own Funds Own Funds – in accordance with the UK’s regulatory regime for Core Absolute surplus movement of the divisions including Chesnara insurers it is the sum of the individual capital resources for surplus entity but adjustments will be made for the impact of items each of the regulated related undertakings less the book-value of emergence such as FX, T2/T3 restrictions, acquisition impacts and shareholder investments by the company in those capital resources. dividends as deemed appropriate. Note: Any adjustments will be subject to board approval (and Remco approval PAA Premium allocation approach – a simplified measurement model if they impact remuneration) and will be transparently reported. which can be applied to short-term contracts. CSM Contractual Service Margin (CSM) represents the unearned profit PRA Prudential Regulation Authority. that an entity expects to earn on its insurance contracts as it QRT Quantitative Reporting Template. provides services. RA Risk adjustment is the additional reserve held for non-financial risks. Divisional cash This represents the cash generated by the three operating divisions RCF 3 year Revolving Credit Facility of £100m (currently unutilised) put generation of Chesnara (UK, Sweden and the Netherlands), exclusive of in place in July 2021. group level activity. Resolution The resolution set out in the notice of General Meeting set out DNB De Nederlandsche Bank is the central bank of the Netherlands and in this document. is the regulator of our Dutch subsidiaries. RMF Risk Management Framework . DPF Discretionary Participation Feature – A contractual right under an insurance contract to receive, as a supplement to guaranteed Robein Leven Robein Leven N.V. benefits, additional benefits whose amount or timing is Scildon Scildon N.V. contractually at the discretion of the issuer. Shareholder(s) Holder(s) of ordinary shares. Dutch business Scildon and the Waard Group, consisting of Waard Leven N.V., Solvency II A fundamental review of the capital adequacy regime for the Waard Schade N.V. and Waard Verzekeringen B.V. European insurance industry. Solvency II aims to establish Economic A measure of pre-tax profit earned from investment market a set of EU-wide capital requirements and risk management profit conditions in the period and any economic assumption changes standards and has replaced the Solvency I requirements. in the future (alternative performance measure – APM). Standard The set of prescribed rules used to calculate the regulatory EcV Economic Value is a financial metric that is derived from Solvency II Formula SCR where an internal model is not being used. Own Funds. It provides a market consistent assessment of the STIS Short-Term Incentive Scheme – A reward system designed to value of existing insurance businesses, plus adjusted net asset incentivise executive directors’ short-term performance. value of the non-insurance business within the group. SCR In accordance with the UK’s regulatory regime for insurers it FCA Financial Conduct Authority. is the sum of individual capital resource requirements for the FI Finansinspektionen, being the Swedish Financial insurer and each of its regulated undertakings. Supervisory Authority. Swedish Movestic and its subsidiaries and associated companies. Form of proxy The form of proxy relating to the General Meeting being sent business to shareholders with this document. S&P Save & Prosper Insurance Limited and Save & Prosper FSMA The Financial Services and Markets Act 2000 of England and Pensions Limited. Wales, as amended. TCF Treating Customers Fairly – a central PRA principle that aims to GMM General measurement model – the default measurement model ensure an efficient and effective market and thereby help which applies to insurance contracts with limited or no pass-through policyholders achieve fair outcomes. of investment risks to policyholders. Tier 2 Term debt capital (Tier 2 Subordinated Notes) issued in February Group Chesnara plc and its existing subsidiary undertakings. 2022 with a 10.5 year maturity and 4.75% coupon rate. Group cash This represents the absolute cash generation for the period at Transfer ratio The proportion of new policies transferred into the business in generation total group level, comprising divisional cash generation as well as relation to those transferred out. both exceptional and non-exceptional group activity. TSR Total Shareholder Return, measured with reference to both Group In accordance with the UK’s regulatory regime for insurers it is dividends and capital growth. Own Funds the sum of the individual capital resources for each of the UK or The United Kingdom of Great Britain and Northern Ireland. regulated related undertakings less the book-value of investments United Kingdom by the group in those capital resources. UK business CA, S&P and CASLP. Group SCR In accordance with the UK’s regulatory regime for insurers it is the sum of individual capital resource requirements for the insurer VA The Volatility Adjustment is a measure to ensure the appropriate and each of its regulated undertakings. treatment of insurance products with long-term guarantees under Solvency II. It represents an adjustment to the rate used to Group solvency Group solvency is a measure of how much the value of the discount liabilities to mitigate the effect of short-term volatility company exceeds the level of capital it is required to hold in bond returns. accordance with Solvency II regulations. VFA Variable fee approach – the measurement model that is applied HCL HCL Insurance BPO Services Limited. to insurance contracts with significant investment-related IFRS International Financial Reporting Standards. pass-through elements. IFA Independent Financial Advisor. Waard The Waard Group. 278 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 ADDITIONAL INFORMATION NOTE ON TERMINOLOGY As explained in Note C to 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 and reinsured into Countrywide Assured plc; CASLP – ‘SLP’ Sanlam Life & Pensions UK 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; 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. CHESNARA ANNUAL REPORT AND ACCOUNTS 2023 279 ADDITIONAL INFORMATION Cautionary and forward looking statements This document has been prepared for the members of Chesnara plc and no one else. Chesnara plc, its directors or agents do not accept or assume responsibility to any other person in connection with this document and any such responsibility or liability is expressly disclaimed. Nothing in this document should be construed as a profit forecast or estimate. This document may contains, and we may make other statements (verbal or otherwise) containing, forward-looking statements with respect to certain of the plans and current expectations relating to the future financial condition, business performance, and results, strategy and/or objectives (including without limitation, climate-related plans and goals) of Chesnara plc. Statements containing the words ‘believes’, intends’, ‘will’, ‘expects’, plans’, ‘aims’, ‘seeks’, ‘targets’, ‘continues’ and ‘anticipates’ or other words of similar meaning are forward looking. 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, political, social, environmental 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. No representation is made with regard to forward-looking statements, including that any future results will be achieved. As a result, you are cautioned not to place undue reliance on such forward-looking statements contained in this document. Chesnara undertakes no obligation to update any of the forward-looking statements contained within this document or any other forward-looking statements we make. Forward-looking statements in this report are current only as of the date on which such statements are made. The climate metrics used in this document should be treated with special caution, as they are more uncertain than, for example, historical financial information and given the wider uncertainty around the evolution and impact of climate change. Climate metrics include estimates of historical emissions and historical climate change and forward-looking climate metrics (such as ambitions, targets, climate scenarios and climate projections and forecasts). Our understanding of climate change and its impact continue to evolve. Accordingly, both historical and forward-looking climate metrics are inherently uncertain and Chesnara expects that certain climate disclosures made in this document are likely to be amended, updated, recalculated or restated in the future. Registered and head office 2nd Floor, Building 4 West Strand Business Park West Strand Road Preston Lancashire PR1 8UY T+ 44 (0)1772 972050 www.chesnara.co.uk Registered Number: 04947166 Designed by The Chase Photos on page 90 (left to right) by Michael Fousert, Anne Nygard, Alfonso Navarro, Andrew Neel and Ross Sneddon on Unsplash 280 CHESNARA ANNUAL REPORT AND ACCOUNTS 2023

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