Chesnara PLC

LSE:CSN

Earnings Call Analysis

Earnings Call Transcript 2021-Q4

[Steven Murray, executive]

Good morning, and welcome to the 2021 Chesnara Full Year Results Presentation Webinar. I'm Steve Murray, Group Chief Executive of Chesnara, and I'm joined by Dave Rimmington, our Group Finance Director. We're delighted you could join us here today. And this year, we're pleased to welcome a far broader audience to this presentation, including some of our new bondholders.

So what will we cover this morning, Well, I'll start by briefly covering the main areas of delivery across Chesnara during 2021. How we performed against our 3 strategic pillars and also some of the more recent activity we've undertaken in 2022. Dave will then cover the financial results in a bit more detail, and this will include where we see potential for future growth, how some of our historical acquisitions have added to the value of the group, and while we have a high degree of confidence that Chesnara will continue to deliver strong cash generation in the future. I'll then finish with an overview of our future areas of focus and an outlook for 2022. And we'll have plenty of time for questions at the end of our presentation, which we expect to take around 35 minutes. And you can also submit questions during the presentation or you can ask your question as part of the managed Q&A at the end.

So let me start with what we see as the key strengths of Chesnara and some of the positive steps we've taken in 2021. So on this slide, you'll see some of those key strengths. Our first area of key strength is the great track record we have of building value and cash generation throughout our history, consistently increasing our dividend through a wide variety of market conditions. And in 2021, we've again seen the delivery of strong commercial cash generation, supporting a further increase in our dividend, and our EcV has grown in each of our divisions.

Our second area of strength is our strong and stable solvency position, which has proved highly resilient in volatile financial markets. And the solvency position in 2021 has remained robust. And the successful issue of GBP 200 million of Tier 2 debt in February this year provides us with further financial and strategic flexibility. Fitch has also recently assigned Chesnara an investment-grade rating.

Our third area of strength is our track record of successful M&A. We announced 2 acquisitions in the second half of 2021, and we expect these to complete in the first half of 2022. And we see further opportunities to deliver shareholder value through acquisitions in the future. And our final area of strength is the experienced Board and management team we have at Chesnara. And in 2021, we've added to our capability here as well. As well as myself joining Chesnara, we brought 2 new non-exec directors into the group, and we strengthened the management team adding further M&A and Investor Relations experience through the hire of Sam Perowne from Phoenix. And I wanted to thank Rakesh and the team at Phoenix for letting Sam join proceedings here today, a day or so earlier than was originally planned.

So let's turn now and look at the financial headlines for 2021. Overall, it's been a good year of delivery here at Chesnara. Commercial cash generation was very strong at GBP 53 million. And as a reminder, commercial cash generation stripped out things like the symmetric adjustment and with profit restrictions. So we see this as a really good underlying indicator of how our businesses are performing. Solvency has remained robust at 152% at the year-end, and we grew our EcV again by GBP 58 million before dividend payments and the impact of Forex movements during the year. Commercial new business profits of GBP 10 million represent about 10 -- about 30% of the ongoing dividend. And we're proposing a 3% increase in our dividend. That's the 17th time we've done that every year since we were listed on the London Stock Exchange in 2004.

Turning now to our strategic objectives. Let's look at how we've delivered against our 3 strategic pillars. And as a reminder, we maximize value from our in-force books of business. We seek to execute value-adding acquisitions of portfolios and businesses, and we write focused new business where we have a high degree of confidence we can make a profit.

So let's look at how we've delivered against each of these 3 areas. On maximizing the value from our existing business, as well as growing the economic value and also improving the cash generation of the group, we grew our funds under management. We executed a number of management actions, including a U.K. annuity reinsurance deal and a Dutch catastrophe risk reinsurance, which reduced our overall capital requirements.

On M&A, having completed the acquisition of a portfolio from Brand New Day in the Netherlands, we announced the acquisitions of Sanlam L&P and Robein Leven in the second half of the year. And I've already mentioned the hiring of Sam and the recent Tier 2 debt raise, both of which will support our increased ambition for value-accretive M&A. And finally, on new business, we saw the commercial value of new business stay at broadly the same levels as 2020, albeit with improved market share for Scildon in the Dutch term market and positive strides made by Movestic in its custodian business line. And Chesnara remained carbon neutral for all of its direct operations, and we put in place a broader program of activity to increase the rate at which we can make further improvements in our approach to ESG.

Turning now to our dividend. Our dividend has grown by over 80% over the last 17 years. and we're pleased to be proposing an increase of 3% to our final dividend. Chesnara has delivered cash generation in support of a progressive dividend through a very wide variety of market conditions. And as Dave will show you in more detail, we have a strong line of sight to future sources of cash generation.

Looking now at more recent events. Whilst not in the 2021 results, we wanted to remind you of the expected impact of the acquisitions we announced last year and also the impact of the February Tier 2 debt issuance, both of which strongly position Chesnara for the future. On the 2 acquisitions, we expect them combined to add around GBP 13 million of day 1 EcV and around GBP 6 million of steady-state cash generation to the group's ongoing result. The pro forma solvency position for the group, post the Tier 2 raise and the expected completion of our proposed acquisitions, will be around 182% versus 152% at the year-end. Now as and when we execute further acquisitions, utilizing our internal resources, we would expect this to reduce back down to our normal operating level of around 140% to 160%. And Dave will provide you with further color on this shortly.

Now finally, it's impossible to be here today and not reflect on the ongoing events in Ukraine, which are truly shocking. At Chesnara, we stand with and support the people of Ukraine, and we've made total corporate donations across the group of GBP 50,000, to charities that are supporting Ukrainian people. At a corporate level, we have very limited exposure to Russia ourselves, and we're working with a very small number of our customers that do to help them manage their positions wherever possible.

So now let me hand over to Dave, who can take us through the numbers in some further detail. Over to you, Dave.

[David Anthony Rimmington, executive]

Thanks, Steve, and good morning all. So I'm going to start with our wider financial scorecard. I'm going to highlight some of the 3 of the key financial observations before going into the more specific metrics in a little bit more detail.

Firstly, we report strong and improving results across most of our P&L metrics. In particular, as Steve previously mentioned, I note the strong commercial cash resource of GBP 53 million, which support a 3% dividend growth. Secondly, the balance sheet remains strong and stable with a closing ratio of 152%, which represents a surplus of GBP 190 million. Assets under management have also increased during the year to GBP 9.1 billion. Finally, you will see here, we've included some pro forma figures, which represent the estimated impact of the post-balance sheet events, Steve recently referred to. You can see here that we expect the solvency ratio to have increased to 182%, and importantly, the level of surplus to have increased to GBP 344 million. This is important because it gives additional firepower to M&A and other actions. Finally, you can see that the assets under management pro forma, the completion of the acquisitions increases to a record high of GBP 12.3 billion.

So moving on to the metrics in more detail. And starting with probably the most important metric of cash generation. I'm going to spend a minute explaining what we mean by cash generation at Chesnara because I'm conscious that not all insurers use the same definition. We define cash generation as the movement in the Solvency 2 surplus. We think this is sensible because it pins the number to a regulated and consistent regime. But what it does mean is the results can sometimes be influenced by some of the more technical nuances of solvency reporting, such as the symmetric adjustment, Steve previously mentioned.

The symmetric adjustment is a feed for Solvency 2, which means after a period of strong equity growth, we're required to hold proportionately more capital. And this can have a surprising impact on the resorts in the period. Because of this, we developed an alternative metric called commercial cash, largely at the request of investors, which cuts through and look through some of these more technical adjustments. So on the graph, we're particularly pleased to show the sharp improvement in commercial cash from GBP 27.7 million to GBP 53 million. This represents 150% coverage of the dividend.

Moving on to look at the commercial cash result by division over both a 5-year and a 1-year time frame. You can see from these charts that the cash continues to primarily come from the closed books of countrywide and Waard, which is what we'd expect. The closed books themselves have more than covered the dividend over both a 5-year and 1-year period. It's equally encouraging to see that the new business operations, which are naturally impacted by the capital strain of writing new business have actually begun to make positive cash contributions. And this is all part of the diversified business model of Chesnara.

The next graph is an important graph, and it's in addition to our presentation this year. And we've always been very confident about the sustainability of the cash generation and the track record to some extent has spoken for itself. But we've added a slide to give us more forward-looking view of where we expect cash to come from in the future. You can see in the gray block on this slide that we've estimated the total outflow over the next 5 years in the form of dividend payments and the new coupon payments on the Tier 2 debt we raised is circa GBP 230 million. So what this graph shows is that the vast majority of that can be covered by 2 sources of cash, the reduction in the risk margin and SCR, which releases over time and is a relatively natural and highly certain source of cash, together with real-world returns on our investments at a relatively conservative estimated level. Those together cover the vast majority of the outflow. Adding to this, we have various management actions we can take to enhance cash, should we need to do so.

Overall, the sources of cashes -- the sources of cash mean that we're confident we have a base cash generation results significantly in excess of the outflows. Whilst this is a 5-year graph, this continued way beyond 5 years. And you'd probably see a similar profile, if you took it to 10 or even 15 years.

Finally, acquisitions. This is the one part of this chart, which isn't drawn to scale. Acquisitions will actually have an impact on short-term or medium-term cash, which is very specific to the details and the nature of each acquisition. The point is, in general, over time, we expect acquisitions to create cash. And this is something we can demonstrate by looking back retrospectively at the recent -- the deals we've done through our history and our further slide. Overall message is there's a clear line of sight from relatively predictable and stable sources of cash to cover all the outflows we expect over the next 5 years.

Moving on to our second financial pillar, and that's solvency. A key feature of Chesnara has been its stable solvency over time. As Steve mentioned, the solvency ratio has remained within our preferred operating range for many years, including the last 5 years. As of the end of 2021, we're comfortably within the 140% to 160% range. It's worth noting at this point, this financial stability is despite having paid out over GBP 150 million in dividends over the same time frame. I also point out that the ratio doesn't include the use of any transitional measures, which by their definition would naturally run off over time. So we believe it's a relatively clean and high-quality solvency ratio.

Looking at the closing ratio in a little bit more detail. So as I say, 152%, the symmetric adjustment and the impact it has on cash also has an impact on the closing solvency position, and we believe this to be a temporary impact. So for illustration, if you look through the symmetric adjustment impact, you get an adjusted solvency ratio of 160%. Equally, as mentioned previously, if we pro forma the impacts of the Tier 2 debt and the 2 acquisitions we expect to complete in the second quarter, our ratio is at 182%. I think it's important to note, this is not a new long-term norm. And actually, we would expect through doing future M&A or other actions for that headline ratio to revert back to within the 140% to 160% range. Looking at the results on an IFRS basis. I think we've been quite consistent in flagging that IFRS is not a core management metric. But suffice to say, it's useful that the profit before tax has remained stable and increased slightly. And at the divisional level, all the results are broadly in line with expectations.

Moving on to the third main pillar of the financial model, and that's growth. Before I get into some of more of the technical points of growth, this slide looks at growth from a more operating perspective. And perhaps contrary to the perception of a company, which is seen in some quarters to be a closed book, you can see here that the operating -- the company has grown actually in terms of both policy count and assets under management. Indeed, assets under management will have increased by 59% pro forma the deals and policies in force have increased by 8%. So Chesnara is actually a growing organization. This growth has been achieved whilst containing good control over costs, and you can see here that the cost base is actually reduced over the last 5 years.

Looking at growth in terms of economic value, strong economic value earnings in the year of GBP 57.8 million have more than covered the dividend. They haven't, however, been quite sufficient to cover the dividend and an FX loss of GBP 37 million. I do note we have a similar FX gain in 2020, so we're neutral over the 2-year period. This is up to a modest reduction in economic value. When we complete the deals in 2022, this will turn to a modest increase.

Looking at economic value at a divisional level. It's great to see all of our divisions have reported strong and positive economic value growth. The growth has been predominantly from economic conditions and for Movestic and Scildon in particular, the positive resorts are after the impact of some material operating losses. Just add a little bit of color to that. In Movestic, we have continued to see transfers out of the business in excess of our long-term assumption. And in Scildon, we've invested heavily in the IT infrastructure. Importantly, we expect both of these sources of outflow to curtail significantly in 2022. Steve mentioned earlier, the Chesnara fan, this is just an illustrative view of where we see that economic value doesn't capture the full growth potential of the group. We expect to be able to grow in the form of acquisitions, new business, synergies through acquisitions or through natural organic growth, real-world returns and risk margin.

Looking at long-term economic value growth. Clearly, this graph demonstrates a positive upward trend. I think it's also worth pointing out that profile is of interest. In periods of lower M&A activity, and if they align to less positive economic conditions, you can, in fact, see plateaus or indeed periods where the value of the company has temporarily reduced. This does not concern us. We're still confident that the long-term trend is upwards.

Moving to new business. It is a key part of our business model for 2 reasons. One, we get real value enhancement of circa GBP 10 million, and that's coming broadly equally from Scildon and Movestic. Secondly, it's an important driver of the scale dynamics I talked to earlier. So over and above the absolute value growth, it helps the group to grow operationally and therefore, offer synergies and operational efficiency. I think it's fair to say the new business operations have been hampered to some extent by COVID conditions over the last 2 years where it's been more difficult for salesmen and brokers to spend face-to-face time with clients. And therefore, we would expect over 2022 and beyond a level of improvement in new business profits over and above the last 2 years.

Moving on to investment return above risk free. An important basis of preparation for economic value is that we assume risk-free returns. Of course, we expect to get real-world returns on our assets, particularly those assets which are held by policyholders in unit-linked funds. So what happens over time is as we get real world returns, the economic value grows over and above the reported value. This has been a key feature in 2021. As reported here, we had over GBP 110 million of value growth from economic conditions. Similarly, over the last 5 years, there's been GBP 290 million of real-world return growth. So this is a key and powerful source of growth. I think it's important to note that, that's not necessarily the long-term norm in terms of quantum. But we are confident that there's significantly in excess of GBP 150 million of future value in the form of real-world returns not recognized in the current economic value.

Finally, Steve mentioned that I'd take a little bit of a historic view of some of our more recent acquisitions -- or sorry, our longer-term acquisitions. For 2 reasons; one, to genuinely assess how successful those acquisitions have been and the power of M&A, but also to demonstrate the growth factors I've talked to in practice. So you can see here, we paid GBP 32.5 million for Movestic, adjusted for inflation. And its current economic value after adjusting for dividends paid or capital injections made is over GBP 250 million. So I think it's fair to say, a very successful venture into Sweden.

And where does that growth come from? And as the illustration shows, the growth is because -- for Movestic over that period, despite some operating challenges at times, all of the growth pillars -- all of the group factors have been material, including investment returns, new business and runoff of the risk margin, et cetera. And this graph shows that for all of our acquisitions not only are the gains healthy, but it's live -- it's evident of the growth factors we expect to continue in the future. And we're confident that not only is Chesnara a stable business, it's also a business we expect to grow.

And I'll hand back to Steve now to talk about M&A on a forward-looking basis.

[Steven Murray, executive]

Thanks for that, Dave. So as I covered at the start of the presentation, Chesnara has a really good track record of successfully executing M&A. 9 deals in our history with 2 more announced in the second half of 2021 and completing shortly. And as David has just shown, we've delivered meaningful upside for shareholders from M&A over a number of years.

Now as shown on this slide, we continue to have a clear and robust process for M&A, supported by 4 key criteria. And these ensure that we remain disciplined in our approach, but they also allow us to have a good amount of flexibility to take advantage of M&A opportunities in the future. And as a group, we're increasing our focus on acquisition-related activity, given the opportunities we're currently seeing in the market.

And we wanted to share a little more detail on how we see the M&A market. And on this slide, the chart on the left gives you a sense of the back book market available across the U.K. and Netherlands. And these are markets that we've been the most active in, in terms of consolidation. Around GBP 390 billion available, which, if anything, probably understates the opportunity. Now within these back books, there remains a very significant opportunity, at least 20% by our math of books at around GBP 10 billion funds under management and below sort of size, which would broadly equate to deals of GBP 500 million and under. Now deals in this lower range are a very good size for us, very transformative at the top end of that range. And we do tend to see slightly less competition than you do for larger deals above this sort of size. Now looking at the available market, it's very much art rather than an exact science. For example, the splits we've shown do not include the potential to carve up larger books into bite-size pieces. And this is the approach we've seen AXA take in Belgium recently, for example.

Looking at our acquisition fire power. Post the Tier 2 debt raise, we continue -- we're able to continue to fund deals a bit above the GBP 100 million mark, from our own existing resources. And whilst it's obvious for us to look at our home markets first, where we have operating platforms and existing regulatory relationships, we will still consider new territories where there's a positive regulatory backdrop for consolidation. And if we can see a clear deal pipeline that's accessible to us, and we think we can generate real value for our shareholders. More broadly, we're continuing to see large international groups seeking to very actively reshape their portfolios, and overall, a very active market in Europe for M&A.

And an active market is good for Chesnara. And as a listed company with long-term capital and a track record of looking after customers, we're an attractive counterparty for vendors and also for local regulators. And we tried to bring to life in more detail what we see as our USPs on the right-hand side of this slide. So all in all, we remain optimistic about our ability to participate successfully in acquisitions going forward.

So turning now to ESG. The group has continued to make progress on ESG, albeit we have much more to do here. We launched a broader program of work this year to accelerate our progress and this includes wider engagement with a number of the parties that evaluate insurers' ESG credentials. Our direct operations remain carbon neutral, trending to negative. We've improved the diversity of our board through the recent non-exec hires that I talked about earlier. And we're working with our asset management partners to ensure that our investments meet highest ESG standards going forward. On customer outcomes, we've continued to maintain a strong focus on positive customer outcomes again in 2021, continue our track record of providing good service right the way through the pandemic. And that's in no short part due to the efforts of people right away across Chesnara Group in 2021. And we've also made improvements to the responsible and sustainable investment choices available to our customers.

So let's look at some of the area of focus you can expect from Chesnara going forward. Now our strategic pillars remain the same: maximizing value from inforce books, seeking to add value from M&A and the focused writing of profitable new business. But you will see some changes in how we approach these. We're looking at how we more proactively manage the balance sheet, looking at actions such as hedging and reinsurance potentially alongside M&A activity. And there are potential opportunities within our existing business to take on some additional risk that would provide further positive diversification benefits and capital synergies. We're looking again at our investment strategy and the ways that we might deliver a better risk reward, particularly on our shareholder owned assets.

It hopefully won't have escaped you that we've got a greater focus on M&A, and we're seeing good opportunities for us to engage in transactions already this year. And the Tier 2 raise gives us further flexibility in a far more capital-efficient structure. And we've also retained our bank revolving credit facility. And finally, we're developing our return on capital frameworks to ensure that we're making more deliberate capital allocation decisions across the group. And this will include us evaluating the relative return of M&A versus new business and versus other activity, including things like share buybacks.

So let's look ahead into 2022. We see the terrible events happening in Ukraine being a strong contributor to short-term inflation rises across Europe, volatile equity markets and yields potentially falling. And at the back end of the presentation, Dave's set out our sensitivities to some of these sorts of stresses and our business continues to perform in line with these sensitivities. The Chesnara business model is delivered over the years through a very wide variety of market conditions, including the global pandemic and the global financial crisis. And we remain confident it will do so again, not least given the strong line of sight, we have the cash generation over the medium term that Dave outlined earlier. And on M&A, we remain optimistic about the outlook here. An active M&A market should be good for Chesnara.

So in summary, Chesnara has had a good year of delivery. We've seen strong commercial cash generation across our businesses, robust and stable solvency levels and an increase in the EcV of the group before the impact of Forex movements and the payment of dividends. Looking forward, we've got strong line of sight to future cash generation, and we remain optimistic about the prospect of us delivering value-adding acquisitions. So all in all, there's a lot to look forward to here at Chesnara. I'm delighted I joined the group. And with the rest of the team here at Chesnara, I'm very focused on the group delivering to its future potential.

So thanks for listening to the presentation, and we'll now open up for questions.

[Samuel Perowne, executive]

We've got a number of questions that have come through the webcast. [Operator Instructions] Our first question is from [ Victor Henimann ]. I noticed that the expected profits included the future premiums is quite sizable and represents 65% of your SCR as of the end of the year 2020. This is significantly higher than your peer group. Could you expand?

[Steven Murray, executive]

Dave, do you want to pick up [ Victor's ] question around expected profits from future premiums. And then I suppose the component of the SCR that's made up of that. Maybe we can just talk to [ Victor ] more generally about what makes up the SCR and some of the key risks that we see.

[David Anthony Rimmington, executive]

Yes. I'm not sure I fully understand specifically the question, but because we've got a unit-linked portfolio, we're quite heavily unit-linked based. A lot of our future profits do come from future cash flows, we expect to flow from that portfolio. So naturally, a large proportion of economic value will be from the cash we expect to flow from future premiums.

In terms of the SCR, similarly, because we have got a large unit-linked portfolio, a lot of our SCR relates to equity market risk and currency risk because we're exposed to movements in both those values. So we have probably got a skew towards market-related investment -- market-related SCR components, and we've probably naturally got a higher skew towards how much of our profits on the balance sheet is future profit rather than net assets at the point of the balance sheet. In terms of those exposures on the SCR, as Steve mentioned earlier, we do have the option to take out more hedging than we currently do. In fact, as a group, we carry out very little hedging. We're pretty much fully exposed to those risks. Therefore, the SCR can be higher. We do business cases and we constantly assess the relative merits of the upside of those exposures versus the costs and the benefits of hedging. And to date, we've chosen not to hedge, but under different circumstances, we might hedge and, therefore, reduce the SCR and create an instant cash release. I don't know if that help answers your question, [ Victor ].

[Samuel Perowne, executive]

That's great. Thank you for that, Dave. Another question. You spoke about looking at other territories. Could you give any more color on where might be of interest?

[Steven Murray, executive]

Yes. Thanks. I'll take that. Thanks for the question. But firstly, what we should say is we'll absolutely start by looking at our home market. So we've got operating platforms, technology, regulatory relationships and people there. So it makes an awful lot of sense for us to start looking in the markets that we're in at the moment. And across both the U.K. and the Netherlands, we are seeing a good pipeline of opportunities. So we're optimistic about what may come to the market there. What we do want to make sure is that we do have the opportunity to look at opportunities outside these markets if we think they make sense for shareholders.

So historically, the group has looked at some offshore territories, particularly where we've seen strong regulation and where the product sets are pretty similar to the ones that we run. So Dave has just talked about the fact that we have a large part of our business that's unit-linked. So again, if we were looking at businesses that had a large part unit linked to over life insurance, again, that would encourage us to look elsewhere. But there's certainly a higher hurdle for us to look at those territories. And we would need to look at the totality of those environments, how the regulator viewed consolidation and also what the deal pipeline looked like as well because I think for us to enter another territory, we need to be confident that we could do further deals and create scale in those markets.

So we aren't talking specifically about territories. That's commercially sensitive. And I think if we were ultimately going to do that, then that we'd want to be able to kind of do our work in the background before we bought in one of these markets.

[Samuel Perowne, executive]

Another question. Could you provide some more detail on planned management actions in the coming years?

[Steven Murray, executive]

Yes, sure. I think Dave can talk to some of the management actions more generally that we have available to us. Do you want to cover that, Dave?

[David Anthony Rimmington, executive]

Yes. Yes. So the management actions tend to fall into 2 categories. There are actions to either reduce the capital we have to hold or their actions to increase the value of the company and combined, they widen the gap between capital and value and hence, the surplus. So the actions we can take to reduce the capital we're holding include hedging, as I mentioned before, not least currency hedging would be one of the more simple actions to take. And by way of illustration, we could release circa GBP 40 million of capital by taking out hedges over the sterling value of our overseas subsidiaries. We could do more sophisticated hedging on some of our equity exposure. Although interestingly, the Solvency 2 model, the symmetric adjustment I talked about earlier is actually, to some extent, to free hedge because we're actually quite protected through that for the impact of falling equity markets to some extent, whilst we've got that free hedge from the rules, why we would pay for one.

We can also do things like take out more reinsurance. During 2021, one of the drivers of the strong cash result was that we did take out more reinsurance in the U.K. and the Netherlands, but we're by no means fully reinsured. So there's definitely room to go there. And in terms of the actions we can take to enhance the value of the company, naturally, as the group grows, you would expect unit cost to drop and therefore, that will burn through to the valuation and the owned funds. We can also continue to invest in systems and the automation of processes, which we've been doing over all of our divisions, and there's still more to do. So they're the type of things we're referring to.

[Samuel Perowne, executive]

That's great. Further question from [ Brendan Reilly ]. With respect to the statement made on Slide 15, re-dividend coverage for the next 18 years, what assumption does the calculation use for average yearly dividend growth?

[Steven Murray, executive]

Dave, I think that's one for you.

[David Anthony Rimmington, executive]

Yes. For the purpose of that illustration, we've assumed 3% a year dividend growth.

[Samuel Perowne, executive]

Okay. That's great. A further question from [ Brendan ]. Why do you expect the adverse outflows you mentioned to reduce in 2022?

[Steven Murray, executive]

Do you want to take that, Dave? And you're on the Movestic Board so -- as am I, so we're pretty close to this.

[David Anthony Rimmington, executive]

So we believe the transfer outflows have been driven by -- well, we know they're driven by 1 thing, and we believe they're driven by 2 things. During '20 and '21, one of the large mutuals in Sweden followed a relatively -- or in fact, a very aggressive pricing strategy. It appeared they were trying to kind of take a chunk of the market. And we know that, that company has withdrawn that offer from the end of 2021. So that specific driver of the outflows. And just for clarity, it wasn't just Movestic, our Swedish business losing business to that mutual -- the whole of the industry was seeing net outflows to the mutual. We know that offer has been withdrawn, and we're already seeing in the monthly MI towards the end of 2021 and into 2022 from relatively encouraging reductions in the level of outflows. So that's happening.

The other dynamic is that brokers definitely changed their behavior under COVID. They were less able to get out and see new clients and spend face-to-face time. So it looked like it happened in the U.K. many years ago, there was a tendency to churn existing business. And we expect when normal business resumes, that level of churn will reduce. Finally, the rules changed mid-2022. Our business has always been fully open and clients have been able to take their pots elsewhere. There are parts of the Swedish market, which have been restricted. So huge parts of the traditional Swedish market has been protected. That protection is being lifted mid-2022. So we believe there will be a more level playing field.

So not only do we think transfers will drop, we believe we will be able to actually start actively targeting transfer business from other players. So that's the main reason why we're confident about that, reducing significantly. One final point on this. We have strengthened our long-term assumption, so we've built into the results and assumption that it might not come back to pre-COVID levels. If it does, great, we'll have a profit, but we've protected against it.

[Samuel Perowne, executive]

We've got a question from Barrie Cornes from Panmure Gordon. He's got 3, but I'll do them individually just for ease. Have you considered a share buyback given the share price discount to EcV?

[Steven Murray, executive]

Thanks, Barrie, and thanks again for your note this morning as well. I talked about looking at capital allocation -- capital allocation more broadly and return on capital levels as a group. And one of the things that we always use to evaluate some of the decisions that we take, particularly those strategic ones, and we will compare that against a share buyback. So we do recognize that there's certainly further value there in the share price when you look at the level that we're trading at and you look at the kind of yield level. We're very focused on making sure that we take the actions to demonstrate to investors and broader stakeholders of the group that the business is growing, and we can deliver value. So we will always think about share buybacks. We're aware of that measure and that being kind of open to us, and we will evaluate things like M&A against the potential benefits of the share buyback.

[Samuel Perowne, executive]

And the second question from Barrie was post Tier 2 capital raise. Have you noticed an enhanced M&A discussions? Or is it too early to date?

[Steven Murray, executive]

So I think what we've seen, Barrie, is it's been helpful for us to go out and market ourselves off the back of that Tier 2. So we've certainly been able to go to organizations that we spoke to last year. And as you all know, these conversations can take a number of years as we talk about the Chesnara story, what we might be able to do and look at assets that some organizations have that aren't core. So I think it's been useful for us to demonstrate again that we have financial resources available. The investment grade rating has also been helpful for us as well. That's another demonstration of external party kind of validating the strength of Chesnara. But we were already seeing a pretty active market across Europe. So I think it's just provided Dave and I and the broader team the opportunity to, I suppose, to remarket the fact that we are in the M&A market, and we believe that we can be a good partner.

[Samuel Perowne, executive]

Thank you, Steve. And the final part of Barrie's question from Panmure Gordon was, do you anticipate IFRS 17 having an impact on presentation of results? Are you looking to introduce a CSM?

[Steven Murray, executive]

Dave, you're the exact sponsor of our IFRS 17 programs. So over to you on that?

[David Anthony Rimmington, executive]

Yes. Well, IFRS 17 will certainly change the presentation of the results. The primary statements will look fundamentally quite different, and we're working hard on understanding those disclosure requirements. In terms of where our projects are up to, look, IFRS 17 is undoubtedly a very complicated piece of work across the whole of the sector. We're in a very good position. We've got no concerns about complying. We've also done our first dry run relatively provisional numbers. But importantly, we don't see any concerns about it having a negative impact on IFRS net equity, which would potentially otherwise have dividend consequences. So we're confident the numbers are looking good. We're confident that process wise, we're in a good position. But you're right, Barrie, the disclosures will change quite significantly. And I think there'll be a learning curve for the whole of the industry and the analysts to become familiar with a new set of primary statements.

[Samuel Perowne, executive]

Great. I'll combine this, a couple of people have asked this. But you've mentioned that you had M&A firepower of above GBP 100 million. How do you think about funding deals above this size?

[Steven Murray, executive]

Dave, do you want to cover kind of how we think about financing, maybe reminding people of what we've got internally and then looking at some other things as well?

[David Anthony Rimmington, executive]

Yes. So yes, smaller to midsized deals, we can kind of fund largely through our own resources. We've got a track record and a very successful track record of going to the equity market. For the right deals, we're confident our equity holders and new equity investors would be willing to support any M&A activity. We've also, as you know, entered the Tier 2 market, and we're becoming familiar with other alternatives like RT1. And we're also open to more creative ways to fund deals if required, if the vendor retain some sort of stake in the business they sold or through operating in partnerships.

So I think our overall conclusion is, we have lots of sources of finance, some of them more proven than others, including equity. We've also got a GBP 150 million revolving credit facility. So whilst you've taken out the Tier 2 debt, we've retained our existing term debt facilities. So that would definitely be another source of cash, especially for deals in the kind of the GBP 150 million to GBP 200 million range. Lots of sources, basically and a track record.

[Samuel Perowne, executive]

Great. Thank you, Dave. We've got time for one final question. You talked about taking on more risk onto the balance sheet. Could you provide more detail on this? And would you consider taking on more longevity risk through acquiring annuity portfolios?

[Steven Murray, executive]

Yes, thanks for that question. So when we've been talking about risk reward more generally, there are some opportunities for us to take some more risk. So longevity is certainly one of those areas that we could look at. So we have some small annuity portfolios, both in the U.K. and in the Netherlands, we could take some of that risk back on to balance sheet or we could extend the product offering that we have in the Netherlands is kind of 2 examples.

Now we would need to be convinced that the risk reward was in the right place on that, that we have the capability to manage that risk. But one of the features of our balance sheet is we are underweight longevity. So actually, we would get some very meaningful diversification benefit if we took a risk like that onto the balance sheet. And that's an example. There are certainly other risks as well. We are also looking on our investment strategy as well. We're pretty conservative when it comes to the management of shareholder assets.

So again, Dave and myself and the team are just taking a fresh look at that to see whether there might be some opportunities to generate some further returns for shareholders still within a relatively conservative approach to investments. On the M&A side, look, we would -- we'd be open-minded if there were books there that had individual annuity portfolios as part of them. We've certainly got the capability to look at that. An annuity -- an individual annuity book in runoff isn't the most complicated thing for us to think about. What you shouldn't expect from us, however, is us going to follow some of the other people in the insurance market and do bulk purchase annuities. Dave and I don't see that as a space where we think we can make the right returns for our shareholders and that we've got the right capabilities and the capital to deploy there. But we'd certainly consider, in payment annuities in runoff, I think, would be a sensible thing for us to look at, particularly as part of a broader deal.

[Samuel Perowne, executive]

I have just another question that's come in from Ashik Musaddi, I hope I pronounced that right, from Morgan Stanley. I have a couple of questions. how much of the recently raised debt can be deployed to M&A? And the second question would be, what would be the type of business you plan to buy, and annuities, with profits, unit-linked?

[Steven Murray, executive]

Yes, it's a great question, and delighted you can join the call this morning. Yes. So we've talked about the -- I suppose the acquisition firepower. So that kind of GBP 100 million plus number that I talked about in the presentation and Dave just talked about. I mean that's absolutely deployable on M&A. The reason there's a bit of a range there is obviously depending on the opportunity. It might be that actually we're able to extend that range a little bit more depending on what the capital attributes of that opportunity were. But we have those funds available for us to deploy at very, very short notice.

And certainly, when we're speaking to vendors, we're making sure they're aware of that. In terms of the sorts of books that we look at, I mean, it is the things you've talked about, we've got a broad range of options because of the existing capabilities we already have within the business. So we've got experience of managing with-profit assets in the U.K. We've got extensive experience of managing unit-linked businesses across the range of individual and group pensions. And we've got lots of experience managing life insurance as well. And we've just talked about some of the smaller annuity books that we have. And actually, we're quite happy to take books that have got a different blend of these things because of the capabilities that we have. So -- and again, that links to the optimism that we have for opportunities coming forward. It doesn't need to be a pure unit-linked book just for us to look at that.

[Samuel Perowne, executive]

Thank you, Steve. Final question. Marcus Rivaldi from Jefferies. Despite raising GBP 200 million of Tier 2 in February, it does not sound as though you are expecting to execute more material M&A -- or sorry, does not sound as though you're expecting to execute more material M&A over the remaining 2022. Is that fair?

[Steven Murray, executive]

Thanks, Marcus. I've been around the block long enough that kind of trying to make predictions about exactly what sorts of deals will land where it can be a little bit of a fool's errand. Look, what we are seeing is we're seeing an active market. We're expecting to be active. We've had the opportunity to look at some portfolios already in 2022. These things can take a little bit of time. Sometimes, they're in competitive processes. Sometimes the timing is not right for the vendors. But having that Tier 2 debt available with that rating, it's very, very helpful for us when we look at our future M&A ambitions. And certainly, we're going to try and be active. We'll be locking and knocking on lots of doors. Sam joining us today is a big addition to the team. We get the benefit of his a little black book as well. So -- but we're optimistic about Chesnara's ability to participate in M&A processes going forward.

[Samuel Perowne, executive]

Thank you, Steve and Dave. We got no further questions from the webcast at the moment. So if I can pass back to you, Steve, for closing remarks.

[Steven Murray, executive]

Okay. Well, thank you for joining us today. We hope you agree that it's a good set of results from Chesnara. We're looking forward to speaking to a number of our shareholders over the next few days. But we wish you a happy Thursday, and hope the rest of your day goes well. Thanks again for listening.