Welcome to the Chesnara investor presentation on the acquisition of Scottish Widows Europe. I would now like to hand you over to CEO, Steve Murray.
Thanks, Sergey, and good morning, everyone. Thanks for joining this Chesnara conference call. So I'm Steve Murray, Group CEO, and with me is Tom Howard, our Group CFO. Earlier today, we announced the proposed acquisition of Scottish Widows Europe from Lloyds Banking Group. This is another important transaction for the group on our second material deal in the last 12 months, following the HSBC Life U.K. acquisition, which completed in January. This deal further demonstrates the significant momentum within our M&A strategy. So what will we cover on the call? Well, I'll start with the highlights of the deal before Tom provides an overview of the Scottish Widows Europe business and further detail on the financials. I'll then finish with an overview of the Luxembourg market and a summary of the key elements of the transaction.
You'll also then have plenty time for questions at the end of our short presentation. Let's look at why we believe this is another attractive transaction for our investors. The deal adds around EUR 250 million of lifetime cash generation to the group, including around EUR 100 million in the first five years. The total consideration of EUR 110 million accounts for around 64% of Scottish Widows Europe's eligible own funds, with the deal expected to be materially value accretive at completion. It enables access to another interesting market, allowing us to further participate in future in-market and cross-border European consolidation. The transaction is fully funded from available cash resources, including the partial utilization of the proceeds from last year's successful RT1 issuance.
The deal strongly, strongly fits with all elements of our capital allocation framework, and post-transaction, we expect to remain comfortably above our normal solvency operating range of 140%-160%. The acquisition is our second major transaction in the last 12 months and 16th deal to date. It underlines the strength of our pipeline and our ability to continue executing disciplined, accretive M&A. And post-deal, we continue to retain financial flexibility and wider bandwidth to prosecute further M&A. So with that, I'll hand over to Tom, who'll give a brief overview of the Scottish Widows Europe business before covering the financial benefits of the deal in a little more detail. Over to you, Tom.
Thanks, Steve, and good morning, everyone. Scottish Widows Europe is a closed life and pensions business, headquartered in Luxembourg. It manages around EUR 1.7 billion of assets and 46,000 policies and is currently part of the wider Lloyds Banking Group. The business manages legacy unit-linked and U.K. with- profits products that were sold via a branch structure into Europe, mainly into Germany. Now, these types of products are well-known to us, and we successfully manage many of them already across the Chesnara group. The business operates on a proven and scalable European administration platform and is led by an experienced local management team, giving us continuity and local market knowledge from day one.
The acquisition of 100% of the share capital of Scottish Widows Europe and associated legal arrangements remains subject to regulatory approvals, and we've already been actively engaging with the Luxembourg regulator in advance of today's announcements and are working towards deal closure in and around the end of this year. From a financial perspective, today's deal meets all of the requirements of our capital allocation framework. It delivers a material, sustainable stream of future cash flows for the group, and we retain strong levels of post-deal solvency cover and central liquidity to support further M&A activity. On a pro forma basis, the group's solvency coverage ratio of 173% remains comfortably above the upper end of the group's operating range of 140%-160%.
The risk profile of the Scottish Widows Europe portfolio is also complementary to the group's existing portfolio, and as a result, the pro forma Solvency II sensitivities are in line with existing impacts. This maintains the group's strong resilience to a wide range of economic and demographic stress scenarios. We also expect the deal to be slightly accretive to leverage, and we expect the group's pro forma leverage position to be significantly below our long-term ambition of 30% or less post-closure of this deal. In calculating these pro formas, we have also allowed for impacts of the recently completed HSBC Life U.K. deal and the group's recent RT1 Bond issuance. Finally, it's also important to note that the pro forma calculations do not incorporate further potential upside from capital and other late-stage synergies from the integration of the Scottish Widows Europe portfolio into the Chesnara group.
With that, I'll pass back to Steve.
Thanks, Tom. We've previously highlighted to our investors that there were attractive opportunities in the wider Benelux region that could be of interest to us. We believe Luxembourg is an attractive market for Chesnara and one we've been monitoring for some time. It's a stable, triple A-rated jurisdiction with around EUR 235 billion of total life insurance liabilities and a dedicated regulator with a strong supervisory framework. The EU passporting regime allows Luxembourg insurers to serve customers across that single market. It's a relatively fragmented market and one where there's a long tail of businesses that haven't yet reached scale. There are also few incumbent consolidators, and we believe our track record and expertise can differentiate Chesnara as a potential future consolidator in Luxembourg and wider continental Europe.
This can be further supported by the local expertise and distinct standalone policy administration platform that comes with Scottish Widows Europe. So the acquisition of Scottish Widows Europe strongly aligns with our stated strategy of seeking out and delivering value-enhancing M&A. It's expected to add an additional EUR 250 million to the group's lifetime cash generation, and it further enhances the value of the group, following on from the materially accretive HSBC Life U.K. deal we completed in January. We believe the acquisition further demonstrates both our position as a leading European consolidator and our ability to source and deliver value accretive acquisitions for our investors. I said at our half-year 2025 results presentation, that we're excited about the momentum building across Chesnara, and that we're continuing to see attractive M&A opportunities across the U.K. and European market.
We, of course, remain fully focused on ensuring the migration of Chesnara Life, the new name for HSBC Life U.K., is carefully managed, as well as moving forward with the change of control process for Scottish Widows Europe. Alongside this work, we continue to actively assess M&A opportunities that we believe could provide further attractive returns for our investors. So with another acquisition announced and a strong future pipeline, we continue to believe that there really is a lot to look forward to here at Chesnara. So with that, we'll hand back to Sergey, our operator, and we'll open up for questions, where Tom and I will also be joined by Sam Perowne, Head of Investor Relations and Strategic Development. So back to you, Sergey.
Thanks very much for that, Steve. We've got a number of questions from the webcast. If I can just remind people of how to ask a question, there is a button at the bottom of your toolbar to type in a question. And we're going to take our first question, which is from Michael Huttner, from Berenberg. What is the reason for the attractive valuation, 64% of own funds? And is there another metric which helps understand how good this deal is?
Thanks for the question, Michael, and for joining us this morning. When we look at the deal and we look at what sort of Lloyds as our partner here were sort of looking for, one of the things that they wanted to ensure that there was a strong counterparty that had knowledge of U.K. sort of products, could make sure that these customers' assets were looked after over the short, medium, and long term, and we also had the regulatory relationships to make sure that regulators would be sort of comfortable with the transaction.
So all of those things have sort of flowed into the deal and the partnership that we've had here with Lloyds Banking Group, and it's been a sort of pleasure to work with Ciara Donald and the broader team at Lloyds Banking Group on this. It's a slightly different deal to HSBC Life U.K., where clearly there was a new business franchise as part of HSBC Life U.K.. This is a sort of closed book in run-off. So all of those things sort of flow into the return profile here. You're right to point out, look, we see the entry multiple as attractive for the group.
We see the cash flow return, just on your second point, as a key measure that we think investors should be looking at, and the total lifetime cash generation of GBP 250 million, with GBP 100 million of that coming through in the first five years, I think demonstrates a good return on capital for investors from the deal, and we're excited to be announcing that this morning.
Thank you, Steve. A further question from Michael: What does this do to the annual cash profile, and what sort of percentage uplift is there?
Tom, do you want to pick up Michael's second question?
Yeah, thank you, Michael. So look, on the... I mean, we've talked in terms of the five-year cash profile. So if you look at sort of what that means in terms of an average uplift in the year, clearly, not every year will be the same, so it's not a case of sort of taking the five-year cumulative cash flow and dividing by five. There will be, you know, some years where it'll be slightly less than an average, some years where it'll be slightly more. But in very broad terms, you know, we expect this deal to add about 20% to the cash flow profile of the group, so the free on average over the first five years.
Okay, we've got our next question from Abid Hussain, from Panmure Liberum. Acquisition price. The discount to own funds seems materially material relative to the size of the deal. From that, I think we can assume that this will be materially accretive from day one. Any reason why you managed to secure the large discount?
Thanks for the question, Abid. I covered a little bit of this, I think, with Michael's question. So look, we have a disciplined capital allocation framework that we apply to M&A. It's important that we can demonstrate to ourselves that where we're deploying capital, we get an appropriate return for investors, so that will sort of always flow into our analysis for a deal. There are some differences with this deal to some of the other ones that we've done. So it's a closed book deal where you know, this book sort of runs off over time, which is slightly different to that HSBC Life U.K. transaction. But look, the fact that we're announcing the deal this morning shows that we believe that this provides great returns for investors.
I suppose if you take HSBC Life and the Scottish Widows Europe deal together, having, you know, bringing in GBP 800 million of additional cash generation from that HSBC Life U.K. deal, and then an additional GBP 250 million of lifetime cash generation from Scottish Widows Europe, you know, very much means that when we look forward at the future cash generation of the group, we've further enhanced that sustainability going forward, which is clearly a key thing that sort of Tom and I and the broader team have been looking at. So very pleased to be announcing this deal and partnering with Lloyds, and we look forward to proceeding through the change of control process and working with the local team in short order on this.
... Thank you. Follow-up question from Abid. Capital synergies. Can you talk to any capital synergies that you can harvest from this deal, or as a result of being larger and more diversified? And deal pipeline, can you give any color on what the pipeline is looking like for the rest of the year?
Shall I pick up pipeline, Tom, first, and then we can come back to you for capital synergies? So, look, I said in my presentation that when we spoke to the market as part of the half-year results, that we were seeing an attractive pipeline. I think more broadly, if you look at how 2026 has started across the broader financial services sector and then down into insurance, you're certainly seeing plenty of activity. Some very, very large deals having been announced. And when we look at the various sort of territories, broader Benelux as well, we're expecting to have plenty of interesting opportunities to evaluate.
Hopefully, I was clear in my presentation that, you know, we've done these two material deals in the last 12 months, but we've retained financial firepower to do further acquisitions. At a group level, we have sort of over GBP 100 million of resources that we can deploy immediately before then looking at the debt capital markets, equity, working with strategic partners that we've talked about as those other sort of sources of capital for us. And the way that the group structures work means that we have a lot of operational bandwidth there because we have sort of separate operating platforms in the different jurisdictions.
We expect, as a reminder, to complete the HSBC Life U.K. migration sort of by the back end of 2026, which means we can be starting to look at U.K. acquisition opportunities now and progressing those through the sort of deal pipeline. So we remain positive. We think it's a good market for us, and the fact that we've sort of partnered with Lloyds Banking Group on the backdrop of having partnered with HSBC, having partnered with Canada Life, having partnered with Sanlam and other large financial services firms, again, we think shows that people can trust us to be good custodians with policyholders and customers going forward. So look, we're excited about the pipeline and the future prospects.
Tom, do you wanna pick up Abid's question on capital synergies?
Sure. Thanks, Abid. So really, there are two types of capital synergies that this deal really brings to the table. So the first are what I call structural synergies. So exactly as you pointed out, actually, in your question, the fact that this deal increases the size of the group, but it also brings in a portfolio from a different territory, actually, means we have more efficient diversification of risks across the group at the top co level, and that's something which I say is structural and which will, sort of naturally evolve as we integrate the business into the broader group. Then there are a second category of capital synergies, which are... Actually, will be familiar to anyone who's been listening to our earnings updates.
So the types of things we currently do within the U.K. business, for example, like mass lapse reinsurance, foreign exchange hedging. So really where we see the opportunity on these, the second category of capital synergies is really just to extend, try and test and proven capital management activities from elsewhere into the group and deploy those, within the Scottish Widows Europe portfolio as well. So certainly what we haven't done, just to be clear as well, you know, within the deal assessment or within any of the numbers that we are disclosing to you here today, is bake in, you know, an array of new management actions that we have not yet deployed elsewhere in the group.
So that gives us a strong level of confidence that, you know, number one, we can deploy those management actions, but also, number two, you know, our view is we're presenting, you know, a relatively prudent view of the cash flow generation profile from this deal.
Thanks, Tom. Next question is from Larissa Van Deventer from Barclays. You expect the deal to generate EUR 100 million in cash within five years, which is just under cash breakeven. What is the average duration of the book you are buying? On the book, is conversion to annuities automatic as contracts run off? And if not, what is the process to recapture those funds? Is your focus increasingly shifting to continental Europe?
Tom, why don't I pick up that sort of final part around, sort of strategy and where we might be looking, and maybe you and Tom can sort of pick up a little bit around duration, the sort of products, and I think Larissa is quite, quite rightly sort of pointing to what happens to endowment policies as they come up for their sort of retirement age. Thanks for joining us this morning, Larissa. I certainly wouldn't look at this as a sort of fundamental shift to Europe at the expense of the U.K., Larissa. We can do deals across all of those markets.
It's the great thing about the sort of structure that we have here with individual operating platforms, where we're regulated directly within all, pretty much all the territories that we, that we operate. So that gives us quite a lot of flexibility. I think we've consistently said, and we certainly said at the half year, that we were seeing some interesting opportunities in, in wider Benelux, and this clearly is, is one of those, and it's great to, to, to have announced this deal this morning. But there are certainly other things for us to look at. We are, though, continuing to see the U.K. as a, an active market off the back of the HSBC life deal, and we're continuing to have sort of conversations with potential counterparties in, in that market as well.
And provided that we can see an attractive return for shareholders, provided that we're convinced that we have the operational bandwidth and capability to bring these books of business in safely and run those products and deliver on the promises that those customers have been made, we're quite comfortable looking at a range of territories. And the platform that we get as part of Scottish Widows Europe does give us some further strategic optionality in terms of the policies that are administered on the system that comes with Scottish Widows Europe as well. So, yeah, a good problem to have with plenty of opportunities across various jurisdictions. Tom, shall I hand to you and Sam on duration and products and those sorts of things?
... Sure, Steve. I'll pick up duration, in fact, and I'll pass to Sam on the product question. So I think so Larissa, yes, I mean, the duration point is an important one, and actually that's part of the reason why we've really been very deliberate in to talk about the cash flow profile of deals more recently. So we did that obviously for HSBC, and we're doing that today. So I think the way I think about the duration is when you look at the emergence of the cash profile, you know, over 60% of that cash generation, we expect to emerge post five years.
You know, so that will give you a sense, without going into the specifics of the, sort of the, you know, the duration of the portfolio, that we, you know, we expect that the longevity of the portfolio to be significantly beyond five years. So hopefully that gives you, you know, a sense of that. I think on the product side, Sam, do you want to pick up the question on the conversion approach on the endowments, the annuities?
Yes, thanks, Tom. So, the main part of the product set are sort of effectively sort of U.K. style with profits endowments, but they do have the ability to then convert at maturity into an annuity. Now, that slightly depends on the exact product type, but we do expect a fairly high level of conversion into annuities over time. And that really is part of the reason that the duration of the book is relatively long as those annuities come through. In terms of how that works in terms of the reinsurance agreements back into the Clerical Medical with-profit fund, there's, in effect, two separate reinsurance agreements as you've seen from the release.
One covering the investment risk within the with-profits fund for the endowments, and then there's a separate one for those vesting annuities as they get taken up by policyholders.
Thank you very much for that, Sam. A follow-up question from Abid, from Panmure Liberum. Free cash flow and dividend. Our estimates, the deal will increase the free cash flow by some 20% from full year 2027. What do you plan to use the additional capital generation for? Reinvesting into growth, accelerating the dividend, or both? And the final part of his question is product set. Are there any odd features we should be aware of within the incoming product set?
Why don't I sort of pick up that broader question on sort of cash flow, and then, Tom, you might want to sort of supplement that and sort of comment on how this sort of adds to the cash flow, and you and Sam can then sort of talk about product set as well, just building on Larissa's question. Firstly, I'm delighted to get a question about what we, what we'll be doing with the sort of the additional cash generation. When I started as Chief Executive Officer of Chesnara over four years ago, a large part of the questions that I was getting at that point was: Is the dividend sustainable? Is there a sort of cliff edge coming?
So the fact that we're now talking about how do we sort of deploy this excess capital that may be coming through off the back of already having announced a step up in the dividend off the back of the HSBC Life deal. As a reminder, we've signaled to the market that we're expecting to accelerate that historic dividend track record by one year and lift the dividend by 6% at sort of full year 2025 in the interim, 2026. I think it's a sign that hopefully we're demonstrating a little bit more transparency around wherein the cash is coming through, but investors' comfort in the additional sort of cash flow that's coming through across the group.
We're still seeing, certainly on the strategic side, as I sort of talked about earlier, we're still seeing good opportunities to look at in the market. When we do our pipeline mapping over sort of three years, our expectation is that we're gonna have good opportunities to look out for investors. I would certainly see there being strong uses of the group's capital to deploy on M&A, as you've seen us consistently do over the last four to five years as well. Tom, I don't know if there's anything that you want to add on sort of cash flow more broadly before just turning to the product set itself.
Yeah, I mean, Steve, the only thing I would really add is to say that, you know, we have been talking a lot recently about our capital allocation framework and how we use that to think about M&A. So, you know, free cash flow is an important aspect, as is retaining a strong level of solvency surplus, as is ensuring we have liquidity, and as is ensuring that our operating leverage is attractive relative to that long-term ambition. So I guess I would wanna... All I would add to Steve's comments is to say that as we're ticking each of those boxes, it just gives us a huge amount of future flexibility around things like, you know, investment in the business, decisions around the dividend, and so on.
This deal just kind of adds an additional layer of flexibility on top of what we already had. I think on the product side, I mean, the short answer to your question is there anything odd in the portfolio? No. I think in my comments earlier, actually, I made the point that these are products, product sets that are very well known to us in the U.K.. And if you think about how these products originated, I mean, these are effectively U.K.-based products which were passported to Europe post-Brexit. So these are very, very well known to us.
You'll see as well that, and we cover this in some detail in the RNS, excuse me, that we have the two reinsurance arrangements in place, with the Clerical Medical with-profits funds, as Sam pointed out earlier. So to the extent that contracts have certain features. So, for example, guaranteed annuity options, those features are reinsured back into the with-profits fund as well. And just that gives us, you know, a level of comfort in the operation of the policies, but also from financial standpoint, you know, that we have a level of coverage against, you know, potential future costs of any guarantees on those products as well.
So, that I started by saying the short answer is no, then I gave you a long answer, which is also no, but that's, that is basically the answer. So, you know, we are comfortable that these are products that are very well known to us.
Thanks very much, Tom. Our next question is from Andreas van Embden, from Peel Hunt. Can you continue to reinsure Scottish Widows Europe under the annuity reinsurance and the investment reinsurance agreement until the policies run off? And what is the amendment and re-statement under the deal? And second question: What is the certainty that the remaining cases in relation to the policy claims will remain within the EUR 60 million provision set? And what is the range of outcomes?
Thanks, Andreas, and thanks for joining this morning. I'll, I'll pick up that sort of second point, and then, Sam, why don't I hand back to you for the, for the first point, just around the, how the sort of different agreements are working. So you're right. So within, as part of the deal, I think one of the important elements up front was, Lloyds Banking Group being very, very clear that, where there had been some sort of historic challenges with, with, a group of policyholders, that they were gonna sort of stand behind those, and there was already, a sort of deed of indemnity in place around that, which gets maintained going forward.
From our perspective, the way that works is that the liability ultimately is capped, as you've pointed out in the RNS, and that's a hard cap. So that's why we're sort of confident that we've got a clear view on that liability. There are teams in place to sort of support the activity that's required on that book. It's quite a well-established and long-established program. And that was a sort of key element of the deal up front that Lloyds wanted to make sure that they stood behind their policyholders, and that meant for us, that was a sort of an issue that was dealt with very early as part of the deal process. Tom, do you just want to pick up the...
Sorry, Sam, do you want to just pick up the, the sort of reinsurance points there?
Yes. Maybe if I just deal with the second part of the question first. So, obviously, Scottish Widows Europe's been part of the Scottish Widows Group for quite some time. So as part of this transaction, when the Scottish Widows Europe business becomes part of a separate group, we obviously required to some amendments to the existing reinsurance agreements that are in place. So, that's the reason why there've been some amendments and restatements under this transaction. Those changes will require U.K. regulatory approval as well. In terms of the length of the policy, so yes, they will remain in place until the policies run off.
Obviously, there's the ability to terminate under very limited circumstances, but we would expect that with those, both those reinsurance agreements to remain in place for the full maturity of the lifetime of the business.
The next question is from Will Mager, from Canaccord Asset Management. Can you please touch on Lifeware a bit more? How well do you know them?
Thanks, Will, and thanks for the question and for joining this morning. So we've been able to spend a bit of time with Lifeware during the deal process. We've also had the feedback from the sort of Scottish Widows Europe, broader Scottish Widows, and Lloyds Banking Group team, who've been working extensively with them as they've been migrating from their own legacy platforms onto this sort of newer system over the last few years. And we've also been able to take market references and also get feedback from the regulator. And all of that has given us a good level of confidence, both in the system itself, but also as the firm. I've spoken to the CEO of Lifeware personally a couple of times as well.
So having that sort of platform there, fully functioning, the fact that the migration of policies onto a more modern platform has already taken place, was an attractive element of the deal from us. And I suppose the administrative capability that that Lifeware system has is a little bit different to some of the other platforms that we have in Europe, which are focused more on sort of term insurance and savings products in the Netherlands, and the group pensions and custodian business lines, and life and health business that we have in Movestic, in Sweden. So it sort of supplements that capability quite nicely. When we look at the U.K., as a reminder, we have SS&C as our primary sort of go-forward policy administration platform.
We're fully focused on ensuring that the migration of HSBC Life U.K. goes well, working in partnership with them. Who knows, in the future, there could be opportunities to collaborate with them more broadly, including in Europe. But having the stability of that platform on a more modern sort of technology stack, and also a company that's sort of used to operating in this market and some other European distinctions, we felt was an attractive part of the deal.
Thanks, Steve. Just a reminder, if you would like to ask a question to the team, please use the toolbar below where you can type in your question. Our question is from Phoebe Baker, from Chelverton Asset Management. How will this acquisition impact the dividend?
Thanks for the question, Phoebe. So we'd previously talked alongside the HSBC Life U.K. acquisition, that our expectation was, given the attractive financials and the cash flow profile, that we'd be looking at a sort of one-year acceleration of the historic dividend profile. And I know you'll be aware of this, Phoebe, 'cause Chelverton had been a long-term supporter of Chesnara. But for those that might be a little bit newer to the story, you know, we have the best dividend growth track record in Europe, U.K., and European insurance. We've increased the dividend every year for the last 20 years plus.
We felt there was a sort of strong signal to investors off the back of that successful deal and the associated rights issue, that we're able to sort of say there was also gonna be a sort of a one-year acceleration in that sort of historic circa 3% profile that we've tended to have, which is inflation beating for investors up to sort of 6%. When we look further forward, look, we're bringing in further sort of long-term cash generation of GBP 250 million, 100 of that, that we're expecting the first five years. That's on top of the GBP 800 million lifetime cash generation in HSBC Life U.K., and around GBP 140 million that we expect over the first five years there.
We think that adds very much to the long-term sustainability of the group's cash flow, which we expect to turn into dividends. We know that that long-standing sort of dividend growth has been important to investors, so that should help sort of support that going forward. That's how we see this deal in the context of the dividend.
Thank you. We've got no further questions at the present time, so Steve, I'd like to hand back to you for any closing remarks.
Yeah, thanks, Sergey. So that ends the Chesnara conference call for, for today. Thanks for joining us. We look forward to speaking to you alongside our full year 2025 results presentation on the 24th of March. So please enjoy the rest of your day. Thanks for joining.