Good morning, welcome to the Chesnara full year 2022 results presentation. I'm Steve Murray, Group Chief Executive, and with me today is Dave Rimmington, our Group Finance Director. It's great to see a number of people with us today in a very sunny London. We also have a great many more people dialing in from across the world, including Chesnara colleagues in Sweden, The Netherlands, Bristol, and of course, Preston. Thank you all for joining. What will we cover this morning? Well, I'll start by looking at how we've been delivering against our renewed strategy. Dave will then cover the financial results in more detail, and I'll then finish looking at some of our future areas of focus, including M&A. We'll have lots of time for questions at the end of our presentation as part of a managed Q&A.
If you're watching online, you can submit questions as we go through the presentation. If you're with us here in London, we'll get a microphone to you if you want to ask a question at the end. Let me start by looking at what we see as the four key areas that are at the heart of what we do here at Chesnara. Firstly, with strong line of sight to future sources of value growth and long-term cash generation. This supports how we allocate capital across the group, including our progressive dividend policy. In 2022, we've again demonstrated that the Chesnara model continues to deliver cash and investor returns in a wide variety of market conditions. This is supported by our strong Solvency II balance sheet, and that's shown itself yet again to be highly resilient to another year of extreme market volatility.
Thirdly, we believe we've got a good track record of delivering acquisitions. This provides our investors with a further opportunity for growth. There's been a renewed focus and energy in this area with 3 acquisitions completed over the last 12 months. Finally, we have a management team and board that are highly focused on creating sustainable shareholder value, and we've strengthened both the executive team and the board over the period. Let's look further at the key highlights from 2022. We've already seen the benefits of our renewed focus on M&A. We completed the acquisitions of Sanlam Life and Pensions and Robein Leven during 2022, with the integration of Robein very largely complete. Having announced the acquisition of Conservatrix over the summer, we completed that acquisition on the 1st of January.
Dave will remind you of what we expect the pro forma impacts of that deal to be when he covers the results in more detail shortly. Looking at the financial results, we've said before that Chesnara has a great track record of delivering cash generation, we've seen that delivery again in 2022, with group Base Cash Generation of GBP 83 million and Commercial Cash Generation of GBP 47 million. Just as a quick reminder, that commercial cash number removes the positive impact on cash that items such as our Symmetric Adjustment have had over the period. Dave will chat you through the cash result in more detail shortly. Our solvency has increased to 197%, which is helped by the raising of our Tier 2 debt back in February last year.
That's well above our normal operating range of 140%-160%, and that gives us significant headroom to support future acquisitions. As with others in the sector, our Economic Value has been material impacted by some of the sharp falls in asset values that we've seen this year. This impact is very much in line with the group sensitivities that we regularly publish alongside our results. We continue to believe that over the longer term, the group's exposure to equity markets will deliver further upside value for our investors. We delivered commercial new business profits of GBP 9.5 million. Finally, given the resilience and cash generative nature of our business, we've announced another 3% increase in our final dividend. That continues our 18-year track record of dividend growth, which is unrivaled in our U.K.-listed sector.
We've also been more proactive in 2022 when it comes to management actions. We raised GBP 200 million of Tier 2 debt in February last year, and we've deployed over half the proceeds predominantly on M&A. We also took the opportunity to reduce the group's exposure to FX volatility this year, executing a hedge in December. That's also benefited our cash generation. On sustainability, we are setting out our first ever targets for the group, and this includes a target to achieve net zero by 2028 from operational emissions that we control, and also to be net zero for our financed emissions by 2050. Now, given the significant increase in M&A activity this year, I wanted to give you an update on how our integration programs are progressing.
On Sanlam, integration planning is progressing well. We expect the Part VII transfer into Countrywide to complete in and around the end of this year. That's an important milestone for us as it enables us to access some additional capital synergies. We remain very much on target to deliver the GBP 5 million per annum steady-state cash generation number that we previously announced. The Robein Leven integration is very much complete. Our ECV gain at year-end from the acquisition is now GBP 6 million. That's GBP 5 million higher than we estimated at the half year results. Finally, Conservatrix completed in January this year. We've already completed the migration of all those policies onto our target VARD systems. The current estimate of the day one ECV gain from Conservatrix is GBP 21 million. That's around GBP 3 million higher than we estimated at the half year.
Overall, we expect the GBP 110 million of capital resources that we've deployed against M&A to generate around GBP 42 million of day one ECV gains and about GBP 10 million of steady-state cash generation going forward. We also start 2023 with a positive M&A pipeline, and we retain significant resources to deploy on future acquisitions. With that, I'll hand it over to Dave, who'll talk you through the numbers in more detail. Over to you, Dave.
Thank you, Steve. Morning, everyone. As Steve says, it's been a very busy year, with 2 acquisitions completed, one announced since the year end, the Tier 2 debt raise and the FX hedge. All this activity naturally makes the results relatively complex, so I'll spend a little bit of time taking you through them. Also, as most of you know, our results are very sensitive to economic market conditions. Before I get into our results in more detail, I've got a slide where I'll just give you a reminder of what was happening in the markets. Not that I suspect many of you need reminding. Then a slide just to show what the big picture impacts of those conditions are on our results. What happened in 2022, starting with equities.
Well, firstly, why is equity movements important? Just now we don't actually have much direct exposure to equity investments. Our unit-linked funds from which we earn most of our fees are invested in equities largely. When equity markets fall, the fee income we expect to earn in the future is seen to be lower. Now, what's important to note here, there's kind of a market-to-market dynamic, we don't assume any sort of market recovery. The low market positions at the end of the year get baked into our Economic Value. In reality, we would expect, as markets recover, some of that Economic Value lost to come back. That cyclical profile has been a feature of our results for many years. What happened to equities in the year?
Actually, if you're looking at the FTSE All-Share, there was a pretty strong recovery in Q4. Actually, it was only down 3%, so probably only, you could say, not a lot to see here. Unfortunately, when we look at some of our other territories, you can see that wasn't the case in Sweden and the Netherlands, and actually the equity market were down hugely in those territories. Not surprisingly, given the dynamic, when we get to our results, you'll be seeing a large negative result of equity market movements. Interest rates, as we all know, have been up sharply across all territories. Credit spreads have widened. FX is slightly more complicated 'cause we've got 2 different movements. The pound strengthened against the Swedish krona, but weakened against the euro, so we've got an offsetting dynamic there.
Finally, inflation. As we all too painfully know, inflation's been up and significantly up across all of our territories. Moving on to the next set. What have those movements done in terms of the big impacts? Well, what jumps off the page is the GBP 67 million Economic Value loss as a result of the equity markets. The dynamic on cash from equities is a little bit more complicated. What you can see is without the symmetric adjustment, the cash impact has been negative. With the symmetric adjustment, it's positive. I do apologize at this point, but I'll just spend 1 minute explaining the symmetric adjustment. This is a feature of Solvency II, whereby when markets fall sharply, we're able to release some of our capital requirements, so you get a temporary reprieve from that market shock.
That's the symmetric adjustment, and therefore you can see it's actually helping our cash result in the year. Moving to bond yields, generally good news on both metrics. Really good news for cash generation, more modest on Economic Value. Credit spreads, conversely, is bad on both metrics. FX, because of the offsetting movements between the SEK, the EUR, not much to report. Finally, inflation. Actually, given the high levels of inflation, I think GBP 6 million a relatively modest impact. We're not unduly concerned about that. And it demonstrates that we're actually not hugely sensitive to inflationary pressure. Now moving on to our financial scorecard in a little bit more detail. Firstly, as Steve mentioned, the cash results are particularly good, the Base Cash results. And I note the GBP 61.9 million of divisional cash.
The solvency, again, Steve mentioned how strong at end of the year. You can see it's increased from 152 to 197, a strong improvement. That's important. That's not because we need to operate at 197. Our normal operating range is between 140 and 160. What it does mean is we've got lots of headroom to do future deals. We've consistently told the market, as do most life companies, that the IFRS results are pretty meaningless. Given we're looking at a loss of GBP 147 million, I feel I ought to spend a minute or two just explaining why they're so meaningless.
Without being too technical, the reserving methodologies under IFRS means that although in reality we match our assets to our liabilities, the IFRS modeling, when you get asset movements, you don't report the liability movement. It's a one-sided. You know, there's a mismatch between your assets and liabilities. Quite frankly, that number is. I don't like to be too dismissive of a statutory metric, but it's actually pretty pointless, and it's not commercially relevant. I did think I ought to mention it because it was so large. Looking at assets under management, great to report that despite the market challenges, we've still increased our assets under management, from GBP 9.1 billion to GBP 11 billion, after the last deal. Finally, the leverage ratio.
Those IFRS losses I've just mentioned naturally have had an impact on our net equity, which has pushed the leverage ratio up. Because we understand that dynamic and what's caused it, we're not so concerned that it's crept up a little bit beyond our long-term target of 30%. Importantly, we hope that when we move to IFRS 17, it will come back down. That reminds me, you've got the pleasure of IFRS 17 later in the presentation. Moving on to cash generation in a little bit more detail. We have two cash metrics, one we call base cash and one commercial.
Base Cash is simply the movement in Solvency II surplus, because of that, it actually naturally includes some of these more technical aspects of Solvency II, like the symmetrical adjustment. Therefore, we strip out those technical components to create a secondary metric called Commercial Cash, which is probably a bit more meaningful of the underlying performance of the business. The two numbers I'm going to refer to here is the GBP 61.9 Base Cash result at a divisional level. That's really important 'cause that's the number which dictates how much dividend our divisions can pay to the parent company. On the back of that result, we're expecting GBP 73 million of dividends to be paid to us in this Q2, 2023. That flow of money from divisions to group is uniquely strong.
The other number to focus on is maybe the GBP 46.6 million total Commercial Cash result, which more than covers the dividend of about GBP 36 million. This is the number which has benefited from the FX hedge Steve referred to earlier. So within that GBP 46.6 million, there's a GBP 36 million credit directly as a result of that management action. Moving on to probably a slightly more simple view of cash, which is basically the bank balance. At the end of this slide, I'll summarize all of this slide with one quote from Abid, which he put in his headline, in his analyst note. What you can see here, probably not surprising given we raised GBP 200 million of debt, the cash balance has increased significantly during the year from GBP 46 million to GBP 108 million.
We actually have deployed a fair proportion of that GBP 200 million. We've got a nice balance between the dividend payments and the dividend receipts in the middle of that waterfall. We end the year at GBP 108 million. Just looking forward short-term, we do expect GBP 73 million to come in from our divisions anytime soon. We are hoping to pay you, or we will be paying you guys a dividend or the investor dividend, so that's the GBP 22.8 million outflow, and we have to pay the coupon on the Tier 2 debt. We do actually expect that closing balance to increase quite significantly over the next six months. That GBP 148 million is important because that's the number which gives us confidence that we've got about GBP 100 million of excess cash to fund future deals.
Very briefly, whilst we're on the Tier 2 debt, whilst I mentioned that, one thing Steve didn't mention was we got it away at a coupon of about 4.7%, which is looking increasingly attractive, based on what's happened since then. Moving on to the final cash slide, taking a longer term view of cash. The gray block shows the GBP 239 shows what we expect our total cash outflows to be over the next five years in the form of dividends and coupon payments. We've got three sources of cash, the purple blocks, which more than cover that outflow. Firstly, we get risk margin and capital requirement run-off. Despite the economic conditions in the year, we still expect over time to get real world equity returns, and that's the second source of cash.
Those first two, in their own right, virtually cover the outflows. On top of that, we can take management actions to boost the cash, as we did do with the FX hedge in the year. The outlook for that cash looks great. Finally, on this slide, acquisitions. That's harder to draw to scale because it naturally depends on what acquisitions you do. As Steve mentioned, by way of illustration, the deals we've done in the last 12 months have added GBP 10 million a year of recurring cash. You know, acquisitions do play a positive part, not only on Economic Value, but also in terms of cash emergence. Okay, moving on to solvency. Okay. You can see clearly on the left here, that sharp increase in the solvency ratio, a quick waterfall. We've covered most of these items.
You can see the positive impact of the Tier 2, then being offset in part by the acquisitions. The BAU item being remarkably small is important because that shows the inherent stability of our solvency, without the exceptional items, and that's been a feature of Chesnara for many years. Then pro forma, you can see that the Conservatrix deal, which we completed since the year-end, will be reducing that solvency ratio by about 15%. Moving on to growth. Steve's already referred to, and I have too, the large economic losses on this, which do clearly dominate the movement. The pie chart illustrates that it's mainly equity is different, but the spread impact was not immaterial as well. The yield impact a lot smaller.
Looking at the operating losses of GBP 24 in the first half of the year and GBP 10 in the second. Despite there being an operating loss, we are really pleased to report that that number is significantly lower than the run rate over recent years. There's been a challenge with transfers in Movestic we've reported in the past where we were losing some business out, business off the books because of a competitive pricing. We're pleased to report that issue seems to be resolved, and we're now down to our long-term assumed rate. We would expect that component of the operating loss to stop. Also within that number, there are actually some positive items. Where we invest money in M&A or the money we invested in the Tier 2 debt, or IFRS 17.
This type of project, future-looking investments still come through as operating losses. To some extent, there will always be... If things are going well, we would still expect there to be a negative item in there. I think what's a bit of a shame is because of the scale of this chart and the dominant of the economic items, the, the positive impacts of the acquisitions and the new business get somewhat lost. As Steve mentioned, the acquisitions together with the economic, the new business have created over GBP 50 million worth of incremental value in the year, you know, which we'll be more than pleased to repeat that on a yearly basis and have ambitions to do so. Okay, economic value long term. We introduced the Chesnara Fan last year.
This is here to demonstrate that the Economic Value we report doesn't capture all sources of value. The five items we report here all create potential for value growth. Just for completeness, I've shown in the year, how have we done against these source, sources of growth. Well, actually four of them have been very positive, with, you know, with material impacts. Not surprising the real world return component has been negative, but that doesn't mean we've not still got the confidence that over time, that remains a source of growth. It just isn't a smooth ride. You get, you know, you get volatility. All in all, we're very confident that the growth potential remains material. Briefly moving on to new business. Our new business profits have stabilized at about GBP 10 million a year.
It's an important part of the strategy, we do believe GBP 10 million, which covers about a third of our dividend, is very worthwhile. There are some positive signs. The Movestic transfers in, so the new business side of that equation are looking good, there's some positive trends, and the Scildon market share is high. Finally from me, just as I mentioned IFRS 17. I was thinking about this slide I don't know if I was kind of encouraged or slightly disheartened that 6 years of work can be summarized on 1 page. Actually to make matters worse, the page basically said there's nothing to see here. Never mind, it's kept us busy. Genuinely, there really we don't see a big commercial consequence of the transition to IFRS 17.
There are no impacts on the metrics by which we manage the business. In terms of timeline, we've issued a fuller IFRS 17 report to market this morning, which I know some of you analysts can't wait to read. The impact on the actual opening balance sheet, which you see in the chart at the top, as of the 1st of January, we are estimating a modest reduction in the IFRS net equity, but we will be sitting on a CSM, which is a future profit source of GBP 124 million gross of tax. Adding those two together, which is what we think we'll do for leverage ratios going forward, we would expect an improvement in our leverage ratio.
Finally, just looking at the roll 4 forward on this, because the losses I've reported in IFRS in the year won't emerge under IFRS 17, we expect the IFRS 17 transition to look better at the end of 22 than it does at the start of 2022. Generally, we think the IFRS transition is in good shape operationally and the impacts will be neutral to positive. That's it from me.
Thanks, Dave. Let me talk about some of the future areas of focus that we have at Chesnara. Dave's just highlighted we've seen extreme market volatility across 2022, and this has impacted asset values and our Economic Value. Against this backdrop, Chesnara has yet again shown strong cash generation and remains in a robust financial position. I'm happy to report that our renewed acquisition strategy is delivering. As you can see in the slide, we do three things here at Chesnara. Firstly, we maximize the value from the in-force books of business that we manage. We now have over 1 million customers who rely on us to provide their life cover, pension savings, funeral plans, and other products.
We've been able to execute a number of positive management actions, such as de-risking FX volatility via a hedge, and we see plenty of opportunities to take further actions in the future. Secondly, we seek to execute value-adding acquisitions of portfolios and businesses. Our activity over the last year demonstrates that the M&A part of the strategy has been revitalized. We're starting 2023 with a positive M&A pipeline. Finally, as Dave has just mentioned, we write focused new business where we have a good level of confidence we can make a profit.
Pleasingly, the Swedish transfer out rates have returned to normal levels, and we've seen a faster start to sales in 2023 than we did in 2022, where there are early signs that we're benefiting from some of the legislative changes that came into force in Sweden in July. Our commitment to becoming a sustainable group is being further embedded across everything that we do. Turning now to M&A. We've previously talked to you all about the large asset pools available for consolidation across the UK, Netherlands, and beyond. Across our markets, we're seeing a further move away from the sale of entire legacy books and legal entities to portfolio transfers and reinsurance type structures. This expands the potential size of our available market, as larger insurers can offload smaller parts of large in-force books.
The chart on the bottom left here that we've borrowed from Fitch shows that smaller deals of GBP 5 billion liabilities and below now make up 2/3 of executed transactions. For portfolio transfers, there are a far smaller number of counterparties competing for these opportunities, as an existing operating platform and regulatory license tend to be prerequisites here. This is clearly an area that we have good experience. On the right-hand side of this slide, we've tried to set out what we're seeing as some of the main drivers for insurers continuing to reshape their books.
If you look at the recent deals that have been completed and also the deal pipeline as we see it, the top 3 trends tend to be companies focusing on specific geographies, simplifying their operational and technology platforms, or a desire to release capital from the disposal of non-core products to invest elsewhere. On the left-hand side of the next slide, we've highlighted some of the key strengths that Chesnara has, such as our regulatory relationships and our ability to manage a wide range of products. On the right, this shows we have the flexibility and available financing options to execute a wide range of deals in terms of their structure and their size. Overall, we see the current market backdrop as very helpful for us, and we remain well-positioned to execute further transactions.
On sustainability, I highlighted upfront that we're publicly committing to our first set of sustainability targets, which we've tried to show on this slide. These targets will support our ambition to become a sustainable group. This remains a fast-moving area. These targets will be regularly reviewed to ensure they remain appropriate. We will supplement them with further interim targets during 2023. More information is available on our wider approach in our first ever group annual sustainability report that's now available on our website. To summarize, Chesnara has continued to deliver. Whilst Economic Value has been impacted by the extraordinary market conditions we've seen in 2022, our divisional and group cash generation has remained strong, as has our solvency.
Importantly, our balance sheet metrics have performed in line with the sensitivities that we set out alongside our results. That demonstrates the resilience of our business model. The integration of Sanlam is well underway. Robein Leven is now fully integrated into Waard, and all Conservatrix policies have now been migrated to our Waard policy admin systems. We remain optimistic about the prospect of delivering value-adding acquisitions in the future. We start 2023 with a positive M&A pipeline. We're continuing to look at ways to enhance value in a sustainable manner, building on the actions that we've already taken this year, including the raising of the Tier 2 debt and our recent de-risking FX hedge. We have yet again increased our full-year dividend by 3% for the eighteenth consecutive year.
Now, at the start of the presentation, I referenced Chesnara colleagues joining us this morning from Sweden, the Netherlands, and across the UK. I wanted to finish by thanking them for their efforts delivering these results and for their support throughout 2022. I know that they share my view that there's a lot to look forward to here at Chesnara. Thank you for listening. What we're now gonna do is we'll open up for questions. I suggest that we start in the room here in London. That will allow people to type their questions online. We'll start to get a microphone out. Mandeep just beat you with his hand up. Sorry. So we'll get you first, Mandeep, and then to Abid.
Morning, everyone. Mandeep Jagpal, RBC Capital Markets. Thanks for the presentation and taking my questions. Three from me, please. The first one is on M&A. With the amount of available capital that you have available for M&A, would you able to convert this into an AuA term, AuA terms? How much AuA could you add? The second is on FX hedge. What specifically was hedged with this hedge in December? Is it the overseas balance sheets or the expected future cash flows? Is there potential for further capital release from more FX hedging down the line? Finally on the dividend, a 3% DPS growth for a number of years now, I think you mentioned 18. In what kind of scenario could we see a deviation from this, either upwards or downwards?
Okay. Thank you for those. Shall I take the first, Dave, you maybe the second, and we'll do a combination on the, on the third. I suppose using an Assets under Administration metric is slightly difficult, I think because of the range of opportunities that we look at. For a unit-linked book, it probably is a relevant metric, but if you look at term business and funeral plans, it's less relevant. Similarly, when we look at, you know, the liability number that I talked about as well, that's relevant for kinda some books. Look, overall, I think you're right to point to the significant resources that we have. We're really pleased with the Tier 2 debt raise that we did in February. You know, it's given us really great flexibility.
I think what we're seeing is off the back of the three deals that we've done and the market conditions that we're seeing an awful lot a lot more people seeing Chesnara as a great option for their, for their books of business. We tend not to kinda use one metric in particular to give that sort of guidance, but we're certainly confident in our ability to go and, go and execute M&A. Dave, do you wanna talk about the FX hedge and how that works?
Yeah. It's a good question. How does it work? I won't get into a detailed de-derivative conversations here, but I think the point is, you're right. We're only hedging at this point or we've only hedged at this point the exposure the group has to our overseas investments. We've not hedged the currency exposure within those divisions. What that means is actually there's still quite a lot of potential to drive more capital synergies. I think what we've learned from the hedging we have done is there's a way to hedge without there being a big premium, which is one of the things which put us off in the past. It's a very well-designed hedge. It's free in inverted commas.
There's the, of course, there is a collateral posting consequence, which is capped actually, 'cause importantly, we didn't want to be uncapped on that. Having learned from that, we're now quite confident actually we will look into the options and merits of rolling out that hedge further into the business and, you know, plenty more potential. When I talk about those future management actions to generate cash, doing more on the currency hedging is definitely one of them.
Do you just wanna talk about the collateral part of the hedge as well?
Yeah. The collateral, the maximum collateral exposure, is GBP 18 million. You know, I think that's within risk appetite.
When we looked at the business case for that, we felt it was a very sensible thing for us to do. As Dave says, there's further opportunities to do that. On dividend. You've rightly pointed to the fantastic track record of 18 years growth on the dividend. We know when we go and speak to investors, that's a very important feature of the Chesnara story, both for institutional investors but particularly for retail investors as well, that have kind of made up a far bigger proportion of our register over the last few years. I suppose when we think about the dividend philosophy, longer term, we've tried to set a rate that broadly beats inflation. We've tended not to react to kinda short term movements of inflation.
The process that we go through ourselves as a management team and the board, we give the number a very hard kick every time that we look at this. We're not, you know, 3% isn't the magic number that the answer has to be every time. I think when we looked at volatility in markets, also the opportunity for us to deploy capital on M&A, we still felt that that was the right balance in this sort of situation. Is there anything else that you'd add?
To be honest, that pretty much sums it up. I think in short, we take a long-term view, and we really value the sustainability of that dividend. We resist the temptation to react to short-term temptations to give the investors, you know, particularly large increases just because inflation's high in the short term.
Morning. It's Abid Hussain from Panmure. 2 questions, I think possibly a 3rd. The first question is on M&A, a slightly different angle from Mandeep. Look, you clearly have the financial power of doing another 3 deals of similar size to the 3 that you've done recently. I won't ask the question on the financial side, but what about operationally, the bandwidth? Do you have the bandwidth to do another 1, 2, 3 transactions this year or the next 12, 18 months, given that you're still integrating, I think, at least one of the recent acquisitions? That's the first question. The 2nd question is on lapses. Good to see that the lapse trend in Movestic is trending back to the long-term assumptions.
Just could you give us a little bit more color in terms of why that is and what the forward-looking why you're confident on that going forward? The third one I'll ask is the dividend, similar question to Mandeep, but I guess really, given the cash balance is so strong and there is that temptation to pay a higher dividend in, you know, I'm sure some investors will be asking the cash balance is so strong, why not give a little bit more than the 3%? It sounds like you're really looking to pay a long-term dividend through the cycle at a base of 3%. Is there any scenario that, you know, you might do a special dividend, for example?
Yeah. Shall I? I'll take M&A. In terms of capacity, yeah, we certainly, as you say, we've got the financing power. We also do have other options outside of the available resources that Dave talked about earlier on. While we've pointed to, you know, around GBP 100 billion of available resources, that doesn't mean that that's the limitation of what we can look at. There are clearly other ways that we can raise further finances. Actually, depending on the shape of some of the books, you know, for example, we could raise debt off potentially some of the portfolio balance sheets that are coming in. We think that kind of GBP 100 million-plus numbers are, you know, is a very certain set of finances that we can point to.
On operations in the Netherlands and in Waard, I think you heard me mention that, you know, a large part of the migration of that Conservatrix book has already happened. As you'll all know, you know, M&A tends to take a little bit of time to kinda come through. We believe we're in a position that we can be actively looking in the market and in the U.K. Because we're able to use the support of our outsourcing partners, that kinda creates a bit more operational bandwidth than you ordinarily might have, might think. We certainly believe in the two markets where we've been more active, we can do that. We'd also be open to look at opportunities in Sweden as well.
We've got a good team and a good operating platform there. That's one of the things that Sam has certainly been considering in his role over the last year in terms of whether there's pipeline. We're very much open to business on M&A. As you probably heard me repeat during my presentation, you know, we see a good number of opportunities at the start of this year that we'll see where we get to over the next 12, 18, 20, 24 months. Let's do dividend and then Dave and I are both from the Movestic board, so maybe Dave can talk through what we've been talking about in Movestic.
Part of what we look at when we set that dividend policy is where we might want to also use the capital that's available. At the moment, when we're looking at the opportunities to deploy capital on M&A, we don't think for our shareholders it makes sense for us to do something like a special or a buyback 'cause there's just much better returns elsewhere. If you look at the GBP 85 million of PLC resources that we've deployed on M&A, that should generate over GBP 40 million of day one Economic Value. David's talked about the Chesnara Fan and those other sources of growth that might come through and GBP 10 million of cash generation.
I think just when we look at that and further opportunities, we just see that as a really great area of growth that we can give our investors, value from. If there was a future point and we felt that wasn't there and there was excess cash, of course, you would look at kind of other things that you might do to deploy the capital. At the moment, I think we, we feel the right thing to do is look for those, those M&A and strategic opportunities as a better way of generating returns. Do you wanna talk about lapses.
Yeah, lapses. The transfer outflow was a direct consequence of a large mutual insurer in Sweden. Triggered to some extent by COVID, we believe, going really aggressive on what they were offering for people to transfer pension balances to them. It was nothing to do with Movestic itself, and actually this flow of business to that mutual was happening across most other companies. It was quite a concentrated issue. Quite simply, that pricing position has not been sustainable. We knew it wouldn't be sustainable to some extent. We just had to ride it out. They've removed that offer now.
As soon as they removed it, subject to a bit of a runoff tail, kind of things have returned to normal and we've landed back with a transfer ratio pretty much exactly in line with what we've always assumed in the long term.
I think the other dynamic that both Dave and I talked about is there were some legislative changes back in July, which meant that there were other parts of the market that were opened up to transfers that hadn't been accessible before. I suppose if you look at the spread of activity, you've seen brokers looking now at some of those books and potentially looking to move those. We think we're seeing a net benefit from that ultimately with kinda gross sales coming in looking a bit better than they were in 2023. As Dave says, the kinda stabilization of that rate. It's those sorts of things that are giving us that confidence in the transfer rate and the momentum of that business. If that's helpful.
Great title in your report this morning, by the way.
Yes. I forgot to mention that in my presentation. We could have just not done the presentation and gone, despite the crash, there's plenty of cash. Which was Abid's headline.
Yeah. Ben?
Thanks very much. Ben Cohen. I had two questions. firstly, on the M&A side, how far have you sort of progressed any sort of partnership discussions in terms of looking at bigger deals, bringing in other capital or presumably PE or whatever? How would that really be structured? The second question was on the expense assumption strengthening in the UK. Was that an inflationary element? maybe as part of that, could you just talk through the detail in terms of how you've changed your inflation assumptions and how you see... Presumably you're still assuming inflation normalizes considerably.
Absolutely.
differently to where we are now. Thanks.
I'll start with that one.
Start with inflation?
Yeah.
Yep.
It's exactly that, Ben. Our in our closing reserves, we've obviously recognized the pay raises we gave at the start of this year, so we've captured last year's inflationary pressure. We've also assumed one further year of high inflation. That combined impact was driving most of the GBP 6 million I quoted earlier. We then do assume in our valuation that there's a return to more normal inflation levels. Fundamentally, for every year that inflation remains high, to the extent we give co-corresponding pay raises, you know, you would get something like that six that GBP 6 million.
Whilst we're not kind of flippant about GBP 6 million, I think for that to be our exposure to inflation compared to kind of most businesses' exposure to inflation, we feel we're in a relatively comfortable place.
Obviously, some of the M&A opportunities that we've executed also give us opportunities to drive some operational synergies, which can be a useful offset for some of that short-term inflation pressure as well, as well, Ben.
Good point, 'cause I said flan last year, I nearly said it again. The Chesnara fund, one of the sources of value is synergies, and we reported over GBP 10 million, and that's exactly that synergy. We've had synergies on the merger of CA and SLP and synergies as we've brought Robein Leven into the Waard group. That part of the business model is working well.
Yeah. On partnerships, you've rightly picked up from one of the slides that one of the things that we would certainly contemplate is working in partnership with other organizations on M&A. Part of the additional resource that we've brought in through Sam and Amanda and others during the year gives us a bit more capacity to look at what those might look like. That could be looking at larger books of business, us taking a portfolio and somebody else taking a portfolio, or it could be working with a private capital provider that provides a bit more firepower alongside ourselves, and we could manage some of the operational pieces. We have looked at both of those things across the year.
Obviously, these are commercially sensitive, but we think we're a good organization, you know, for businesses to deal with us directly in terms of portfolio sales, but also a good organization to partner with. In a number of our markets, we don't tend to be big competitors with some of the bigger players. We've got some flexibility in terms of the way that we manage our assets as well. So we'll continue to explore whether those sorts of partnerships make sense for our investors, but we can clearly do plenty of stuff on our own, so we don't need a partnership to execute the strategy. We think it's the right thing to have a broad set of opportunities.
I think, Christian had a question.
Thank you. Thank you very much. Christian Emonet from Morgan Stanley Capital Markets. Thanks for your presentation. Two follow-up questions if I may. One, if you could elaborate a bit further around the M&A opportunities that you see, perhaps more or so in nature of the portfolios that you see as potential opportunities, and also the geographies. Whether you're focused on your three main sort of core markets, or whether you see opportunities elsewhere. A second question around the leverage and the gearing. Obviously, lots of moving parts with IFRS 17. If you could perhaps sort of clarify what, you know, what the key metrics should be going forward.
Whether you had conversations with Fitch around how they are looking at the gearing ratio given the new accounting standards?
Do you want to pick up leverage first?
I mean, firstly, I think we don't quite know exactly how Fitch are going to reassess gearing and what's acceptable and what the new targets are in a post IFRS 17 world. Our market intel seems to be suggesting that leverage ratios will be based on the IFRS 17 net equity plus the contractual service margin, so giving credit for that. That's where we're of the view based on our estimated numbers. If that proves to be the case, our leverage ratio will be a lot lower. What we don't know is whether Fitch will effectively say, "Well, under this new regime, your target is no longer 30, it needs to be 20." It's difficult at the moment to know exactly where this is gonna play out.
I think what we do know is that on a direct basis, and even more so including the contractual service margin, our number will be lower than 37. We're also confident that if the deals are at the right price, future M&A has a positive impact on the net equity. As we deploy that capital, we should have a positive impact on the gearing ratio. Finally, you know, whilst we have a long-term target of 30, as long as we're confident that we can fund the coupon payments and the cash generation and the cash balances give us a huge amount of confidence around that, we're probably slightly less concerned about it than maybe in other sectors where there's more short-term working capital constraints, where you see kind of the pressure of the higher gearing actually having real immediate working capital risk.
You know, it doesn't create any form of working capital coupon payment risk for us. That's where. You know, that's why, you know, we're not dismissive of the fact the ratio's gone up. We need to make sure we're maintaining that conversations with Fitch. We generally don't see any real commercial in consequences of that.
I think a lot of people in the room will have dealt with Fitch. They're smart people. They understand what's happened to asset values during the year. I don't think we're the only ones that have seen a bit of inflation in the leverage. You know, Dave talked about that mismatch between liability and assets. We don't give other leverage ratios, but I suppose if we were going to, if you looked at a ratio that was based on the ECV, it would be down at 25%-27%, something like that. I think a lot of other people show a Solvency II sort of ratio on own funds.
I think if you look at the strength of the cash generation, I'd hope our debt holders had a huge degree of confidence that their coupon's very safe with Chesnara. That's for sure. On M&A, what we've talked about historically is kind of being more focused on our core markets 'cause we clearly have the operating platforms, the regulatory relationships that we can drive synergies from, but we're open-minded about other territories as well. I suppose if we look at the activity over the last 12 months, it's tended to be a bit more focused on where we are already. To be honest, that is just because of the nature of opportunities that we're seeing.
I suppose maybe some of the success of the engagement that we've been having with organizations. We'd certainly look at other territories. We're not being kind of forced to do that because of a lack of opportunities in terms of where we are. In the Netherlands, you know, we've seen some good activity. You know, Waard, Laurens and the team are continuing to do a great job there, hunting out kind of portfolio opportunities. We've seen a mega deal in that market with Aegon and ASR, which hopefully then means for us that might mean there's broader opportunities in the market where there's a little less competition in the short term. In the U.K., we're seeing a kinda mix of things.
I think all the big insurers are undertaking some sort of transformation program at the moment to try and upgrade legacy systems. Probably being a little bit more focused on some of the core portfolios that they have. We're seeing different sort of a different mix of opportunities across both unit-linked term and term. We're very happy to look kind of across the spectrum of opportunities. Obviously we can't give details on exactly when things might happen. I've got too much gray hair, been around the block too much to give a prediction around when these things land. I think the ingredients are there for us to have some confidence that we can continue to do M&A over the medium term. That's for sure. Thanks.
Are there other questions in the room? What's your queue online?
We have a number of questions that have been received from the online audience. The first few come from Barrie Cornes at Panmure Gordon. The dividend payout ratio using group Base Cash is less than 50%. Given that and the cash reserves, why is 3% the right number for the increase?
Okay. Dave?
I pick up the point of looking at it up from a ratio point of view. This is where it gets quite complicated because it comes back to the slide where you've actually got 4 different cash results for the year. Now, the higher figures, which include the benefits of things like symmetric adjustments, the ratio would be a lot lower. If you look at the Commercial Cash Generation at group, it was GBP 46. The dividend payment on the back of that GBP 46 feels slightly more realistic. I don't think there's a massive underpayment in compared to the cash result in the year. Looking back to the general point, it's what Steve mentioned before, that long term we believe 3% has ensured that the...
It's kept up with inflation over that cumulative period. We're just relatively resistant to start reacting very short term because of short term inflationary pressures. It's back to that point. We think there's a premium, and we think our investors value the predictability of our dividend and the sustainability of it. It's not 3% every year by rule, but every time we look at it, we're struggling to find a reason to move from 3%. I think that's how I would summarize it. There might one day be a compelling argument that it isn't 3%. We do challenge ourselves every year, and we did that again this year, looking at all the cash results, looking at the prospects for M&A, and our general conclusion was, why not 3%?
Yeah. It's great you're joining us online, Barrie. I think the other thing that's pleasing for me is that when I first joined Chesnara, I think some people thought, you know, "Is the dividend cliff coming in the next three years?" The fact that there's a huge amount of focus on whether we should pay a much larger dividend, I think shows that hopefully people understand the strong cash generation from the model. I think it's great that people are kind of challenging us on whether we might be paying a bit more.
Yeah.
As Dave says, we're managing that cash position not just on a kinda one-year view. We're looking at three and five, the other things that we can potentially deploy, capital around. That's why, you know, we were delighted to announce a further rise in the, in the dividend this morning at the, at the level that we're at, so.
Thank you. The next couple of questions from Barry. What has been the impact on the SII coverage ratio in Q1 2023, given the market volatility? Have you found any positive or negative surprises from the completion of Conservatrix?
Sure. I'll deal with Conservatrix. I think I was in the Netherlands in early January, and we brought together, under Lawrence's leadership, the team from Conservatrix, the team from Robein Leven, and the existing team from Waard, 'cause we really are bringing, you know, a broader population together and as almost as part of a new business as we go forward. I was just really pleased with the level of engagement. They were delighted that we'd managed to secure a transaction there after a long period of uncertainty for them and also their policy holders. I think we're finding some really good people that seem to be very pleased to be part of the Waard family and the Chesnara group.
It's obviously early days in terms of the completion. That only happened in the 1st of January. I think the fact that the team, you know, what we were very hopeful around is we thought there was a great match between the policies in Conservatrix and our target systems, and that's what we found. The fact that we've been able to transition those policies in the 1st quarter of the year is a very impressive result from the team, but I think it's verified what we saw in the due diligence that we'd be able to do that. I don't think there's anything else I would add on that. Do you wanna talk about what we've seen in Q1? I suppose we're gonna talk
Yeah
... pre and post, Silicon Valley Bank and Credit Suisse, but...
Yeah. Just a reminder, we've, I mentioned earlier, the Conservatrix deal will have reduced the solvency ratio by about 15 percentage points. Over and above that, I don't think I'm sharing something which you couldn't calculate yourselves from the sensitivities, but you know, you won't be surprised that when this turmoil was happening, we are kind of constantly doing kind of almost weekly solvency estimates. They show very little movement in that underlying solvency ratio. That's that, you know, I've said before, that's kind of one of the key features of Chesnara. I've been here for kind of far too long, to be honest, and we've been through lots of financial cycles. The one thing which is constant is that underlying solvency.
That's, Barry, that's very much the case as we sit here today. You know, if we reported tomorrow, you wouldn't see a big movement in the solvency ratio.
Yeah.
We have no direct exposure to the banks which have been under pressure, and we're slightly underweight in terms of our overall exposure to the banking sector.
Yeah. I think, what we might have seen before, kinda the latest turmoil was we would probably see there was good equity market growth in the first part of Q1. We, I think we would've expected the ECV to have grown. Clearly, given what happened over the last few weeks, that'll have come back down a little bit. As Dave says, you know, the solvency position is very, very strong. It's very robust. We've shown that over the last 10 years through a whole variety of market conditions. Hopefully I think you've seen that again this morning, that the cash generation, the business remains strong as well. Nothing that we've seen over the first quarter changes any of that.
Thank you. The next couple of questions come from Ming Zhu. Your recent three deals have been done in a 20%-30% discount to ECV. Has the pricing environment and the competition landscape changed much in the last 12 months, given all the global market turmoil?
I think the kind of difficult answer to that is it depends. I think, if you look at the broader transactions that have happened in the marketplace, they certainly haven't all been done at a discount to ECV. I think particularly we've seen deals in the kind of GBP 200 million to the kind of GBP 300 million, GBP 400 million sort of space, where there's been a much kind of narrower discount, I think, to the own funds position in the ECV. I suspect that's because some of the larger players have been a bit more interested. That's where maybe some of the bigger PE firms have been interested as well.
I think the discount to ECV is kind of a helpful metric in terms of looking at M&A, but it's clearly not the only one that we should be considering. We absolutely look at the day one ECV, but we're looking at the elements of the Chesnara fan and the future commercial value that we can generate over the longer term. I think it's helpful to look at the discount, but ultimately it's about the value that you create from these opportunities over the next 5-10 years. We're quite happy with, you know, the pricing of the deals that Ming's kind of highlighted.
As part of those, it was useful to be able to see that we're purchasing at a discount to the ECV. If it had been at par and we saw lots of upside potential through the commercial value as well, that would still have been, you know, the right sort of deals for us to look at as well. Hopefully that gives a bit of a sense of what we're seeing.
Yeah, I think there's always a slight challenge. It depends whether you're looking at the discount versus the vendor's calculation of Economic Value or what we think the Economic Value will be on our book, including synergies.
Yeah.
The same deal can have two different discounts to economic value depending on how you're looking at it.
Yeah.
Which I always find just makes life a little bit more interesting.
A quick follow-up from Ming. There was a comment on Scildon's lapse in mortality experience, strengthening of assumptions. These seem to pop up from time to time. Can you please provide a bit of more color on these, and how comfortable and confident are you going forward?
Okay. Yeah, thanks, Ming. Process-wise in Netherlands, we take our mortality assumptions from centrally produced actuarial tables. To some extent, therefore, if there have been general demographic changes or mortality changes, the impact is out of our control. Ming's right. Over the last couple of years, in general, when we've changed our assumptions, we've seen a negative impact. What's important is our year-end balance sheet, you know, is always based on the latest view of mortality, we don't know of any reasons why it would worsen or improve. The starting point is secure. In reality, if there are kind of mortality changes in the real world, we will be exposed to those both positively and negatively. Yeah, that's...
I think we looked in a little bit more detail along with the rest of the market on mortality. There seems to have been a dynamic where there's some younger. There's a higher number of deaths in younger lives, so they're kind of 45-55-year-old cohorts. Some people are suggesting that's because there was some really vicious flu going around in the Netherlands for a period of time, maybe post-COVID. People's immune systems weren't quite as high. That could be a kinda one-off thing that we're seeing through the tables. As Dave says, ultimately, it's the, you know, central actuarial communities that look at that data going forward. On lapses, I think quite often when you see a negative lapse assumption, you assume that you're losing policies.
It's the reverse in Scildon, there's actually less people lapsing their policies than we expected. Some of that may be again, a COVID impact where people are looking at life insurance in a different way. I think we've seen some UK insurers saying the same that maybe people have kept coverage or increased coverage, having seen, you know, the benefits of that potential protection, kind of through there as well. Just in case people were kind of hearing, you know, that slight adjustment as people kind of leaving, it's actually the reverse in when you look at a term insurance business.
The final question comes from Brian Moretta at Hardman & Co. Could you explain any expected impacts from Solvency II reform on the risk margin? What is the impact on capital and future cash releases?
Do you wanna take that?
Yeah. Yeah. We're not... Based on our current understanding of the Solvency II reforms, which are still obviously not finalized, we do expect our risk margin to reduce and relatively materially so. Probably not quite as much as other parts of the sector where there's a larger annuity exposure. Our understanding it's upwards of GBP 10 million potential risk margin reduction, and that would effectively flow through to our cash generation results at, you know, almost at a pound-for-pound equivalent level at the point we recognize that.
Yeah. It's important maybe to remind people we don't have transitionals in the model, so there's no offsetting impact. At the same time, we don't have a matching adjustment portfolio, so maybe some of the other Solvency II changes that might benefit some of the big BPA writers, we're not in that space. Overall, yeah, we expect that to be a net positive. It's unclear how European regulators will respond as to whether they'll wanna kind of equalize that benefit or not. I think Well, it's too early to say whether we'll see a corresponding benefit in European markets as well.
Thank you. As there are no further questions from the online audience, I'd like to hand back for any additional or closing remarks.
I'm not seeing any more hands shoot up in the room here. Thank you very much for joining us for the presentation. It's been great to see you here today. As you can hopefully hear from us, we're delighted by the strong cash generation of the business, the future prospects that we have, and there's a lot to look forward to here at Chesnara. I hope you enjoy the rest of your day. Thanks very much.