Final Results

RNS Number : 8796T

Chesnara PLC

30 March 2021

CHESNARA plc

("Chesnara" or "the Company")

30 March 2021

LEI Number: 213800VFRMBRTSZ3SJ06

FINAL RESULTS

Chesnara plc

Protecting our Stakeholders

2020 has been a unique and challenging year for everyone. Whilst our core strategic priorities remain unchanged, the pandemic has created a focus on additional short-term priorities relating to staff welfare, customers and regulators, the ongoing protection of shareholder dividends and maximising the company's potential to succeed in a post-Covid-19, post-Brexit environment.

We are pleased to report good outcomes against each of these criteria, resulting in a good balance of positive outcomes for all key stakeholders.

Despite the priorities created by Covid-19, adverse operating conditions and continued downward pressure on yields, it is reassuring to report a stable pre-dividend Economic Value and cash generation levels that enable the divisions to propose a further c£48m of dividends to the parent company, supporting our decision to propose a 3% increase in the dividend.

PROTECTING OUR STAKEHOLDERS

· EMPLOYEE WELFARE

From very early in the pandemic, our initial priority was to ensure staff could work safely from home. At the same time, we have invested to make sure our offices are as safe as possible so that on the occasions any staff do need to work from the office and when government guidelines allowed, they could do so with minimum risk. From an economic welfare perspective, all employees have been paid in full throughout, without the use of any government support schemes.

· BUSINESS CONTINUITY - CUSTOMERS AND REGULATORS

The emergence of Covid-19 gave rise to significant changes in the way we work, largely as a result of the group having to respond to governmental rules that were put in force in the jurisdictions within which we (and our outsourcers) operate. It is pleasing to report that we undertook a smooth transition to these remote working conditions, which have remained largely in force over the course of the year, with no significant immediate or ongoing disruption to key customer related business services or regulatory routines.

· SHAREHOLDER DIVIDEND INCREASE

Prudent financial management and solid results mean we have been able to maintain our dividend model and increase the dividend payment in 2020 by 3%. Importantly, this has been done without compromising the financial stability of group. The post dividend group solvency ratio has increased slightly to 156% (31 December 2019: 155%) and the closing Chesnara cash balance remains healthy at £59.9m (31 December 2019: £75.5m) having repaid debt of £15.4m in the year.

· PROTECTING THE BUSINESS

Funds under management (9% increase), policy counts (3% increase) and new business market shares remains strong. Our gearing is low at 7.4%. Together this creates a solid foundation for profit growth post Covid-19.

2020 FINANCIAL HIGHLIGHTS

· GROUP CASH GENERATION OF £27.7M (2019: £36.7M) ^Note1

Cash generation in the year has enabled the divisions to propose total dividends to Chesnara of £48m ^note5, representing c150% dividend coverage.

· DIVISIONAL COMMER CIAL CASH GENERATION OF £38.0M (2019: £99.2M) ^{Note 2}

All divisions have delivered solid positive results. The UK remains the stable dominant component (£18.7m) and Movestic has made a significant contribution of £13.1m. A more modest contribution from Scildon of £3.5m reflects the impact of new business strain and further downward pressure on yields.

· GROUP SOLVENCY RATIO OF 156% ( 31 December 2019 : 155%)

We are well capitalised at both group and subsidiary level under Solvency II, with group solvency increasing marginally in 2020.

· 3% INCREASE IN FINAL DIVIDEND

The results support the continued growth of the final dividend to 14.29p per share (2019 final: 13.87p per share) ), resulting in a 3% increase in the total full year dividend to 21.94p per share (2019 full year: 21.30p per share). This constitutes the 16^th consecutive annual dividend increase for shareholders.

· ECONOMIC VALUE (ECV) OF £636.8M ( 31 December 2019 : £670.0 M ) ^{Note 3}

Pre-dividend Economic Value has remained largely unchanged. Factoring in dividend distributions of £32.3m have resulted in a 5% overall reduction (2019: 7% increase).

· COMMERCIAL NEW BUSINESS PROFIT OF £10.5M (2019: £14.4 M ) ^{Note 4}

During 2020, Scildon has increased market share in both term and individual life markets, which has driven a record new business result (£8.8m) and an uplift of 12.5% on 2019. Covid-19 restrictions have had a marked impact on broker activity in Sweden which has contributed to a significant reduction in new business volume and profitability. Given a general market shift from unit linked investments, market shares have held up relatively well and we are confident of a good recovery when Covid-19 restrictions lift and market conditions are more conducive to the attractiveness of unit linked products.

· ACQUISITIONS

During the year we completed the acquisition of a portfolio of c40,000 policies from Argenta in the Netherlands which created c£9m of incremental value and a 40% increase in the policies in force of Waard. We also agreed a further small portfolio acquisition, expected to complete in the first half of 2021. The combined impact of these deals together with the Monuta portfolio in 2019, result in a total value gain of c£13m for Waard.

· IFRS PRE-TAX PROFIT OF £24.6M (2019: pre-tax profit £96.1 M )

Profits arising from economic market conditions of £21.2m were lower than in 2019 (£49.1m). The result also includes an intangible asset impairment charge of £27.6m ^{note 6}

· IFRS TOTAL COMPREHENSIVE INCOME OF £43.3M (2019: £60.6 M )

The 2020 result includes a foreign exchange gain of £22.6m (2019: loss of £18.7m).

John Deane, Chief Executive said:

"I am pleased to report that even after paying the increased 2020 final dividend, Chesnara's cash reserves and solvency surplus remain largely unchanged compared to the pre-pandemic position.

It is this robustness of both solvency and cash that supported the payment of a record 2020 interim dividend, and it enables us to increase the final dividend once again by a further 3% - a progressive return for the 16^th successive year. 2020 has shone a spotlight on the operations of the group and I am proud of the strong and stable business we have created which, despite the pandemic, enables us to provide comfort regarding dividend sustainability. Ongoing cash generation from the existing portfolios underpinned by strong and stable solvency levels and parent company liquidity and supplemented by management actions, acquisitions and new business gives confidence in the sustainability of the investor proposition.

Our operations have proved to be resilient to the challenges that Covid-19 has presented. Our IT infrastructure has supported a near seamless transition to remote working; however, we have seen some impact of Covid-19 on our new business operations, with reduced activity particularly during the second half of the year.

I would like to express my thanks to our staff and business partners for all their commitment and flexibility in dealing with the current environment and their work in previous years. This has provided the solid base to enable the business to continue to provide our usual high standards of customer service throughout 2020. We have not furloughed any staff as a result of the pandemic and have not used any other state support packages in the UK, Sweden or the Netherlands.

We continue to increase our focus on ESG matters and environmental sustainability in particular. We have again ensured our operations are carbon neutral. The focus moving forward will include improving the sustainability characteristics of the investment portfolio.

The return to pre-Covid-19 investment market conditions will take some time, but we also believe this will provide us with acquisition opportunities as the market reacts to changing circumstances. In the meantime, we will as ever continue to work hard to ensure positive outcomes for customers and investors."

Note 1 Cash generation is used by the group as a measure of assessing how much dividend potential has been generated, subject to ensuring other constraints are managed.

Group cash generation is calculated as the movement in the group's surplus own funds above the group's internally required capital, as determined by applying the group's capital management policy, which has Solvency II rules at its heart.

Note 2 Divisional commercial cash generation draws out components of the cash generation in the group's divisions relating to technical complexities, modelling issues or exceptional corporate activity (e.g. acquisitions). The result excluding such items is deemed to better reflect the underlying commercial outcome (commercial cash generation). This commercial result is then analysed to show the key drivers of that result. There are a number of approximations in the analysis, and as such each individual line item should only be used as a guide to the factors that have influenced cash generation in the year.

Note 3 Economic Value is based on the Solvency II "Own funds" valuation with adjustments for contract boundaries, risk margin and adding back the impact of restrictions placed on the value of certain ring-fenced with-profit funds. We consider the Solvency II rules understate the commercial value of these items. Contract boundary rules require Solvency II Own Funds to assume no future regular premiums on certain contracts and the Solvency II risk margin rules, in our view, overstate the cost of capital.

Note 4 Commercial new business is a more commercially relevant measure of new business profit than that recognised directly under the Solvency II regime, allowing for a modest level of return, over and above risk-free, and exclusion of the incremental risk margin Solvency II assigns to new business. This provides a fair commercial reflection of the value added by new business operations and is more comparable with how new business is reported by our peers, improving market consistency.

Note 5 The Movestic dividend of £10m is planned to be paid in Q4 2021.

Note 6 This is largely in relation to Scildon. During the year the Scildon AVIF intangible asset written down by £26.6m as a result of a reduction in the assessed value of the future cash flows of policies that were in force at the point of acquisition. The impairment is in part driven by the low yield environment we are currently operating in.

The Board approved this statement on 29 March 2021.

Enquiries

John Deane, Chief Executive, Chesnara plc - 01772 972079

Roddy Watt, Director, Capital Markets, FWD - 020 7280 0651

Notes to Editors

Chesnara is a life and pensions company listed on the London Stock Exchange. It administers over one million policies and operates as Countrywide Assured in the UK, as The Waard Group and Scildon in the Netherlands, and as Movestic in Sweden.

Following a three pillar strategy, Chesnara's primary responsibility is the efficient administration of its customers' life and savings policies, ensuring good customer outcomes and providing a secure and compliant environment to protect policyholder interests. It also adds value by writing profitable new business in Sweden and the Netherlands and by undertaking value-adding acquisitions of either companies or portfolios.

Consistent delivery of the Company strategy has enabled Chesnara to increase its dividend for 16 years in succession.

Further details are available on the Company's website ( www.chesnara.co.uk ).

CAUTIONARY STATEMENT

This document may contain forward-looking statements with respect to certain of the plans and current expectations relating to the future financial condition, business performance and results of Chesnara plc. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the control of Chesnara plc including, amongst other things, UK domestic, Swedish domestic, Dutch domestic and global economic and business conditions, market-related risks such as fluctuations in interest rates, currency exchange rates, inflation, deflation, the impact of competition, changes in customer preferences, delays in implementing proposals, the timing, impact and other uncertainties of future acquisitions or other combinations within relevant industries, the policies and actions of regulatory authorities, the impact of tax or other legislation and other regulations in the jurisdictions in which Chesnara plc and its subsidiaries operate. As a result, Chesnara plc's actual future condition, business performance and results may differ materially from the plans, goals and expectations expressed or implied in these forward-looking statements.

2020 HIGHLIGHTS

FINANCIAL HIGHLIGHTS

IFRS PRE-TAX PROFIT £24.6 M 2019 £96.1M

This includes profits arising from economic market conditions of £21.2m and an intangible asset impairment charge of £27.6m.

IFRS TOTAL COMPREHENSIVE INCOME £43.3 M 2019 £60.6M

The 2020 result includes a foreign exchange gain of £22.6m (2019: loss of £18.7m).

GROUP SOLVENCY 156% 2019 155%

We are well capitalised at both group and subsidiary level under Solvency II.

FUNDS UNDER MANAGEMENT £8.5BN 2019 £7.7BN

Strong performance in volatile investment markets during 2020.

ECONOMIC VALUE £636.8 M 2019 £670.0M

Movement in the year is stated after dividend distributions of £32.3m (2019: £31.3m) and includes a foreign exchange gain of £36.7m (2019: loss of £28.8).

ECONOMIC VALUE EARNINGS £(37.6) M 2019 £104.0M

The result includes £22.9m of earnings resulting from investment market movements (2019: investment market gain of £121.1m) and operating losses of £49.8m (2019: profit of £4.1m).

COMMERCIAL NEW BUSINESS PROFIT £10.5 M 2019 £14.4M

During 2020 Scildon has increased market share in both term and individual life markets, which has driven a healthy new business result (£8.8m) and an uplift of 12.5% on 2019. Pricing pressures and changes to fee income and rebates have continued to suppress Movestic's new business value in 2020, with more modest returns of £1.6m (2019: £6.9m).

GROUP CASH GENERATION £27.7 M 2019 £36.7M

DIVISIONAL CASH GENERATION £23.6 M 2019 £50.8M

Group and divisional cash generation of £27.7m and £23.6m respectively reflects a challenging year operationally and also reflects significantly lower economic returns than the prior year. The reported cash generation includes a net release from the with-profits funds of £9.2m (2019: £5.1m net growth in restricted surplus).

OPERATIONAL AND STRATEGIC HIGHLIGHTS

FULL YEAR DIVIDEND INCREASE

Total dividends for the year increased by 3% to 21.94p per share (7.65p interim and 14.29p proposed final). This compares with 21.30p in 2019 (7.43p interim and 13.87p final).

2020 HAS SEEN SIGNIFICANT VOLATILITY IN INVESTMENT MARKETS AS A RESULT OF COVID-19 EMERGING AS A GLOBAL PANDEMIC

2020 was a turbulent period for equity markets with the impact of the pandemic being felt early in the year as asset values plummeted. At its lowest point the FTSE 100 value fell to c34% below that at the start of the year and, despite gradual recovery, the index closed the year 14% lower than the opening value. Falling interest rates and continued downward pressure on bond yields throughout 2020 also impacted the businesses to varying degrees. Sterling depreciation against the euro and Swedish krona has led to foreign exchange translation gains.

EXPANSION IN THE NETHERLANDS CONTINUES

Our presence in the Netherlands continued to grow following regulatory approval of a portfolio acquisition from Argenta Bank (announced in 2019), at a discount to EcV of c22%, which completed on 31 August 2020.

THE GROUP HAS REMAINED OPERATIONALLY RESILIENT DURING THE COVID-19 PANDEMIC

Changes in working practices have been required in order to accommodate appropriate safety measures, such as staff working from home. The group has remained operationally resilient throughout this transition, in particular focusing on ensuring key business services relating to customers continue to be delivered. Where necessary we have introduced changes to processes to help customers who may be in a vulnerable position due to Covid-19, and have ensured that any Covid-19 death claims have been dealt with compassionately.

These financial highlights include the use of Alternative Performance Measures (APMs) that are not required to be reported under International Financial Reporting Standards.

1 - Economic profit is a measure of pre-tax profit earned from investment market conditions in the period and any economic assumption changes in the future.

2 - Operating profit is a measure of the pre-tax profit earned from a company's ongoing core business operations, excluding any profit earned from investment market conditions in the period and any economic assumption changes in the future.

3 - Funds Under Management (FuM) represents the sum of all financial assets on the IFRS balance sheet.

4 - Economic Value (EcV) is a financial metric derived from Solvency II. It provides a market consistent assessment of the value of existing insurance businesses, plus adjusted net asset value of the non-insurance business within the group.

5 - Economic Value earnings are a measure of the value generated in the period, recognising the longer-term nature of the group's insurance and investment contracts.

6 - Commercial new business represents the best estimate of cash flows expected to emerge from new business written in the period. It is deemed to be a more commercially relevant and market consistent measurement of the value generated through the writing of new business, in comparison to the restrictions imposed under the Solvency II regime.

7 - Group cash generation represents the surplus cash that the group has generated in the period. Cash generation is largely a function of the movement in the solvency position, used by the group as a measure of assessing how much dividend potential has been generated, subject to ensuring other constraints are managed.

8 - Divisional cash generation represents the cash generated by the three operating divisions of Chesnara (UK, Sweden and the Netherlands), exclusive of group level activity.

MEASURING OUR PERFORMANCE

Throughout our Report & Accounts we use measures to assess and report how well we have performed. The range of measures is broad and includes many measures that are not based on IFRS. The financial analysis of a life and pensions business also needs to recognise the importance of Solvency II figures, the basis of regulatory solvency. In addition, the measures aim to assess performance from the perspective of all stakeholders.

FINANCIAL ANALYSIS OF A LIFE AND PENSION BUSINESS

The IFRS results form the core of the Report & Accounts and hence retain prominence as a key financial performance metric. However, this Report & Accounts also adopts several Alternative Performance Measures (APMs).

These measures compliment the IFRS metrics and present additional insight into the financial position and performance of the business, from the perspective of all stakeholders.

The non-IFRS APMs have at their heart the Solvency II valuation known as Own Funds and, as such, all major financial APMs are derived from a defined rules-based regime. The diagram below shows the core financial metrics that sit alongside the IFRS results, together with their associated KPIs and interested parties.

FINANCIAL STATEMENT KPIS:

· IFRS net assets

· IFRS profits

ADDITIONAL METRICS:

· Solvency

o Own Funds

o Solvency Capital Requirement (SCR)

o SCR plus management buffer

o Solvency position (absolute value)

o Solvency position ratio

· Cash generation

o Group cash generation

o Divisional cash generation

· Economic Value

o Balance sheet

o Earnings

· New business

o EcV

o Commercial

SOLVENCY

Solvency is a fundamental financial measure which is of paramount importance to investors and policyholders. It represents the relationship between the value of the business as measured on a Solvency II basis and the capital the business is required to hold - the Solvency Capital Requirement (SCR). Solvency can be reported as an absolute surplus value or as a ratio.

Solvency gives policyholders comfort regarding the security of their provider. This is also the case for investors together with giving them a sense of the level of potential surplus available to invest in the business or distribute as dividends (subject to other considerations and approvals).

ECONOMIC VALUE

Economic Value (EcV) is deemed to be a more meaningful measure of the long-term value of the group and it generally approximates to Embedded Value reporting, which was used before the introduction of SII. In essence, the IFRS balance sheet is not generally deemed to represent a fair commercial value of our business as it does not fully recognise the impact of future profit expectations of long-term policies.

EcV is derived from Solvency II Own Funds and recognises the impact of future profit expectations from existing business.

An element of the EcV earnings each period is the economic value of new business. Factoring in the real world investment returns and removing the impact of risk margins is used by the group to determine the value of new business on a commercial basis.

CASH GENERATION

Cash generation is used by the group as a measure of assessing how much dividend potential has been generated, subject to ensuring other constraints are managed.

Divisional cash generation represents the movement in surplus own funds above local capital management policies within the three operating divisions of Chesnara. Divisional cash generation is used as a measure of how much dividend potential a division has generated, subject to ensuring other constraints are managed.

OPERATIONAL AND OTHER PERFORMANCE MEASURES

In addition to the financial performance measures, this Report & Accounts includes measures that consider and assess the performance of all our key stakeholder groups. The diagram below summarises the performance measures adopted throughout the Report & Accounts.

MEASURE	WHAT IS IT AND WHY IS IT IMPORTANT?
Customer service levels	How well we service our customers is of paramount importance and so through various means we aim to assess customer service levels. The business reviews within the Report & Accounts refer to a number of indicators of customer service levels.
Broker satisfaction	Broker satisfaction is important because they sell our new policies, provide ongoing service to their customers and influence book persistency. We include several measures within the Report & Accounts, including direct broker assessment ratings for Movestic and general assessment of how our brands fare in industry performance awards in the Netherlands.
Policy investment performance	This is a measure of how the assets are performing that underpin policyholder returns. It is important as it indicates to the customer the returns that their contributions are generating.
Industry performance assessments	This is a comparative measure of how well our investments are performing against the rest of the industry, which provides valuable context to our performance.
Funds under management	This shows the value of the investments that the business manages. This is important because scale influences operational sustainability in run-off books and operational efficiency in growing books. Funds under management are also a strong indicator of fee income.
Policy count	Policy count is the number of policies that the group manages on behalf of customers. This is important to show the scale of the business, particularly to provide context to the rate at which the closed book business is maturing. In our open businesses, the policy count shows the net impact of new business versus policy attrition.
Total shareholder returns	This includes dividend growth and yield and shows the return that an investor is generating on the shares that they hold. It is highly important as it shows the success of the business in translating its operations into a return for shareholders.
New business profitability	This shows our ability to write profitable new business which increases the value of the group. This is an important indicator given one of our core objectives is to "enhance value through profitable new business".
New business market share	This shows our success at writing new business relative to the rest of the market and is important context for considering our success at writing new business against our target market shares.
Gearing ratio	The gearing is a ratio of debt to IFRS net assets and shows the extent to which the business is funded by external debt versus internal resources. The appropriate use of debt is an efficient source of funding but in general Chesnara seeks to avoid becoming overly dependent on permanent debt on the balance sheet.
Knowledge, skills and experience of the Board of Directors	This is a key measure given our view that the quality, balance and effectiveness of the Board of Directors has a direct bearing on delivering positive outcomes to all stakeholders.

* For the purposes of this key performance indicator assessment business partners refers to major suppliers and outsource partners.

CHAIRMAN'S STATEMENT

2020 has been a unique and challenging year. Whilst our core strategic priorities remain unchanged, the pandemic has created a focus on additional short-term priorities, namely:

- The welfare of employees;

- Ensuring good business continuity with no detrimental impact on customer outcomes or the regulatory framework;

- Maintaining the shareholder dividend strategy without compromising financial stability; and

- Protecting the business fundamentals to maximise the potential for post Covid-19 recovery.

Despite the emerging new priorities, adverse operating conditions and continued downward pressure on yields, it is reassuring to report a stable pre-dividend Economic Value and cash generation levels that enable the divisions to propose a further c£48m of dividends to the parent company.

The financial stability during the year combined with a clear expectation of future divisional dividends means I am pleased to report continuation of our dividend strategy with a 3% increase in the proposed final dividend and hence total dividend.

LUKE SAVAGE,

CHAIRMAN

Before I report the headline results and expand upon how we have delivered against our core strategic priorities, I would like to concentrate on how the Covid-19 pandemic has impacted our short-term attention and how we have worked hard to ensure our stakeholders have been well protected during such difficult conditions. Our areas of enhanced short-term focus relate to staff welfare, customers and regulators, shareholder dividends and maximising the potential for post-Covid-19 recovery. Taking each in turn:

Employee welfare

From very early in the pandemic our initial priority was to ensure staff could work safely from home. At the same time we have invested to make sure our offices are as safe as possible so that on the occasions any staff do need to work from the office and when government guidelines allowed, they could do so with minimum risk. From an economic welfare perspective all employees have been paid in full throughout, without use of the government furlough scheme.

Business Continuity - customers and regulators

The emergence of Covid-19 gave rise to significant changes in the way we work, largely as a result of the group having to respond to local governmental rules that were put in force in the jurisdictions within which we (and our outsourcers) operate. It is pleasing to report that we undertook a smooth transition to these remote working conditions, which have remained largely in force over the course of the year, with no significant immediate or ongoing disruption to key customer related business services.

Maintaining the shareholder dividend strategy

We have managed to maintain our dividend model and increase the dividend payment in 2020 by 3%. Importantly this has been done without compromising the financial stability of group. The post dividend group solvency ratio has increased slightly to 156% (31 December 2019: 155%) and the closing Chesnara cash and instant access liquidity funds balance remains healthy at £59.9m (31 December 2019: £75.5m).

Protecting the business

A balance has been struck between delivering good results in the year and protecting the business so that we can maximise the potential for future profits as the world recovers from the pandemic. As things stand, we believe the business fundamentals remain solid and offer a good foundation for the future. Total Funds under Management closed higher than the opening position, policy persistency in our closed operations was better than expected and despite the challenges of Covid, Scildon goes into 2021 with over 7% more policies in-force than was the case pre-Covid-19 at the end of 2019. Despite smaller total new business markets in the year, our new business market shares have held up relatively well in Sweden and we have made notable market share gains in the Netherlands. In summary, the business in terms of funds, policy counts and new business market shares remains strong and offers a solid foundation for profit growth post Covid-19. In short, to date we have weathered the pandemic storm well and emerge in good shape.

Moving onto the results during the year. Despite the aforementioned generally positive assessment of the year, the reality is that in the short-term, adverse conditions have had a detrimental impact on the results. In Scildon, cash generation has been adversely impacted by the continued downward pressure on yields, which contributes to an overall cash loss of £22.3m (2019: gain £22.6m). Against this backdrop, with the exception of Scildon cash, I am pleased that the consolidated results on all metrics demonstrate a level of resilience synonymous with Chesnara's financial track record and ability to increase the dividend through difficult conditions.

From an IFRS perspective, we are reporting a reduction in pre-tax profits compared with the 2019 result of £96.1m, to £24.6m in 2020. All divisional results are generally lower than last year, with Scildon seeing the largest reduction. In addition, the group results include the impact of a £27.6m impairment to the AVIF (Acquired Value in Force) intangible assets, largely relating to Scildon. From an IFRS balance sheet perspective it is pleasing to report that Funds Under Management have grown c10% since the start of the year.

Although we were able to protect the pre dividend Economic Value which closed the year at £669.1m, marginally lower than at the end of 2019, the impact of the dividend payment resulted in an overall post dividend reduction in EcV of 5% (2019: 7% increase in post dividend EcV). Our long-term aim is to at least protect the post-dividend value. Clearly and perhaps unsurprisingly, this has not been achieved during 2020. However, in light of the challenges faced the level of reduction has been well contained. The reduction was significantly less than the gains in 2019. In addition, actions regarding catastrophe risk reinsurance and lapse risk reduction, together with the impact of post balance sheet yield recovery, will have reversed a good proportion of the Scildon 2020 cash loss.

Despite a level of increased uncertainty at the point the 2019 accounts were issued, as predicted we received the vast majority of the 2019 closing proposed divisional dividends. Total divisional dividend receipts of £40.6m have ensured we close the difficult year with £59.9m in cash and instant access liquidity funds at the Chesnara company level. The cash generation results for the year mean we expect further divisional dividend receipts totalling £47.8m during 2021, comfortably funding the 2021 shareholder dividends whilst maintaining a healthy residual cash balance. We do not expect the Movestic dividend of c£10m to be received until the final quarter of 2021.

I will now report on how we have delivered against our three strategic objectives in a little more detail:

01 MAXIMISE VALUE FROM EXISTING BUSINESS

Robust levels of cash generation supplied by all divisions except Scildon have resulted in cash generation of £27.7m.

The businesses have continued to generate sufficient cash to support Chesnara's dividend strategy. In addition, during the challenging conditions, management have focused on capital management actions to optimise the solvency and cash generation potential across the group. This has resulted in material enhancements to the cash results in 2020. We have also progressed further actions to the point they will be applied in the first half of 2021 and will in turn enhance cash generation in 2021.

Overall, we have been able to protect the pre-dividend value of the existing businesses. There have however been specific areas where conditions, in part driven by Covid-19, have resulted in value losses. Conditions during the pandemic in Sweden have driven a notable increase in transfer activity. This has led to a loss in value from an increase in policies transferring out. Despite this increase in transfers, the overall Funds under Management have marginally increased and to the extent the current spike in outward transfers is considered to be partially due to Covid-19 conditions including temporary competitor pricing, we would expect the Swedish business to stabilise in 2021.

In addition to the capital management actions, management have also delivered notable value enhancing actions. In particular changes to asset management providers have added c£14m of incremental EcV (£10m of this value was recognised in the 2019 results).

02 ACQUIRE LIFE AND PENSIONS BUSINESSES

The acquisition of Argenta Insurance in the Netherlands completed on 31 August with an incremental value impact of c£9m.

COMPLETION OF OUR ACQUISITION OF ARGENTA INSURANCE IN THE NETHERLANDS

Small deals will not transform Chesnara but they can, along with other actions mean we can deliver gradual EcV growth whilst continuing the dividend payment strategy. Similarly, in the UK we remain optimistic about more significant opportunities but likewise are mindful of the cumulative merits of smaller, well priced transactions.

Our balance sheet and existing debt arrangements which create a 7.4% leverage ratio, provide sufficient funding capacity for numerous small deals or a larger deal of up to approximately £120m without the need for additional funding sources such as Tier 2 debt or equity.

03 ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS

Commercial new business profit of £10.5m:

Record new business profits in Scildon of £8.81m but Covid-19 conditions in Sweden have resulted in a reduction in Movestic's new business profits to £1.64m.

Chesnara writes new business in both Sweden and the Netherlands. The ultimate aim is to create sufficient annual profits, either through returns on existing business, or through writing new business, to replace a significant proportion of the Economic Value lost by way of dividend payments.

Despite a degree of Covid-19 related pressure on Dutch new business markets, especially during the second half of the year, new business volumes have held up well, largely due to a welcome improvement in market shares. This has resulted in a further improvement in new business profits with an increase of 12.5% to £8.8m (2019: £7.8m - restated at 2020 exchange rates).

By contrast, pension new business broker markets in Sweden were hit more heavily by pandemic restrictions. In addition, we experienced a modest reduction in market shares. This tends to be the case during periods of heightened equity market volatility when unit-linked companies such as Movestic are deemed less attractive than traditional investments with guarantees or performance smoothing. This has resulted in a reduction in Movestic's new business profitability with a total profit in the year of £1.6m (2019: £6.9m). Historically, as equity markets stabilise or increase in value then the Movestic market shares have tended to recover. We would therefore expect a degree of recovery in 2021 with steady state post Covid-19 profit levels ultimately recovering to pre-pandemic levels.

Covid-19 has undoubtedly accelerated the move towards people transacting remotely using digital solutions. Therefore, whilst we do not believe the pandemic will have any permanent impact on the demand for the core products we sell and administer we do recognise that the impact of sales and service methods and preferences will be permanent. We have continued to deliver solutions to remain competitive in the digital world.

In Movestic we are nearing completion of our digitalisation programme and in Scildon we are coming to the final stages of modernising our pensions processes. This is expected to have a positive impact on both costs and pension new business levels in Scildon, with the business well positioned to take advantage of the anticipated growth in the defined contribution market. The programme will then move to the term product migration through 2021 and into 2022, delivering expected efficiencies and strengthening the business's market and operating position. The expected costs and benefits are included within the 2020 year end position.

Solvency

The group continues to show a robust solvency ratio of 156% at 31 December 2020 (31 December 2019: 155%). The closing solvency position is stated after recognising the £21.4m cost of the proposed final dividend, which is expected to be paid in May 2021.

To further improve capital efficiency we have also chosen to apply the volatility adjustment in the UK in 2021, which will be implemented alongside plans to refine the mix of assets that back certain non-linked policies in the UK, following approval from the PRA.

Regulation and governance

IFRS 17

Our programme has progressed well during the year. Notably we selected Willis Towers Watson to provide a group-wide tool to calculate the contractual service margin and store the associated data and implementation of the tool commenced during the second half of 2020. As part of our continual assessment of our plans, we have increased our budget to reflect the complexity and scale of the programme and have fully provided for the costs in our solvency position. Looking forward, 2021 will be focused on the operational implementation of the CSM tool and associated processes, and as such is a key priority for management and the group board.

We continue to be of the view that IFRS 17 should not have any significant bearing on the commercial assessment of Chesnara, with our expectation that capital management decision making will continue to be driven by regulatory solvency and Economic Value as opposed to our IFRS results and position.

Regulatory compliance

Compliance with regulation remains a priority for the group. We have continued to maintain positive and constructive relationships with regulatory bodies across the group.

Governance framework

We continue to maintain a strong risk and governance culture across the group. Our focus this year has been on ensuring that we continue to adhere to these core principles whilst dealing with the challenges of the global pandemic, and it is extremely pleasing to report that investment in operational resilience across the group over recent years has made operating in these conditions significantly easier, with all important business services having been delivered.

AT CHESNARA WE HAVE ALWAYS MANAGED OUR BUSINESS IN A RESPONSIBLE WAY AND HAVE A STRONG SENSE OF ACTING IN A FAIR MANNER, GIVING FULL REGARD TO THE RELATIVE INTERESTS OF ALL STAKEHOLDERS.

Corporate purpose and Section 172 Reporting

Chesnara has always assessed its corporate purpose by considering the following eight aspects of our business and by looking at the business from the perspective of all stakeholders. Increased emphasis on reporting in line with Section 172 of the Companies Act (S172) has therefore not required any notable change in our approach to decision making. It has however formalised the requirement to consider and report how we ensure we act in a way to find an optimal long-term balance for stakeholder outcomes. The Report & Accounts include a section that demonstrates how we comply with S172 requirements and how our governance framework and culture considers the interests of all stakeholders.

The section also provides detailed insight into the major decisions the board has made during the year and reports how we have assessed the long-term impact on our stakeholders.

Business model

- Our acquisition strategy is built upon long term commitments to the markets we operate in. Our consolidation model therefore offers a genuine solution to the challenges certain insurance markets face.

The products and services we provide

- We help protect people and their dependants through the provision of life, health and disability cover or by providing savings and pensions which help customers with their financial needs in the future. We seek to provide customers and their advisers with helpful and reliable support.

Sustainability

- We continued in 2020 to build on our sustainability/ESG activities, looking at both our own operational impacts and also investments, whether they are under our own control or by offering sustainable fund offerings for client chosen investments.

- Movestic became a signatory to the UN's Principles of Responsible Investment and targeted five of the UN's Sustainable Development Goals to focus on., This was replicated in the UK through completion of our fund manager rationalisation project and selection of Schroders, with availability of ESG data, reporting and focus being at the core of our decision to place our funds with them for management.

Shareholder proposition

- Investors, especially in a low interest rate environment do have a genuine need for income and hence our investor proposition, track record and responsible approach provides an investment opportunity for individuals seeking sustainable equity-based income.

Taxation

- As detailed in our tax strategy, we adopt a responsible and open approach to taxation and, consequently, pay the appropriate taxes throughout the group.

Staff

- We provide high quality jobs with competitive remuneration and good working conditions both directly and through outsourced arrangements. Across the group staff have been able to work from home during Covid-19 restrictions.

Suppliers and partners

- We seek mutually respectful and sustainable relationships with our suppliers. We believe that supplier relationships only work in the long term if the terms and conditions are mutually beneficial. Our instinct and natural preference is to maintain established long-term supplier relationships where they remain commercially competitive and operationally viable.

Local community

- In the UK our investment and continued commitment to the North West and Preston in particular creates high quality financial services roles outside of London.

- All divisions support local community initiatives to the extent deemed appropriate given our financial responsibilities as a PLC.

Outlook

Sustainability of the business model

Our assessment is that the impacts of the pandemic have had minimal permanent adverse impact on the business model. In fact, three out of our four businesses have actually grown in terms of scale through the year and hence the risk that loss of scale compromises the business model is not apparent. The UK division has experienced continued reduction in policy volumes however, Funds under Management remain relatively stable and even in the absence of acquisitions the cost base is deemed sufficiently variable to absorb the impact of run off for many years.

We believe one consequence of the pandemic will be an acceleration towards remote, digital customer engagement. In light of this I am pleased to report that Movestic's digitalisation programme is nearing completion and Scildon is shortly due to migrate to a new pension platform with enhanced end to end processes. Both these successful developments leave us well positioned to react to shifting customer service demands.

Brexit

We have consistently reported that we expected minimal impact from Brexit. Having now exited the EU we have indeed experienced very limited disruption. The only area where we have seen an impact is with regards to a modest divergence of the Solvency II regulatory rules from the PRA compared to those from EIOPA. The changes have had no financial impact at this stage. We continue to expect a high level of equivalence between regulatory reporting regimes but are mindful of the possibility of an increased level of divergence as the PRA are enabled to move to UK specific terms. We see no specific reason to expect the PRA to use their enhanced freedoms to take a route that systemically makes it harder to do business in the UK. That said, we continue to monitor the potential impact of Brexit closely and it continues to be identified within our Principal Risks and Uncertainties.

Sustainability of the dividend

We do not provide specific forward-looking financial projections or guidance however there are several financial metrics and factors that provide a level of comfort regarding dividend sustainability:

- Ongoing cash generation expectations from the existing portfolios - The cash generation model continues to show a good level of resilience to difficult conditions. Longer term the EcV offers a useful proxy to the total level of future cash. The closing EcV (which conservatively assumes risk free asset returns) represents over 19 years coverage of the current full year dividend.

- New business has minimal positive impact on short term cash due to the associated acquisition costs and capital strain. New business does however create future positive cash flows. Incremental future cash flows at the end of 2020 as a result of new business in the year are £22.4m (2019: £27.0m).

- Strong and stable solvency .

- Management actions and acquisitions - there remains the potential for capital management actions and acquisitions to create material future cash generation and capital releases. Actions are scheduled for 2021 including catastrophe risk reinsurance in Scildon and cross group lapse capital optimisation. These actions in particular have a material positive impact on the prospects of future dividends from Scildon.

- Chesnara plc cash reserves - in the medium term the existence of £59.9m of cash and instant access liquidity funds on the parent company balance sheet, combined with a 7.4% gearing ratio provide comfort over the ability to support future dividend payments.

Sustainability in ESG terms

We continue to increase our focus on ESG matters and environmental sustainability in particular. We have again ensured our operations are carbon neutral and commit to this as a permanent objective. The focus moving forward will shift towards improving the sustainability characteristics of the investment portfolio.

In light of the above, I am confident that after we have overcome the short-term challenges from Covid-19 including doing everything in our power to keep colleagues and business partners safe, Chesnara is well positioned to continue to provide value to policyholders and shareholders.

Luke Savage

Chairman

29 March 2021

STRATEGIC REPORT

OVERVIEW OF STRATEGY

Our strategy focuses on delivering value to policyholders and shareholders. The strategy is delivered through a proven business model underpinned by a robust risk management and governance framework and our established culture & values.

STRATEGIC OBJECTIVES

1.		2.		3.
MAXIMISE THE VALUE FROM EXISTING BUSINESS		ACQUIRE LIFE AND PENSIONS BUSINESSES		ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS
Managing our existing customers fairly and efficiently is core to delivering our overall strategic aims.		Acquiring and integrating companies into our business model is key to continuing our growth journey.		Writing profitable new business supports the growth of our group and helps mitigate the natural run-off of our book.

KPIs Cash generation EcV earnings Customer outcomes		KPIs Cash generation EcV growth Customer outcomes Risk appetite		KPIs EcV growth

OUR CULTURE AND VALUES - RESPONSIBLE RISK BASED MANAGEMENT

FAIR TREATMENT OF CUSTOMERS	MAINTAIN ADEQUATE FINANCIAL RESOURCES		PROVIDE A COMPETITIVE RETURN TO OUR SHAREHOLDERS		ROBUST REGULATORY COMPLIANCE

BUSINESS REVIEW | UK

The UK division principally consists of the insurance company Countrywide Assured plc. The company manages c240,000 policies and is in run-off. Countrywide Assured follows an outsourcer-based operating model, with functions such as customer services, investment management and accounting and actuarial services being outsourced. A central governance team is responsible for managing all outsourced operations.

MAXIMISE VALUE FROM EXISTING BUSINESS

CAPITAL AND VALUE MANAGEMENT

BACKGROUND INFORMATION

As a closed book, the division creates value through managing the following key value drivers: costs; policy attrition; investment return; and reinsurance strategy.

In general, surplus regulatory capital emerges as the book runs off. The level of required capital is closely linked to the level of risk to which the division is exposed. Management's risk-based decision-making process seeks to continually manage and monitor the balance of making value enhancing decisions whilst maintaining a risk profile in line with the board's risk appetite.

At the heart of maintaining value is ensuring that the division is governed well from a regulatory and customer perspective.

INITIATIVES AND PROGRESS IN 2020

- The division has completed its fund management rationalisation programme during the year, which has involved consolidating the vast majority of unit-linked fund management with one investment management company. This programme's purpose was to deliver a combination of cost efficiencies, whilst also continuing to provide customers with strong fund performance.

- The division has been investigating revising its investment approach for assets backing some of its non-linked policies, and in conjunction has been assessing the benefits of applying for the volatility adjustment ("VA") when calculating its solvency position. An application to the PRA was made during December 2020 to apply the VA. We plan to implement this change to our investment mix at the same time as applying the volatility adjustment following approval from the PRA.

- The Economic Value of the division, excluding the impact of dividend distributions, has increased over the course of the year, despite the investment market volatility arising from Covid-19.

FUTURE PRIORITIES

- Implement planned changes to investments backing certain non-linked liabilities and apply the VA when calculating its solvency position.

- Manage the transition from using a risk-free curve based on LIBOR (London Interbank Offering Rate) for discounting insurance liabilities under Solvency II to using SONIA (Sterling Overnight Index Average) as required by the PRA.

- Continue to focus on maintaining an efficient and cost-effective operating model.

- Continue to support Chesnara in identifying and delivering UK acquisitions.

KPIs

Economic Value

£m	2016	2017	2018	2019	2020

EEV / EcV	239.6	255.5	214.7	204.6	187.4
Cumulative dividends		30.0	62.0	121.0	150.0
Total	239.6	285.5	276.7	325.6	337.4

Cash generation

£m	2016	2017	2018	2019	2020

Cash generation	21.3	34.5	55.8	33.6	29.5

CUSTOMER OUTCOMES

BACKGROUND INFORMATION

Treating customers fairly is one of our primary responsibilities. We seek to do this by having effective customer service operations together with competitive fund performance whilst giving full regard to all regulatory matters. This supports our aim to ensure policyholders receive good returns, appropriate communication, and service in line with customer expectations.

INITIATIVES AND PROGRESS IN 2020

- A key focus during the year has been ensuring that we continue to meet the needs of our customers during the ongoing Covid-19 pandemic. This has resulted in a need for a large proportion of the organisation, and its key outsource partners, to work from home. Despite the necessary changes, all important business services have continued to operate effectively, having adapted our processes accordingly.

- During the year we have implemented changes that enable customers to contact us in new ways.

- The multi-year customer strategy implementation program was successfully completed, with any revised processes having been transferred into business as usual operations.

- The division's operational resilience programme has continued. This is a multi-year programme which was set up to ensure that we comply with expectations of our regulators and customers. Whilst the regulators' requirements are still at a consultation stage, we recognise the business and customer benefits of ensuring resilience in our business services.

FUTURE PRIORITIES

- Continue to deliver the division's operational resilience programme, focusing primarily on business services affecting our customers. This will include reviewing and responding to any new rules that are introduced by the regulators.

- Key business as usual activities include:

o Continuing to complete product reviews which are designed to support our ongoing assessment of providing fair outcomes to our customers. Deliver any resultant remediation activity as required.

o Continuing to work at getting back in touch with customers who have not provided us with their most recent contact details.

KPIs

Policyholder fund performance

	2020	2019
CA Pension Managed	3.0%	17.9%
CWA Balanced Managed Pension	2.9%	16.4%
S&P Managed Pension	1.6%	17.8%
Benchmark - ABI Mixed Inv 40%-85% shares	4.7%	15.5%

During a very volatile year, our three main managed funds under-performed the reported ABI sector benchmark, due to the portfolio asset positioning being higher in equities during the earlier stages of the year, which saw significant equity falls driven by Covid-19. Whilst in the second half of the year the funds outperformed the sector benchmark, this did not quite result in the overall full year position exceeding sector index.

GOVERNANCE

BACKGROUND INFORMATION

Maintaining effective governance and a constructive relationship with regulators underpins the delivery of the division's strategic plans.

Having robust governance processes provides management with a platform to deliver the other aspects of the business strategy. As a result, a significant proportion of management's time and attention continues to be focused on ensuring that both the existing governance processes, coupled with future developments, are delivered.

INITIATIVES AND PROGRESS IN 2020

- The division has continued to deliver on its business as usual governance responsibilities despite the Covid-19 situation. The organisation has transitioned to a predominantly working from home environment, both in terms of our outsourcers and the oversight governance team itself. This process was successfully implemented with no material issues.

- Throughout the year, especially at the start of the pandemic, the business implemented enhanced monitoring of key measures, such as claims and customer service, ensuring performance levels were maintained despite the impact of the pandemic.

- The IFRS 17 programme has continued to progress in line with plans. We have been working with Willis Towers Watson as the group's provider of the contractual service margin (CSM) tool.

FUTURE PRIORITIES

- From an IFRS 17 perspective, 2021 is a year that will see some of the operational changes that are required being tested and implemented.

KPIs

SOLVENCY RATIO: 163%

Surplus generated in the year increases solvency ratio from 131% to 163%. After the dividend, due to be paid in 2021, the ratio is 130%.

	£m	Solvency Ratio

31 Dec 2019 surplus	32.9	131%
Surplus generation	31.5
31 Dec 2020 surplus (pre-dividend)	64.4	163%
2020 dividend	(33.5)
31 Dec 2020 surplus	30.9	130%

BUSINESS REVIEW | SWEDEN

Movestic is a life and pensions business based in Sweden and is open to new business. From its Stockholm base, Movestic operates as an innovative brand in the Swedish life insurance market. It offers personalised unit-linked pension and savings solutions through brokers and is well-rated within the broker community.

MAXIMISE VALUE FROM EXISTING BUSINESS

CAPITAL AND VALUE MANAGEMENT

BACKGROUND INFORMATION

Movestic creates value predominantly by generating growth in the unit-linked Funds under Management (FuM), whilst assuring a high quality customer proposition and maintaining an efficient operating model. FuM growth is dependent upon positive client cash flows and positive investment performance. Capital surplus is a factor of both the value and capital requirements and hence surplus can also be optimised by effective management of capital.

INITIATIVES AND PROGRESS IN 2020

- Covid-19 resulted in significant volatility in financial markets during the year, though Swedish equities recovered well delivering 10.8% growth in 2020.

- The division has completed the liquidation of Modernac as part of its corporate restructuring initiatives. This has released £1m of surplus capital.

- Policyholder transfers continues to be a feature of the business due to the competitive Swedish market. High transfer activity has resulted in an adverse transfer ratio, with slightly negative net client cash flows. That said, Movestic has strengthened its transfer out assumptions in light of this dynamic, resulting in an increase in reserves of £18.7m, which includes short-term cover for temporary Covid-19 related pressures. The company has also increased its focus on business retention activity.

- New industry-wide regulations have been introduced in order to make it easier for customers to transfer their pension funds. As part of this, further rules are expected during 2021 that limit the amount that can be charged when transferring policies, with an adverse EcV impact of £3.1m.

- Despite turbulent financial markets FuM increased by 1.8% over the year.

- Continuation of dividend policy with a proposed record payment of £10.2m.

- As part of streamlining its fund management proposition the division closed its Luxembourg based operation and set up 5 new funds in Sweden.

FUTURE PRIORITIES

- Continue the journey of digitalising and automating processes, with a view to improving both efficiency and control.

- Continue to develop more digitalised and individualised customer propositions and experience.

- Strengthen distribution capacity with the direct business area, as a complement to the broker channel.

- Provide a predictable and sustainable dividend to Chesnara.

- Increased focus on retention.

KPIs ( all comparatives have been presented using 2020 exchange rates)

Economic Value

£m	2016	2017	2018	2019	2020


Reported value	226.0	246.4	233.1	277.6	246.5
Cumulative dividends		2.7	5.5	8.5	15.3
Total	226.0	249.1	238.6	286.1	261.8

CUSTOMER OUTCOMES

BACKGROUND INFORMATION

Movestic provides personalised long-term savings, insurance policies and occupational pensions for individuals and business owners. We believe that recurring independent financial advice increases the likelihood of a solid and well-planned financial status, hence we are offering our products and services through advisors and licenced brokers.

INITIATIVES AND PROGRESS IN 2020

- Policyholder average investment return of 2.7% in the year (2019: 18.9%), despite Covid-19 the Swedish equity index rose 10.8%, however other equities and non-equity investments were less positive resulting in lower total investment returns.

- Broker and customer servicing have been a key focus during the pandemic. The division has adjusted its processes accordingly in order to ensure that such servicing continues to an acceptable level.

- Development of customer and broker offerings remained a focus with new transparent and personalised unit-linked pension and savings solutions as well as insurance products, delivering enhanced digital service and functionality.

- The division received a rating from UNPRI (UN initiative for responsible investment) that is better than, or in accordance with its peers, while the sustainable customer fund offerings have remained a focus.

FUTURE PRIORITIES

- Continue to develop new solutions and tools to support the brokers' value enhancing customer proposition.

- Strengthen the relationship with brokers further and continue to develop improved functionality and digital administration self-services for brokers.

- Continue to build distribution capacity in the direct business area.

- Broaden product and service offering for other customer segments.

KPIs ( all comparatives have been presented using 2020 exchange rates)

Broker assessment rating (out of 5)

	2016	2017	2018	2019	2020

Rating	3.8	3.7	3.8	3.5	3.3

Following the broker assessment review we have conducted our own satisfaction surveys. These surveys gave a more positive result, and the feedback, both positive and negative helped identify further actions as we continue to work on improving broker satisfaction.

POLICYHOLDER AVERAGE INVESTMENT RETURN:

2.7%

GOVERNANCE

BACKGROUND INFORMATION

Movestic operates to exacting regulatory standards and adopts a robust approach to risk management.

Maintaining strong governance is a critical platform to delivering the various value-enhancing initiatives planned by the division.

INITIATIVES AND PROGRESS IN 2020

- Dealing with the impact of Covid-19 has been a key management focus in 2020.

- The company has ensured that it is operating in line with local government guidelines, which essentially recommend that employees should work from home unless they cannot.

- In setting up these arrangements, management has focused on ensuring that the IT infrastructure, both in terms of employee usability and security resilience, can accommodate the revised working practices.

- Movestic has also focused on staff well-being throughout the lock down given its significant change for many staff members.

- The division's digitisation programme has progressed well and was completed during the fourth quarter. The business now has a more robust platform and the ongoing enhancement to this, and our customer experience, continues as part of our core mission.

- The division has continued its strategic focus on strengthening relations with new and existing brokers and partners, building direct distribution capacity.

- IFRS 17 continues to progress with Willis Towers Watson selected as provider of the contractual service margin (CSM) tool and implementation initiated.

FUTURE PRIORITIES

- The Covid-19 situation will continue to be monitored closely, with returning to the office options under continuous review.

- A focus on the application decisions and operational impact of the IFRS 17 programme, including implementation of the contractual service margin (CSM) tool.

KPIs ( all comparatives have been presented using 2020 exchange rates)

SOLVENCY RATIO: 165%

Solvency remains strong. After the dividend, due to paid in 2021, the ratio is 158%.

	£m	Solvency Ratio

31 Dec 2019 surplus	90.1	155%
Surplus generation	2.2
31 Dec 2020 surplus (pre-dividend)	92.3	165%
2020 dividend	(10.2)
31 Dec 2020 surplus	82.1	158%

ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS

BACKGROUND INFORMATION

As an "open" business, Movestic not only adds value from sales but as it gains scale, it will become increasingly cash generative which will fund further growth or contribute towards the group's dividend strategy. Movestic has a clear sales focus and targets a market share of 6% -10% of the advised occupational pension market. This focus ensures we are able to adopt a profitable pricing strategy.

INITIATIVES AND PROGRESS IN 2020

- Movestic reported commercial new business profit1 of £1.6m (2019: £7.0m). The decrease compared with 2019 is largely due to reduced sales volumes and increased transfer activity with strengthened transfer out assumptions, driven by Covid-19 dynamics and the effects of price pressure on the Swedish market.

- Sales volumes were affected by lower activity across the market during 2020, due to the pandemic, particularly during the second half of the year, as we sign-posted in our Half Year Report. As the Swedish market also experienced continued price pressure, the division developed its offering to increase competitiveness and build customer loyalty for the future.

FUTURE PRIORITIES

- Continued focus on sales activities and competitive offerings in the broker channel as well as increasing distribution capacity in the direct business area.

- Ongoing development of the customer offering and delivery of new functionality on web platforms to improve customer and broker experience.

KPIs ( all comparatives have been presented using 2020 exchange rates)

Occupational pension market share %

%	2016	2017	2018	2019	2020

Market share	8.3	7.6	6.6	6.5	4.5

New business profit*

£m	2016	2017	2018	2019	2020

New business profit	11.5	11.0	11.2	7.0	1.6

*New business figures from 2018 onwards represent commercial new business. Values prior to this are retained at that which they were previously reported.

BUSINESS REVIEW | NETHERLANDS

Our Dutch businesses aim to deliver growth and earnings through their dual closed and open book approach and through the group acquisition strategy will integrate portfolios and businesses into their operations.

MAXIMISE VALUE FROM EXISTING BUSINESS

CAPITAL AND VALUE MANAGEMENT

BACKGROUND INFORMATION

Both Waard and Scildon have a common aim to make capital available to the Chesnara group to fund further acquisitions or to contribute to the dividend funding. Whilst their aims are common, the dynamics by which the businesses add value differ:

- Waard is in run-off and has the benefit that the capital requirements reduce in-line with the attrition of the book.

- As an "open business", Scildon's capital position does not benefit from book run-off. It therefore adds value and creates surplus capital through writing new business and by efficient operational management and capital optimisation.

INITIATIVES AND PROGRESS IN 2020

- Waard completed the acquisition of a portfolio of term life and savings products from Argenta Bank and has migrated the policies onto our systems. Towards the end of the year, a further portfolio acquisition was agreed (subject to regulatory approval), further strengthening Waard's position as an acquirer of small portfolios that are not core to vendors.

- Despite the market turmoil caused by the Covid-19 pandemic, both businesses continue to have strong solvency positions, inclusive of the use of the volatility adjustment. Scildon remains strong at 178%, above the internal capital management policy of 175%. Waard continued to maintain significant solvency levels, the ratio ending the year at 438%.

- Scildon has continued to optimise its risk-based return through de-risking its asset portfolio and investing into mortgage funds with c£170m held as at 31 December 2020.

FUTURE PRIORITIES

- Integrate the new acquisition into the Waard business and continue to support Chesnara in identifying and delivering Dutch acquisitions.

- Progress capital management and cash generation initiatives across the group, particularly in Scildon, with the aim of creating future dividend potential.

- Effective management of the closed book run-off in Waard to enable ongoing divided payments to Chesnara.

KPIs ( all comparatives have been presented using 2020 exchange rates)

Scildon Economic Value

£m	2016	2017	2018	2019	2020

EcV	227.2	224.2	171.5	178.7	165.1
Cumulative dividends		37.8	60.3	65.4	65.4
Total	227.2	261.9	231.8	244.1	230.5

CUSTOMER OUTCOMES

BACKGROUND INFORMATION

Great importance is placed on providing customers with high quality service and positive outcomes.

Whilst the ultimate priority is the end customer, in Scildon we also see the brokers who distribute our products as being customers and hence developing processes to best support their needs is a key focus.

INITIATIVES AND PROGRESS IN 2020

- A key focus during the year has been ensuring that we continue to meet the needs of our customers during the ongoing Covid-19 pandemic. This has resulted in a need for a large proportion of the organisation to work remotely. Our processes have been adapted accordingly and we have continued to effectively operate all key business services.

- Scildon continues work on the migration and digitalisation of its policy administration system. Work has focussed on development of the pension proposition with key portals going live in 2021, positioning the business well to take advantage of expected growth in the defined contribution market. The project will then move to the term product migration through 2021 and into 2022, delivering expected efficiencies and strengthening the business's market and operating position. The expected costs and benefits are included within the 2020 year end position.

FUTURE PRIORITIES

- Regular engagement with its customers to improve service quality and to enhance and develop existing processes, infrastructure and customer experiences.

- Continue with the migration and digitalisation of the Scildon IT platform.

KPIs ( all comparatives have been presented using 2020 exchange rates)

Scildon client satisfaction rating (out of 10)

	2016	2017	2018	2019	2020

Rating	7.4	7.6	7.7	7.8	8.1

GOVERNANCE

BACKGROUND INFORMATION

Waard and Scildon operate in a regulated environment and comply with rules and regulations both from a prudential and from a financial conduct point of view.

INITIATIVES AND PROGRESS IN 2020

- We have engaged with the regulator throughout 2020 and the business implemented enhanced monitoring of key measures, such as claims and customer service, ensuring performance levels were maintained despite the impact of the pandemic.

- The division has continued to deliver on its business as usual governance responsibilities despite the Covid-19 situation. The organisation successfully and rapidly transitioned to a predominantly remote working environment.

- The IFRS 17 programme has continued to progress in line with plans. We began working with Willis Towers Watson as the group's provider of the contractual service margin (CSM) tool.

FUTURE PRIORITIES

- During 2021 we plan to implement changes that mean Scildon will directly benefit from the lapse capital reversal currently at group.

- From an IFRS 17 perspective, 2021 is a year that will see some of the required operational changes being tested and implemented.

KPIs ( all comparatives have been presented using 2020 exchange rates)

SOLVENCY RATIO: SCILDON 178%; WAARD 438%

Solvency is robust in both businesses, with post-dividend solvency ratios of 178% and 438% for Scildon and Waard respectively. The Scildon reduction includes the impact of an increase in lapse capital which reverses out at group level.

Scildon

	£m	Solvency Ratio

31 Dec 2019 surplus	83.6	210%
Surplus generation	(16.8)
31 Dec 2020 surplus	66.7	178%

Waard

	£m	Solvency Ratio

31 Dec 2019 surplus	38.6	501%
Surplus generation	2.2
31 Dec 2020 surplus (pre-dividend)	40.8	475%
2020 dividend	(4.0)
31 Dec 2020 surplus	36.7	438%

ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS

BACKGROUND INFORMATION

Scildon brings a "New business" dimension to the Dutch division. Scildon sell protection, individual savings and group pensions contracts via a broker-led distribution model. The aim is to deliver meaningful value growth from realistic market share. Having realistic aspirations regarding volumes means we are able to adopt a profitable pricing strategy. New business also helps the business maintain scale and hence contributes to unit cost management.

INITIATIVES AND PROGRESS IN 2020

- Despite a tough and uncertain market, we continue to see increasing new business profits, with £8.8m earned in the year on our commercially realistic metric. As noted previously, we will face headwinds to maintain this progress, but we have a solid base to take advantage.

- Underpinning this, Scildon policy count continues to increase, now with in excess of 200,000 policies. Also, the term market share for Scildon term lifestyle product for the month of December 2020 has risen to 16.3%, although the market size has decreased, partly as a result of Covid-19.

- We have established a white labelling relationship with Dazure (a distribution partner) as a route to market to enable us to service more of the market.

FUTURE PRIORITIES

- Continue to deliver product innovation and cost management actions to ensure we meet our full potential in terms on new business value.

- Consider alternative routes to market that do not compromise our existing broker relationships, such as product white labelling.

KPIs ( all comparatives have been presented using 2020 exchange rates)

Scildon - term assurance market share %

%	2016	2017	2018	2019	2020

Market share	5.9	7.3	7.6	11.6	14.2

Scildon - new business profit*

£m	2016	2017	2018	2019	2020

New business profit	2.0	1.9	4.8	7.9	8.8

*New business figures from 2018 onwards represent commercial new business. Values prior to this are retained at that which they were previously reported.

BUSINESS REVIEW | acquire life and pension businesses

Well considered and appropriately priced acquisitions maintain the effectiveness of the operating model, create a source of value enhancement and sustain the cash generation potential of the group.

HOW WE DELIVER OUR ACQUISITION STRATEGY

- Identify potential deals through an effective network of advisers and industry associates, utilising both group and divisional management expertise as appropriate.

- We primarily focus on acquisitions in the UK and Netherlands, although will consider other territories should the opportunity arise.

- We assess deals applying well established criteria which consider the impact on cash generation and Economic Value under best estimate and stressed scenarios.

- We work cooperatively with regulators.

- The financial benefits are viewed in the context of the impact the deal will have on the enlarged group's risk profile.

- Transaction risk is minimised through stringent risk-based due diligence procedures and the senior management team's acquisition experience and positive track record.

- We fund deals with a combination of debt, equity or cash depending on the size and cash flows of each opportunity and commercial considerations.

HOW WE ASSESS DEALS

Cash generation

- Collectively our future acquisitions must be suitably cash generative to continue to fund the Chesnara dividend strategy.

Value enhancement

- Acquisitions are required to have a positive impact on the Economic Value per share under best estimate and certain more adverse scenarios.

Customer outcomes

- Acquisitions must ensure we protect, or ideally enhance, customer interests.

Risk appetite

- Acquisitions should normally align with the group's documented risk appetite. If a deal is deemed to sit outside our risk appetite the financial returns must be suitably compelling.

RISKS

- There is the risk that if a lack of suitable acquisition opportunities come to market at a realistic valuation, the investment case for Chesnara diminishes over time.

- There is the risk that we make an inappropriate acquisition that adversely impacts the financial strength of the group.

WHAT WE CAN DO ABOUT THIS

- Operating in three territories increases our options thereby reducing the risk that no further value adding deals are done.

- A broader target market also increases the potential for deals that meet our strategic objectives.

- Flexibility over the timing of subsequent divisional dividend flows provide an element of management control over the sterling value of cash inflows.

- Each acquisition is supported by a financial deal assessment model which includes high quality financial analysis. This is reviewed and challenged by management and the board, mitigating the risk of a bad deal being pursued.

INITIATIVES AND PROGRESS IN 2020

During 2020, the group completed one transaction:

Argenta transaction

On 1 September 2020, Chesnara announced the completion of an acquisition of a portfolio of life insurance business in run-off from the Dutch branch of Belgian-owned Argenta Bank-en Verzekeringsgroep N.V. The transaction was both earnings and EcV accretive on completion. Chesnara estimates that the acquired portfolio will have a positive cumulative cash generation profile over its remaining life.

The transaction involved the transfer of a portfolio of in excess of 40,000 term and savings policies, for a consideration of €29.2m (approximately £25m), paid in cash. The consideration represents a discount of 17% to the acquired portfolio's Solvency II Own Funds, calculated on a Chesnara-consistent basis, and delivered c£9m of incremental value1. The acquired portfolio had IFRS gross assets of c.£368m (at 31 December 2020 exchange rates) and contributed growth of over 40% to the Waard Group policy count.

A further small portfolio acquisition, with approximately 9,000 policies has been agreed before the year end. This will complete upon regulatory approval in 2021.

ACQUISITION OUTLOOK

- Despite the Covid-19 restrictions, we have continued to see a healthy flow of acquisition activity in the year. We have also continued to see the continuation of, what we perceive to be, high seller's valuations and prices paid for potential targets.

- In light of this, it is worth reiterating that Chesnara continues to measure potential targets against its stringent acquisition assessment model which takes into account; (a) the price compared to the EcV; (b) the cash generation capability; (c) the strategic fit; and (d) the risks within the target. We are committed to maintaining our discipline when assessing potential acquisitions.

- The environment in which European life insurance companies operate continues to become more challenging. The long-term economic implications resulting from Covid-19, in particular the further reduction in both short and long-term interest rates is likely to increase the challenges of businesses who own non-core back-books. We believe this will potentially drive further consolidation as institutions seek to remove operational complexity, refocus on core business lines and potentially release capital or generate funds from capital intensive life and pension businesses.

- Historically we have had strong support from shareholders and lending institutions to progress our acquisition strategy. We also believe that our operating model has the flexibility to accommodate a wide range of potential target books.

- Our good network of contacts in the adviser community, who understand the Chesnara acquisition model, ensures that we are aware of most viable opportunities in the UK and Western Europe. With this in mind, we are confident that we are well positioned to continue the successful acquisition track record in the future.

CAPITAL MANAGEMENT | Solvency II

Subject to ensuring other constraints are managed, surplus capital is a useful proxy measure for liquid resources available to fund items such as dividends, acquisitions or business investment. As such, Chesnara defines cash generation as the movement in surplus, above management buffers, during the period.

What is solvency and capital surplus?

- Solvency is a measure of how much the value of the company exceeds the level of capital it is required to hold.

- The value of the company is referred to as its "Own Funds" (OF) and this is measured in accordance with the rules of the newly adopted Solvency II regime.

- The capital requirement is again defined by Solvency II rules and the primary requirement is referred to as the Solvency Capital Requirement (SCR).

- Solvency is expressed as either a ratio: OF/SCR % or as an absolute surplus OF LESS SCR

WHAT ARE OWN FUNDS?

A valuation which reflects the net assets of the company and includes a value for future profits expected to arise from in-force policies.

The Own Fund valuation is deemed to represent a commercially meaningful figure with the exception of:

- Contract boundaries: Solvency II rules do not allow for the recognition of future cash flows on certain policies despite a high probability of receipt.

- Risk margin: The Solvency II rules require a "risk margin" liability which is deemed to be above the realistic cost.

- Restricted with profit surpluses: Surpluses in the group's with-profit funds are not recognised in Solvency II Own Funds despite their commercial value .

We define Economic Value (EcV) as being the Own Funds adjusted for the items above. As such our Own Funds and EcV have many common characteristics and tend to be impacted by the same factors.

Transitional measures, introduced as part of the long-term guarantee package when Solvency II was introduced, are available to temporarily increase Own Funds. Chesnara does not take advantage of such measures, however we do apply the volatility adjustment within our Dutch division and have applied to do so in the UK.

How do Own Funds change?

Own Funds (and Economic Value) are sensitive to economic conditions. In general, positive equity markets and increasing yields lead to OF growth and vice versa. Other factors that improve Own Funds include writing profitable new business, reducing the expense base and improvements to lapse rates.

WHAT IS CAPITAL REQUIREMENT?

The solvency capital requirement can be calculated using a "Standard formula" or "internal model". Chesnara adopts the "Standard formula".

The standard formula requires capital to be held against a range of risk categories. The following chart shows the categories and their relative weighting for Chesnara:

£	2020

Total market risk	265,650,816
Counterparty default risk	17,727,404
Total life underwriting risk	199,744,798
Total health underwriting risk	16,242,957
Diversification risk	(114,415,750)
Capital requirement for other sub	368,534
Operational risk	14,055,183
ALAC DT	(35,655,863)
SCR	363,718,078

There are three levels of capital requirement:

Minimum dividend paying requirement/risk appetite requirement

The board sets a minimum solvency level above the SCR which means a more prudent level is applied when making dividend decisions.

Solvency Capital Requirement

Amount of capital required to withstand a 1 in 200 event. The SCR acts as an intervention point for supervisory action including cancellation or the deferral of distributions to investors.

Minimum Capital Requirement

The MCR is between 45% and 25% of the SCR. At this point Chesnara would need to submit a recovery plan which if not effective within three months may result in authorisation being withdrawn.

How does the SCR change?

Given the largest component of Chesnara's SCR is market risk, changes in investment mix or changes in the overall value of our assets has the greatest impact on the SCR. For example, equity assets require more capital than low risk bonds. Also, positive investment growth in general creates an increase in SCR. Book run-off will tend to reduce SCR, but this will be partially offset by an increase as a result of new business.

CHESNARA GROUP SOLVENCY METRICS

£m	2020	2019

Own funds	568	591
SCR	364	380
Solvency surplus	204	211
Solvency ratio %	156%	155%

We are well capitalised at both a group and subsidiary level. We have applied the volatility adjustment in our Dutch businesses and applied to do so in the UK but have not used any other elements of the long-term guarantee package within the group. The volatility adjustment is an optional measure that can be used in solvency calculations to reduce volatility arising from large movements in bond spreads.

CHESNARA GROUP

SOLVENCY POSITION

£m	2020	2019

Own funds (post dividend)	567.7	590.9
SCR	363.7	380.1
Buffer	36.4	38.0
Surplus above buffer	167.6	172.8
Solvency ratio %	156%	155%

SOLVENCY SURPLUS

£m

Group solvency surplus at 31 Dec 2019	210.8
CA	28.5
Movestic	2.1
Waard	2.2
Scildon	(24.0)
Chesnara / consol adj	1.3
Exchange rates	16.0
Dividends	(32.9)
Group solvency surplus at 31 Dec 2020	204.0

Surplus: The group has £167.6m of surplus over and above the internal capital management policy, compared to £172.8m at the end of 2019. The group solvency ratio has increased from 155% to 156%. Solvency surplus has fallen as a result of own funds falling slightly more than the capital requirements, after the proposed dividend is taken into account.

Dividends: The closing solvency position is stated after deducting the £21.4m proposed dividend (31 December 2019: £20.8m), and reflects the payment of an interim dividend of £11.5m.

Own Funds: Own Funds have risen by £9.7m (pre-dividends). Drivers of growth include a UK with-profit net transfer of £9.2m and completion of the Argenta acquisition. These factors were partly offset by the impact of the fall in yields and operating strains.

SCR: T he SCR has fallen by £16.4m, mainly due to a material reduction in equity risk, currency and lapse risk; partially offset by an increase in expense and catastrophe risk.

The numbers that follow present the divisional view of the solvency position which may differ to the position of the individual insurance company(ies) within the consolidated numbers. Note that year end 2019 figures have been restated using 31 December 2020 exchange rates in order to aid comparison at a divisional level.

£m	2020	2019

Own funds (post dividend)	133.2	140.5
SCR	102.3	107.6
Buffer	20.5	21.5
Surplus	10.5	11.4
Solvency ratio %	130%	131%

Surplus: £10.5m above board's capital management policy.

Dividends: Solvency position stated after £33.5m proposed dividend (2019: £29.0m)

Own Funds: Increased by £26.2m (pre-dividend) due to a net with-profit capital transfer and modest economic growth, offset by a strengthening of operating assumptions.

SCR: Fallen by £5.3m, driven by fall in equity risk capital. Currency risk and lapse risk have also contributed to SCR reduction.

SWEDEN

£m	2020	2019

Own funds (post dividend)	224.6	255.2
SCR	142.5	165.1
Buffer	28.5	33.0
Surplus	53.6	57.1
Solvency ratio %	158%	155%

Surplus: 53.6m above board's capital management policy.

Dividends: Solvency position stated after £10.2m proposed dividend (2019: £6.8m).

Own Funds: Fallen by £20.4m (pre-dividend) mainly driven by operating losses due to changes in transfer legislation and modelling, and fund management fees.

SCR: Fallen by £22.6m, driven by material fall in equity risk, spread risk and lapse risk reductions.

NETHERLANDS - WAARD

£m	2020	2019

Own funds (post dividend)	47.1	47.6
SCR	10.8	9.5
Buffer	8.1	8.1
Surplus	28.2	30.1
Solvency ratio %	438%	501%

Surplus: £28.6m above board's capital management policy (£1.0m rise due to buffer reduction: 85% to 75%).

Dividends: Solvency position stated after £4.0m proposed dividend (2019: £5.2m).

Own Funds: Increased by £3.5m, mainly due to completion of the Argenta acquisition.

SCR: Risen by £1.3m, as business run-off reductions were more than offset by additional Argenta SCR, mainly due to an increase in lapse, expense and catastrophe risk from the new portfolio.

NETHERLANDS - SCILDON

£m	2020	2019

Own funds (post dividend)	150.4	157.7
SCR	84.5	75.1
Buffer	63.4	63.8
Surplus	2.6	18.8
Solvency ratio %	178%	210%

Surplus: £2.6m above board's capital management policy (£8.6m rise due to buffer reduction: 85% to 75%).

Dividends: No foreseeable dividend is proposed. The 2019 foreseeable dividend of £7.4m was not paid.

Own Funds: Fallen by £7.3m due to operating losses, partially offset by modest economic profits.

SCR: Increased by £9.5m, largely due to increases in underwriting risks due to the fall in yields, which mainly reverses at group level.

CAPITAL MANAGEMENT | Sensitivities

The group's solvency position can be affected by a number of factors over time. As a consequence, the group's EcV and cash generation, both of which are derived from the group's solvency calculations, are also sensitive to these factors.

The table below provides some insight into the immediate impact of certain sensitivities that the group is exposed to, covering solvency surplus and Economic Value. As can be seen, EcV tends to take the 'full force' of adverse conditions whereas solvency is often protected in the short term and, to a certain extent, the longer term due to compensating impacts on required capital. Whilst cash generation has not been shown in the diagrams below, the impact of these sensitivities on the group's solvency surplus has a direct read across to the immediate impact on cash generation.

	Solvency surplus	EcV
	Impact range £m	Impact range £m
20% sterling appreciation	(28.5) to (23.5)	(100.0) to (90.0)
20 % sterling depreciation	28.5 to 23.5	100.0 to 90.0
25% equity fall	(17.5) to (2.5)	(96.5) to (81.5)
25% equity rise	(12.5) to 2.5	84.5 to 99.5
10% equity fall	(5.4) to 4.6	(40.0) to (30.0)
10% equity rise	(7.0) to 3.0	30.0 to 40.0
1% interest rate rise	16.0 to 26.0	4.0 to 14.0
1% interest rate fall	(51.5) to (36.5)	(42.5) to (27.5)
50bps credit spread rise	(12.5) to (7.5)	(17.5) to (12.5)
25 bps swap rate fall	(26.5) to (21.5)	(22.0) to (12.0)
10% mass lapse	(12.5) to (7.5)	(47.0) to (37.0)
10% expense increase plus 1% inflation rise	(62.0) to (52.0)	(63.0) to (53.0)

INSIGHT*

20% sterling appreciation: A material sterling appreciation reduces the value of surplus in our overseas divisions and hence has an immediate impact on group solvency surplus and EcV. It also reduces the value of overseas investments in CA.

Equity sensitivities: The equity rise sensitivities cause both Own Funds and SCR to rise, as the value of the funds exposed to risk is higher. The increase in SCR can be larger than Own Funds, resulting in an immediate reduction in surplus, depending on the starting point of the symmetric adjustment. Conversely, in an equity fall, Own Funds and SCR both fall. The extent to which the SCR reduction offsets the Own Funds depends on the stress applied. The impacts are not fully symmetrical due to management actions and tax. The change in symmetric adjustment has a significant impact (25% equity fall: -£21m to the SCR, 25% equity rise: +£30m to SCR). The EcV impacts are more intuitive as they are more directly linked to Own Funds impact. CA and Movestic contribute the most due to their large amounts of unit-linked business, much of which is invested in equities.

Interest rate sensitivities: An interest rate rise is generally positive across the group. An interest rate fall results in a larger impact on Own Funds than an interest rate rise, given the current low interest rate environment. CA, Movestic and Scildon all contribute towards the total solvency surplus impact.

50bps credit spread rise: A credit spread rise has an adverse impact on surplus and future cash generation, particularly in Scildon due to corporate and non-local government bond holdings that form part of the asset portfolios backing non-linked insurance liabilities. The impact on the other divisions is less severe.

25bps swap rate fall: This sensitivity measures the impact of a fall in the swap discount curve with no change in the value of assets. The result is that liability values increase in isolation. The most material impacts are on CA and Scildon due to the size of the non-linked book.

10% mass lapse: This sensitivity has a small impact on surplus as the reduction in Own Funds is largely offset by the SCR fall. However, with fewer policies on the books there is less potential for future profits. The division most affected is Movestic; the loss in future fee income following mass lapse hits Own Funds by more than the SCR reduction.

10% expense rise + 1% inflation rise: The expense sensitivity hits the solvency position immediately as the increase in future expenses and inflation is capitalised into the balance sheet.

10% mortality increase: This sensitivity has an adverse impact on surplus and cash generation, particularly for Scildon due to their term products.

*BASIS OF PREPARATION ON REPORTING:

Although it is not a precise exercise, the general aim is that the sensitivities modelled are deemed to be broadly similar (with the exception that the 10% equity movements are naturally more likely to arise) in terms of likelihood. Whilst sensitivities provide a useful guide, in practice, how our results react to changing conditions is complex and the exact level of impact can vary due to the interactions of events and starting position.

FINANCIAL REVIEW

The key performance indicators are a reflection of how the business has performed in delivering its three strategic objectives.

Summary of each KPI:

IFRS

PRE-TAX PROFIT: £24.6M (2019: £96.1M)

TOTAL COMPREHENSIVE INCOME: £43.3M (2019: £60.6M)

What is it?

Presentation of the results in accordance with International Financial Reporting Standards (IFRS) aims to recognise the profit arising from the longer-term insurance and investment contracts over the life of the policy.

Why is it important?

The IFRS results form the core of reporting and hence retain prominence as a key financial performance metric. There is however a general acceptance that the IFRS results in isolation do not recognise the wider financial performance of a typical life and pensions business, hence the use of supplementary alternative performance measures to enhance understanding of financial performance.

Risks

The IFRS profit/(loss) can be affected by a number of our principal risks and uncertainties. Volatility in equity markets and bond yields can result in volatility in the IFRS pre-tax profit/(loss), and foreign currency fluctuations can affect total comprehensive income. The IFRS results of Scildon are potentially relatively volatile, in part, due to the different approach used by the division for valuing assets and liabilities, as permitted under IFRS 4.

£m	2020

Operating profit	30.6
Economic profit	21.2
AVIF impairment	(27.6)
Profit on portfolio acquisition	0.4
Profit before tax	24.6
Tax	(3.4)
Forex impact	22.6
Other	(0.5)
Total comprehensive income	43.3

- Solid profits were delivered in each of the operating divisions, despite the challenging year and impact of Covid-19 on investment markets.

- Operating profits, excluding AVIF impairment were down on last year's £46.2m, in part due to a strengthening of reserves (c£10m) in Scildon.

- Economic earnings, excluding AVIF impairment were also more muted than in 2019 (£49.1m) and reflect the pandemic-related low equity growth environment compared with the previous year.

- The AVIF impairment charge has arisen from reassessing the future profits from Scildon, which has been hit in part by falling yields in the year.

- Total comprehensive income includes foreign exchange gains on translation of the Dutch and Swedish divisional results, owing to sterling depreciation against the euro and Swedish krona.

CASH GENERATION

GROUP CASH GENERATION £27.7M (2019: £36.7M)

DIVISIONAL CASH GENERATION £23.6M (2019: £50.8M)

What is it?

Cash generation is calculated as being the movement in Solvency II Own Funds over the internally required capital. The internally required capital is determined with reference to the group's capital management policies, which have Solvency II rules at their heart. Cash generation is used by the group as a measure of assessing how much dividend potential has been generated, subject to ensuring other constraints are managed.

Why is it important?

Cash generation is a key measure, because it is the net cash flows to Chesnara from its life and pensions businesses which support Chesnara's dividend-paying capacity and acquisition strategy. Cash generation can be a strong indicator of how we are performing against our stated objective of 'maximising value from existing business'. However, our cash generation is always managed in the context of our stated value of maintaining strong solvency positions within the regulated entities of the group.

Risks

The ability of the underlying regulated subsidiaries within the group to generate cash is affected by a number of our principal risks and uncertainties. Whilst cash generation is a function of the regulatory surplus, as opposed to the IFRS surplus, it is impacted by similar drivers, and therefore factors such as yields on fixed interest securities and equity and property performance contribute significantly to the level of cash generation within the group.

£m	2020

UK	29.5
Sweden	12.4
Netherlands - Waard	4.1
Netherlands - Scildon	(22.3)
Divisional cash generation	23.6
Other group activities	4.1
Group cash generation	27.7

Divisional cash generation

- Cash generation in the UK is the largest component of the divisional result.

- The UK contribution was delivered through solid value growth, while a reduction in capital requirements, in excess of the reduction in Own Funds, underpinned the Swedish result. Cash returns in Waard benefit from the completion of the Argenta policy portfolio acquisition.

- Scildon reported cash utilisation of £22.3m following a reduction in Own Funds and an increase in capital requirements. Modest economic positives were insufficient to offset operational losses, which were themselves partially due to reducing yields. The rise in SCR included a strain from reinvesting low risk cash into mortgages (mortgage balance £170m at 31 December 2020) and falling yields caused a lapse SCR increase that reverses at group.

- The 2020 result includes the benefit of a net £9.2m capital transfer from restricted with-profit funds in the UK (2019: £5.1m net increase in restriction).

Group cash generation

- Total group cash generation includes the impact of other group activities, primarily the impact of group expenses on own funds and a reduction in capital requirements upon consolidation of divisions and as consequence of a management action to reduce SCR.

ECONOMIC VALUE (EcV)

£636.8M ( 2019: £670.0M)

What is it?

Economic value (EcV) was introduced following the introduction of Solvency II at the start of 2016, with EcV being derived from Solvency II Own Funds. EcV reflects a market-consistent assessment of the value of the existing insurance business, plus the adjusted net asset value of the non-insurance businesses within the group.

Why is it important?

EcV aims to reflect the market-related value of in-force business and net assets of the non-insurance business and hence is an important reference point by which to assess Chesnara's value. A life and pensions group may typically be characterised as trading at a discount or premium to its Economic Value. Analysis of EcV provides additional insight into the development of the business over time.

The EcV development of the Chesnara group over time can be a strong indicator of how we have delivered to our strategic objectives, in particular the value created from acquiring life and pensions businesses and enhancing our value through writing profitable new business. It ignores the potential of new business to be written in the future (the franchise value of our Swedish and Dutch businesses) and the value of the company's ability to acquire further businesses.

Risks

The Economic Value of the group is affected by economic factors such as equity and property markets, yields on fixed interest securities and bond spreads. In addition, the EcV position of the group can be materially affected by exchange rate fluctuations. For example, a 20.0% weakening of the Swedish krona and euro against sterling would reduce the EcV of the group within a range of £90m-£100m, based on the composition of the group's EcV at 31 December 2020.

£m

2019 Group EcV	670.0
EcV earnings	(37.6)
Forex gain	36.7
Pre-dividend EcV	669.1
Dividends	(32.3)
2020 Group EcV	636.8

- Prior to any dividend payment impact, the total Economic Value remains largely unchanged from the prior year.

- The closing position includes an EcV earnings loss of £37.6m, heavily impacted by the pandemic's impact on both business conditions and the economic environment, with operating losses in Scildon and Movestic and modest investment market returns compared to prior years.

- The change in EcV over the year includes the impact of the payment of the final 2019 and interim 2020 dividends.

- Foreign exchange gains arose on translation of the Dutch and Swedish divisional results, representing the weakening of sterling against both the euro and Swedish krona.

ECV EARNINGS

£(37.6)M ( 2019: £104.0M)

What is it?

In recognition of the longer-term nature of the group's insurance and investment contracts, supplementary information is presented that provides information on the Economic Value of our business.

The principal underlying components of the Economic Value result are:

- The expected return from existing business (being the effect of the unwind of the rates used to discount the value in-force);

- Value added by the writing of new business;

- Variations in actual experience from that assumed in the opening valuation;

- The impact of restating assumptions underlying the determination of expected cash flows; and

- The impact of acquisitions.

Why is it important?

A different perspective is provided in the performance of the group and on the valuation of the business. Economic Value earnings are an important KPI as they provide a longer-term measure of the value generated during a period. The Economic Value earnings of the group can be a strong indicator of how we have delivered against all three of our core strategic objectives. This includes new business profits generated from writing profitable new business, Economic Value profit emergence from our existing businesses, and the Economic Value impact of acquisitions.

Risks

The EcV earnings of the group can be affected by a number of factors, including those highlighted within our principal risks and uncertainties and sensitivities analysis. In addition to the factors that affect the IFRS pre-tax profit and cash generation of the group, the EcV earnings can be more sensitive to other factors such as the expense base and persistency assumptions. This is primarily due to the fact that assumption changes in EcV affect our long-term view of the future cash flows arising from our books of business.

£m	2020

Underlying operating earnings	(49.8)
Material other operating items	(16.2)
Economic earnings	22.9
Other	5.7
Total EcV earnings	(37.6)

- An EcV loss of £37.6m was incurred in 2020.

- The underlying operating earnings1 loss in the year is largely driven by losses in Scildon and Movestic. Movestic's are a function of fund rebate pressures across the industry, whilst Scildon's are largely driven by the impact of the current low yield environment. CA and Waard delivered positive operating earnings.

- Material other operating items largely relates to Movestic, and reflects changes in transfer out assumptions. Off-setting this is a £7.2m gain on completion of a portfolio acquisition in the Waard Group.

- Economic earnings were more modest than in 2019, owing to muted equity market returns, falling bond yields and widening bond spreads, largely due to the effect of Covid-19.

CASH GENERATION

GROUP CASH GENERATION

£27.7M (2019: £36.7M)

DIVISIONAL CASH GENERATION

£23.6M (2019: £50.8M)

The UK and Swedish businesses delivered solid cash contributions, supporting a total cash generation of £27.7m in 2020. Cash is generated from increases in the group's solvency surplus, which is represented by the excess of own funds held over management's internal capital needs. These are based on regulatory capital requirements, with the inclusion of additional 'management buffers'.

Definition: Defining cash generation in a Life and Pensions business is complex and there is no reporting framework defined by the regulators. This can lead to inconsistency across the sector. We define cash generation as being the movement in Solvency II surplus own funds over and above the group's internally required capital, which is based on Solvency II rules.

Implications of our cash definition:

Positives

- Creates a strong and transparent alignment to a regulated framework.

- Positive cash results can be approximated to increased dividend potential.

- Cash is a factor of both value and capital and hence management are focused on capital efficiency in addition to value growth and indeed the interplay between the two.

Challenges and limitations

- In certain circumstances the cash reported may not be immediately distributable by a division to group or from group to shareholders.

- Brings the technical complexities of the SII framework into the cash results e.g. symmetric adjustment, with-profit fund restrictions, model changes etc, and hence the headline results do not always reflect the underlying commercial or operational performance.

	2020 £m				2019 £m
	Movement in Own Funds	Movement in management's capital requirement	Forex impact	Cash generated / (utilised)	Cash generated / (utilised)
	Movement in Own Funds	Movement in management's capital requirement	Forex impact	Cash generated / (utilised)	Cash generated / (utilised)
UK	23.2	6.3	-	29.5	33.6
Sweden	(19.3)	25.6	6.0	12.4	(6.2)
Netherlands - Waard Group	3.5	(1.3)	1.9	4.1	0.8
Netherlands - Scildon	(14.6)	(8.9)	1.2	(22.3)	22.6
Divisional cash generation / (utilisation)	(7.1)	21.8	9.0	23.6	50.8
Other group activities	(18.0)	17.0	5.1	4.1	(14.1)
Group cash generation / (utilisation)	(25.1)	38.7	14.1	27.7	36.7

GROUP

- Group cash generation of £27.7m reflects a challenging year operationally and significantly lower economic returns than the prior year.

- Cash utilisation in Scildon is the largest component of the year on year reduction. Further analysis of the key drivers of cash generation across the group is provided below.

- The division continued to deliver sound value growth, supported by a smaller reduction in capital requirements, resulting in solid cash generation. The result includes the benefit of a £20.0m capital transfer from the with-profit funds, off-set by a further restricted surplus build up of £10.8m.

SWEDEN

- The division has reported positive cash generation compared to cash utilisation during 2019. Detailed analysis is provided in the enhanced analysis, with the movement year on year including exchange rate impacts (2020: +£6.0m; 2019: -£4.4m) coupled with equity-market driven impacts, including the symmetric adjustment (2020: £+11.7m; 2019: +£6.0m). The equity-market driven cash generation in the current year is in part due to customers moving out of equity exposures due to volatility during the year, which reduces the level of capital Movestic is required to hold.

NETHERLANDS - WAARD

- Waard has again reported growth in Own funds, outweighing an increase in the capital requirement, resulting in yet another year with positive cash generation contributing to the overall group result. Much of the growth is due to the Argenta policy portfolio acquisition, while the result also benefits from foreign exchange gains due to sterling's depreciation against the euro.

NETHERLANDS - SCILDON

- The Scildon cash generation was disappointing, moving from positive in 2019 to cash utilisation during the current year. The result does however include a £6.0m loss as a direct consequence of yield reductions, coupled with the reinvestment from cash to higher returning mortgage investments, which also had a negative impact of c£6m. This change of investments was a continuation of a wider programme to improve capital efficiency, which resulted in £24.1m of cash generation during 2019.

CASH GENERATION - ENHANCED ANALYSIS

The format of the analysis draws out components of the cash generation results relating to technical complexities, modelling issues or exceptional corporate activity (e.g. acquisitions). The results excluding such items are deemed to better reflect the underlying commercial outcome (commercial cash generation). This commercial result is then analysed to show the key drivers of that result. In particular, the analysis draws out the extent by which cash generation is due to external economic conditions. The analysis also highlights the impacts of management actions and exceptional items. There are a number of approximations in the analysis, and as such each individual line item should only be used as a guide to the factors that have influenced cash generation in the year.

COMMERCIAL CASH GENERATION

£27.7M (2019: £75.3M)

ECONOMIC CASH GENERATION

£24.7M (2019: £37.5M)

		UK	SWEDEN	NETHERLANDS WAARD	NETHERLANDS SCILDON	GROUP ADJ	TOTAL
Base cash generation		29.5	12.4	4.1	(22.3)	4.1	27.7

Symmetric adjustment		0.5	0.8	-	(0.1)	-	1.2
With-profits restrictions		(9.2)	-	-	-	-	(9.2)
Acquisition activity		-	-	(1.4)	-	1.0	(0.4)
Lapse SCR reversal		-	-	-	15.4	(15.4)	-
Model changes		(2.1)	-	-	10.5	-	8.4

Commercial cash generation		18.7	13.1	2.7	3.5	(10.3)	27.7

Analysed as:
Economic cash generation		1.1	23.6	3.6	(2.7 )	(0.9)	24.7
Equities		3.5	12.5	-	(0.8)	-	15.2
Spreads		(0.6)	(1.5)	1.4	3.6	0.1	3.1
Forex		-	6.0	1.9	1.2	5.1	14.1
Yields		(5.8)	(2.1)	(0.1)	(6.0)	(2.4)	(16.4)
Other economics		3.9	8.7	0.5	(0.7)	(3.7)	8.7

Core operating cash generation		7.9	2.0	(2.5 )	18.8	(18.1)	8.0
New business strain		-	-	-	(13.0)	-	(13.0)
Material other operating items		3.0	(12.5)	-	(2.2)	(10.1)	(21.8)

Management actions & other exceptional		6.7	-	1.6	2.5	18.8	29.7
Strategic asset allocation implementation	a	6.7	-	-	-	-	6.7
Buffer reduction	b	-	-	1.6	8.4	-	10.0
Scildon cash to mortgages	c	-	-	-	(5.9)	-	(5.9)
Currency SCR methodology	d	-	-	-	-	18.8	18.8

At a total group level commercial cash generation is the same as base case generation. At a divisional level there are however some significant differences. The underlying commercial result for Scildon is significantly better than the base result when adjustments are made to give credit for components that reverse on consolidation and one-off model enhancement impacts. Conversely whilst the commercial cash generation for the UK remains significant, it is lower than the base result which includes the benefit of transfers from previously built up surpluses in the with-profit funds.

Impacts from economic conditions

At a total level the commercial cash result includes £24.7m of economic benefits with notable losses from reducing yields being more than offset by foreign exchange and equity market related gains.

Despite volatility, equity markets in Sweden actually increased by 10% over the year and this together with the impact of fund reallocations from equity to fixed interest investments, has contributed to a total economic cash gain of £23.6m. Scildon is more exposed to the impact of reducing yields. Yield related losses were greater than spread and foreign exchange gains, resulting is a small net economic loss.

Core operating cash generation

In total the divisions have delivered a core operating cash gain of £26.1m.

The closed book operations in the UK and the Netherlands benefit from the impact of book run-off resulting in £5.3m of core operating cash generation. There is also a book run-off benefit in Scildon but this is broadly offset by new business strain, drawn out as a separate item. The central group item of £(18.1)m is the total value of numerous items including uncovered central expenses incurred, changes in central provisions for future expenses, interest payments, an increases in counterparty capital and capital requirement consolidation adjustments.

New business strain

As an open operation selling relatively capital-intensive term contracts, the Scildon result is impacted by new business strain and this has been drawn out from the core result. The strain in Movestic is less material so not drawn out as a separate item.

Material other operating items

This includes operating items that were individually material and have therefore been separately analysed to aid the understanding of the operating cash generation in the year. The Movestic loss includes the impact of regulatory changes on transfer rates plus the temporary impact due to both Covid-19 conditions and competitor pricing. In Scildon we have experienced cash utilisation as a result of adopting revised standard mortality tables which suggest higher mortality than our specific portfolio experiences. Finally, the group figure relates to IFRS 17 expense reserves. This is mainly due to a policy to centralise the programme and hence there are corresponding releases in the UK and Scildon results of £3.0m and £3.4m respectively.

Management actions

Management actions have had a notable positive impact during the year:

a) The UK implemented a change in its asset mix backing its with profit policies, which benefitted the level of risk capital required to be held.

b) During the year we have delivered our pre-agreed flight path of reducing our capital management buffers in our Dutch businesses.

c) We have switched a significant proportion of Dutch assets from BBB corporate investments to mortgage based investments. This was implemented in two stages. Stage 1 involved the switch from BBB to cash which created £24.1m of cash generation and this was completed in 2019 and was hence recognised in the 2019 results. The second stage involved moving from cash to mortgage-based investments which resulted in cash utilisation of £5.9m in 2020. Therefore, despite the end to end process creating a large capital efficiency gain, the 2020 result includes a notable negative impact.

d) As part of the group's capital management programme we have reassessed the modelling of our currency risk capital requirement resulting in a large reduction.

EcV EARNINGS

£(37.6)M (2019: £104.0M)

EcV loss in the year is driven by some large operating losses reflecting difficult trading conditions in Sweden and a challenging low yield environment affecting Scildon, offset by modest economic profits over the course of the year.

Analysis of the EcV result in the period by earnings source:

	31 Dec 2020 £m	31 Dec 2019 £m	Note
Expected movement in period	0.3	(0.4)
New business	3.7	7.8
Operating experience variances	(22.0)	(6.8)
Operating assumption changes	(35.8)	3.8
Other operating variances	3.9	(0.3)
Total EcV underlying operating earnings	(49.8)	4.1	2
Material other operating items	(16.2)	1.5	3
Total EcV operating earnings	(66.1)	5.6
Economic experience variances	45.7	143.1	1
Economic assumption changes	(22.8)	(22.0)	1
Total EcV economic earnings	22.9	121.1	1
Other non-operating variances	(2.8)	(5.2)
Risk margin movement	4.7	(7.0)
Tax	3.7	(10.5)
Total EcV earnings	(37.6)	104.0

Analysis of the EcV result in the year by business segment:

	31 Dec 2020 £m	31 Dec 2019 £m	Note
UK	11.8	48.9	4
Sweden	(22.9)	43.8	5
Netherlands	(8.5)	16.7	6
Group and group adjustments	(18.0)	(5.3)	7
EcV earnings	(37.6)	104.0

Note 1 - Economic conditions: The EcV result is sensitive to investment market conditions, as reflected by the change in economic earnings year on year. Key movements in investment market conditions during the year are as follows:

- FTSE All World index increased by 24% (year ended 31 December 2019: increased by 24%);

- Swedish OMX all share index increased by 13% (year ended 31 December 2019: increased by 30%);

- The Netherlands AEX all share index increased by 4% (year ended 31 December 2019: increased by 20%); and

- 10-year UK gilt yields have decreased from 0.84% to 0.24%.

Note 2 - Underlying operating earnings: The loss of £49.8m is largely made up of losses in Scildon and Movestic, coupled with some group expense strain being reported (see note 7). The competitive environment in Sweden has continued over the course of the year, with fund rebate pressure being the main driver of experience losses. Turning to Scildon, there has been positive lapse experience in the year, but in the current low yield economic environment this results in EcV losses due to guarantees within certain policies biting. In addition Scildon has also reported some mortality losses largely due to applying the most recently published mortality tables. The UK business and the Waard group have reported positive operating results.

Note 3 - Material other operating items: This includes operating items that are individually material and have therefore been analysed separately. This largely relates to Movestic, whereby assumption strengthening has been made in the year, amounting to £21.8m. This is largely down to: the general competitive environment and amount of churn in the market; changes to transfer regulations and associated charges; and a general move from customers to more traditional products with guarantees as a result of Covid-19 related market volatility concerns. Also included in this category is a £7.2m gain on the completion of Waard's acquisition of the Argenta portfolio during the year.

Note 4 - UK: The UK reported value growth of £11.8m in 2020, with economic earnings being the largest component of the result, despite the Covid-19 impact on investment markets early in the year. Economic gains were primarily the positive impact of modest equity market growth, noting that our policyholder funds are invested in a combination of UK and global equities, although this this was partially offset by the negative impact of falling yields. Operational earnings included gains arising from positive lapse experience (resulting in future fee income higher than assumed at the start of the year) and favourable mortality experience, offset by a strengthening of future expense assumptions.

Note 5 - Sweden: Movestic recorded a large loss (£22.9m) over the year. As described in note 3 the majority of this was as a result of assumption changes in relation to dynamics around policy transfers. New business profits of £1.0m were reported, representing a reduction compared to last year's reported profits of £4.3m. Volumes have been hit by Covid-19 and we believe these will return as Swedish society starts to open back up. Operating losses were also recorded in relation to fund management fees, which have come under pressure over the course of the year. Economic earnings of £9.2m were reported, substantially lower than 2019 (£55.3m), largely as a result of the significant equity market growth in 2019 not being repeated during 2020.

Note 6 - Netherlands: The Dutch businesses posted a loss of £8.5m for 2020. Waard delivered solid profits of £4.9m while Scildon incurred a loss of £13.4m. New business performance in Scildon of £2.7m (2019: £3.5m) was largely in line with the prior year. As referred to note 2, Scildon has reported operating losses amounting to £23.0m, largely as a result of incurring guarantee related costs as a result of better than expected policy retention, and also the impact of adjusting mortality assumptions to an updated mortality table. Economic gains were modest in Scildon (£5.3m).

Waard has reported positive EcV earnings of £5.3m. The majority of this arose from the Argenta portfolio acquisition, offset by small economic losses.

Note 7 - Group: This component includes various group-related costs, and includes: non-maintenance related costs (such as acquisition costs); the costs of the group's IFRS 17 programme (the budget of which was increased during the year); and some economic-related costs such as a foreign exchange loss on our euro debt, the negative impact of reduced interest rates and interest on our bank debt.

EcV

£636.8M (31 DEC 2019: £670.0M)

The Economic Value of Chesnara represents the present value of future profits of the existing insurance business, plus the adjusted net asset value of the non-insurance business within the group. EcV is an important reference point by which to assess Chesnara's intrinsic value.

Value movement: 1 Jan 2020 to 31 Dec 2020:

£m

2019 Group EcV	670.0
EcV earnings	(37.6)
Forex gain	36.7
Pre-dividend EcV	669.1
Dividends	(32.3)
2020 Group EcV	636.8

EcV earnings: A loss of £37.6m has been reported in 2020. The impact of the Covid-19 pandemic felt in all divisions, with operating losses and more modest investment markets returns in the year.

Dividends: Under EcV, dividends are recognised in the period in which they are paid. Dividends of £32.3m were paid during the period, being the final dividend from 2019 and the 2020 interim dividend.

Foreign exchange: The EcV of the group benefitted from a foreign exchange gain in the period, a consequence of the sterling depreciation against the euro and Swedish krona.

EcV by segment at 31 Dec 2020:

£m

UK	187.4
Sweden	246.5
Netherlands	219.1
Other group activities	(16.3)
2020 Group EcV	636.8

The above table shows that the EcV of the group is diversified across its different markets.

EcV to Solvency II:

£m

2020 Group EcV	636.8
Risk margin	(45.8)
Contract boundaries	(0.3)
Own funds restrictions	(1.5)
Dividends	(21.4)
2020 SII own funds	567.7

Our reported EcV is based on a Solvency II assessment of the value of the business but adjusted for certain items where it is deemed that Solvency II does not reflect the commercial value of the business. The above waterfall shows the key difference between EcV and SII, with explanations for each item below.

Risk margin: Solvency II rules require a significant 'risk margin' which is held on the Solvency II balance sheet as a liability, and this is considered to be materially above a realistic cost. We therefore reduce this margin for risk for EcV valuation purposes from being based on a 6% cost of capital to a 3.25% cost of capital.

Contract boundaries: Solvency II rules do not allow for the recognition of future cash flows on certain in-force contracts, despite the high probability of receipt. We therefore make an adjustment to reflect the realistic value of the cash flows under EcV.

Ring-fenced fund restrictions: Solvency II rules require a restriction to be placed on the value of surpluses that exist within certain ring-fenced funds. These restrictions are reversed for EcV valuation purposes as they are deemed to be temporary in nature.

Dividends: The proposed final dividend of £21.4m is recognised for SII regulatory reporting purposes. It is not recognised within EcV until it is actually paid.

IFRS

IFRS PRE-TAX PROFIT

£24.6M (2019: £96.1M)

IFRS TOTAL COMPREHENSIVE INCOME

£43.3M (2019: £60.6M)

The group IFRS results reflect the natural dynamics of the segments of the group, which can be characterised in three major components: stable core, variable element and growth operation.

Executive summary

Stable core: At the heart of surplus, and hence cash generation, are the core CA (excluding the S&P book) and Waard

Group segments. The requirements of these books are to provide a predictable and stable platform for the financial model and dividend strategy. As closed books, the key is to sustain this income source as effectively as possible.

Variable element: Included within the CA segment is the S&P book. This can bring an element of short-term earnings volatility to the group, with the results being particularly sensitive to investment market movements due to product guarantees. The IFRS results of Scildon are potentially relatively volatile although this is, in part, due to reserving methodology rather than 'real world' value movements.

Growth operation: The long-term financial models of Movestic and Scildon are based on growth, with levels of new business and premiums from existing business being targeted to more than offset the impact of policy attrition, leading to a general increase in assets under management and, hence, management fee income.

IFRS results

The financial dynamics of Chesnara, as described above, are reflected in the following IFRS results:

	2020	2019
	£m	£m	Note
CA	35.7	47.9	1
Movestic	12.9	13.2	2
Waard Group	4.1	4.1	3
Scildon	14.6	41.6	4
Chesnara	(9.4)	(6.4)	5
Consolidation adjustments	(6.1)	(5.1)	6
Profit before tax, AVIF impairment and profit on acquisition	51.8	95.3
AVIF impairment	(27.6)	-	7
Post completion gain on portfolio acquisition	0.4	0.8	3
Profit before tax	24.6	96.1
Tax	(3.4)	(17.0)
Profit after tax	21.2	79.1
Foreign exchange	22.6	(18.7)	8
Other comprehensive income	(0.5)	0.2
Total comprehensive income	43.3	60.6

Operating profit, excluding AVIF impairment¹	30.6	46.2	9
Economic profit, excluding AVIF impairment ¹	21.2	49.1	10
Profit before tax, AVIF impairment and profit on acquisition	51.8	95.3
AVIF impairment	(27.6)	-	7
Post completion gain on portfolio acquisition	0.4	0.8	3
Profit before tax	24.6	96.1
Tax	(3.4)	(17.0)
Profit after tax	21.2	79.1
Foreign exchange	22.6	(18.7)	8
Other comprehensive income	(0.5)	0.2
Total comprehensive income	43.3	60.6

Note 1: The CA segment has posted a strong result, albeit down on the prior year, which saw strong investment related returns late in 2019. In addition to positive economic returns, the current year result also benefited from positive operational impacts arising from mortality assumption changes, expense modelling impacts and favourable policyholder tax deductions.

Note 2: Movestic continues to contribute positively to the overall group IFRS result, with profits broadly in line with the prior year. Positive investment returns, strong claims development and reduced operational expenses produced a favourable result year to date.

Note 3: The Waard Group result reflects weaker investment performance due to investment market volatility. It has also incurred slightly higher than expected acquisition related expenditure, which includes costs in relation to the purchase of a portfolio of life insurance business in run-off from the Dutch branch of Belgian-owned Argenta Bank-en Verzekeringsgroep N.V., which completed on 31 August 2020.

Note 4: Scildon has delivered a relatively strong IFRS result, despite the need for a strengthening of reserves of circa £10m in the year arising from the liability adequacy test biting. Positive investment value growth has arisen from favourable spread and interest rate movements, coupled with a positive insurance result due to favourable mortality experience.

Note 5: The Chesnara result largely represents holding company expenses. The current year loss is higher than last year largely due to 2020 including larger one-off items such as project related expenditure and a foreign exchange loss in respect of the Euro denominated loan that it holds.

Note 6: Consolidation adjustments relate to items such as the amortisation and impairment of intangible assets.

Note 7: During the year a write down of the Scildon AVIF intangible asset was performed amounting to £26.6m (£11.6m of this was recognised in the first half of the year). The impairment was as a result of a reduction in the assessed value of the future cash flows of policies that were in force at the point of acquisition. The AVIF held in respect of the Protection Life book within CA was also impaired by £1.0m, following a year end assessment. The impairments are driven by a combination of economic and operating factors, with the exact allocation between the two being impracticable to determine. As a result this has been reported outside of both operating and economic profits.

Note 8: Sterling weakened against both the euro and Swedish krona in the period, having a material impact on the 2020 result, creating a sizeable exchange gain at the end of the year.

Note 9: The operating proft, excluding AVIF impairment, includes the negative impact of the liability adequacy test biting in Scildon, amounting to £10.0m, which is driven by a combination of economic and operating assumption changes. In the absence of this operating profits have remained broadly in line year on year, demonstrating the stability of the core business.

Note 10: Economic profit, excluding AVIF impairment, represents the components of the earnings that are directly driven by movements in economic variables. Despite being lower than last year, economic profits have held up well in what has been a turbulent year for global investment markets, which have largely recovered from the steep falls seen at the start of the Covid-19 pandemic.

IFRS net assets remained relatively stable during the year, whilst cash generated from operating activities increased period on period, as positive investment returns outweighed corresponding movements in insurance and investment contract liabilities.

FINANCIAL management

The group's financial management framework is designed to provide security for all stakeholders, while meeting the expectations of policyholders, shareholders and regulators.

Summary:

OBJECTIVES

The group's financial management framework is designed to provide security for all stakeholders, while meeting the expectations of policyholders, shareholders and regulators. Accordingly we aim to:

- Maintain solvency targets

- Meet the dividend expectations of shareholders

- Optimise the gearing ratio to ensure an efficient capital base

- Ensure there is sufficient liquidity to meet obligations to policyholders, debt financiers and creditors

- Maintain the group as a going concern

HOW WE DELIVER TO OUR OBJECTIVES

In order to meet our obligations we employ and undertake a number of methods. These are centred on:

1. Monitor and control risk & solvency

2. Longer-term projections

3. Responsible investment management

4. Management actions

OUTCOMES

Key outcomes from our financial management process, in terms of meeting our objectives, are set out below:

1. SOLVENCY:

Group Solvency Ratio: 156%

2. SHAREHOLDER RETURNS

2018-2020 TSR (14.07)%

2020 dividend yield 7.5%

Based on average 2020 share price and full year 2020 dividend of 21.94p.

3. CAPITAL STRUCTURE

Gearing ratio of 7.4%

This does not include the financial reinsurance within the Swedish business.

4. LIQUIDITY AND POLICYHOLDER RETURNS

Policyholders' reasonable expectations maintained.

Asset liability matching framework operated effectively in the year.

Sufficient liquidity in the Chesnara holding company.

5. MAINTAIN THE GROUP AS A GOING CONCERN

Group remains a going concern

Further detail on capital structure

The group is funded by a combination of share capital, retained earnings and debt finance. The debt gearing (excluding financial reinsurance in Sweden) was 7.4% at 31 December 2020 (11.0% at 31 December 2019). The level of debt that the board is prepared to take on is driven by the group's "Debt and leverage policy" which incorporates the board's risk appetite in this area. Over time, the level of gearing within the group will change, and is a function of the funding requirements for future acquisitions and the repayment of existing debt.

Acquisitions are funded through a combination of debt, equity and internal cash resources. The ratios of these three funding methods vary on a deal-by-deal basis and are driven by a number of factors including, but not limited to the size of the acquisition; current cash resources of the group; the current gearing ratio and the board's risk tolerance limits for additional debt; the expected cash generation profile and funding requirements of the existing subsidiaries and potential acquisition; future financial commitments; and regulatory rules. In addition to the above, Movestic uses a financial reinsurance arrangement to fund its new business operation.

OUTCOMES FROM IMPLEMENTING OUR FINANCIAL MANAGEMENT OBJECTIVES

1. Maintain the group as a going concern

After making appropriate enquiries, including consideration of the impact of Covid-19 on the group's operations and financial position and prospects, the directors confirm that they are satisfied that the company and the group have adequate resources to continue in business for the foreseeable future. Accordingly, they continue to adopt the going concern basis in the preparation of the financial statements.

In performing this work, the board has considered the current solvency and cash position of the group and company, coupled with the group's and company's projected solvency and cash position as highlighted in its most recent business plan and Own Risk and Solvency Assessment (ORSA) process. These processes consider the financial projections of the group and its subsidiaries on both a base case and a range of stressed scenarios, covering projected solvency, liquidity, EcV and IFRS positions. In particular these projections assess the cash generation of the life insurance divisions and how these flow up into the Chesnara parent company balance sheet, with these cash flows being used to fund debt repayments, shareholder dividends and the head office function of the parent company. Further insight into the immediate and longer-term impact of certain scenarios, covering solvency, cash generation and Economic Value, can be found under the section headed 'Capital Management Sensitivities'. The directors believe these scenarios will encompass any potential future impact of Covid-19 on the group as Chesnara's most material ongoing exposure to Covid-19 is any associated future investment market impacts. Underpinning the projections process outlined above are a number of assumptions. The key ones include:

- We do not assume that a future acquisition needs to take place to make this assessment.

- We make long term investment return assumptions on equities and fixed income securities.

- The base case scenario assumes exchange rates remain stable, and the impact of adverse rate changes are assessed through scenario analysis.

- Levels of new business volumes and margins are assumed.

- The projections apply the most recent actuarial assumptions, such as mortality and morbidity, lapses and expenses.

Due to the group's strong capital position and the group's business model, although the Covid-19 outbreak caused significant global economic disruption, the group and the company remain well capitalised and has sufficient liquidity. No significant strengthening of mortality assumptions has been required as a result of Covid-19 at this stage. As such we can continue to remain confident that the group will continue to be in existence in the foreseeable future. The information set out under the Capital Management section indicates a strong Solvency II position as at 31 December 2020 as measured at both the individual regulated life company levels and at the group level. As well as being well-capitalised the group also has a healthy level of cash reserves to be able to meet its debt obligations as they fall due and does not rely on the renewal or extension of bank facilities to continue trading. The group's subsidiaries rely on cash flows from the maturity or sale of fixed interest securities which match certain obligations to policyholders, which brings with it the risk of bond default. In order to manage this risk, we ensure that our bond portfolio is actively monitored and well diversified. Other significant counterparty default risk relates to our principal reinsurers. We monitor their financial position and are satisfied that any associated credit default risk is low.

Whilst there was some short-term operational disruption from dealing with the restricted operating environment in light of Covid-19, our assessment has shown that both our internal functions and those operated by our key outsourcers and suppliers adapted to these restrictions and do not cause any issues as to our going concern.

2. Assessment of viability

The board assesses that being financially viable includes continuing to pay an attractive and sustainable level of dividends to investors and meeting all other financial obligations, including debt repayments over the three-year business planning time horizon. The board's assessment of the viability of the group is performed in conjunction with its going concern assessment and considers both the time horizons required for going concern, and the slightly longer term timelines for assessing viability. The assessment for viability also considers the same key financial metrics as for assessing going concern, being solvency, cash, EcV and IFRS, both on base case and stressed scenarios.

As reported in the going concern section, the group has remained well capitalised throughout the Covid-19 pandemic, and any operational disruption in moving to a largely remote working model in the short term, was minimal. In light of this, should the Covid-19 situation be with us in society over the whole viability period, we do not believe that this factor would cause any concern as to our overall viability.

3. Viability statement

Based on the results of the analysis above, the directors have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment.

4. Assessment of prospects

Our longer-term prospects are primarily considered through the conclusions drawn from our annual business planning process, updated for key events that may occur in-between business plans.

The business plans include underlying operational deliverables, an assessment of the business model and the financial consequences of following those plans. As part of this process we also consider the principal risks and uncertainties that the group faces and how these might affect our prospects.

An assessment of our prospects has been shown below, updated for our consideration of the impact of Covid-19. This has been structured around our three strategic objectives:

Value from in-force book: The group has c930,000 policies in force at 31 December 2020. These are generally long-term policies, and the associated cash flows can, at an overall portfolio level, be reasonably well predicted on base case and stressed scenarios. The group is well capitalised at both a group and divisional level and we have high quality assets backing our insurance liabilities. From a Covid-19 perspective, whilst equity markets have somewhat recovered from the initial falls at the start of the pandemic, sustained depressed market values do adversely impact fee income streams and therefore if markets fall again then profitability prospects reduce. Similarly, further reductions in yields would adversely impact our prospects. Temporary market volatility is however a natural feature of investment markets and our financial model is well positioned to withstand difficult conditions without creating any permanent harm to the longer-term profitability prospects.

Acquisition Strategy: We see no reason to expect that Covid-19 will have a long term impact on the availability of acquisition opportunities. Despite a competitive landscape, where deals have completed over the past year, the acquiring companies have still tended to report value gains. Indeed, we completed a small Dutch acquisition which has resulted in a €7.2m EcV gain. Waard are building a useful market position as a company who are able and willing to acquire books that are sub-scale for the vendors business model. Whilst we maintain our ambition to complete larger deals, the prospects from a steady flow of well priced smaller acquisitions should not be underestimated. The financial position of the group continues to support financing deals through the use of our own resources or by raising debt, however in the short-term equity funding would likely be less attractive.

Value from new business: Chesnara is in a fortunate position in that its prospects do not fundamentally rely on the ability to sustain new business volumes. New business levels have held up well in Scildon despite overall market size reductions during the year. An increase in market share stands us in a good position to take advantage should market volumes increase post Covid as we would expect them to do. Movestic's new business results have been more adversely impact by Covid-19 primarily due to an overall reduction in wider market activity. That said, we were still able to post a new business profit and our market share would mean a notable recovery in future profits when the wider market volume recovers.

Our business fundamentals such as assets under management, policy volumes, new business market shares and expenses have all proven resilient to the impact of the pandemic. This, together with the positive assessment of our core strategic objectives and a line of sight to positive management actions over the planning period, leaves use well positioned to deliver ongoing positive outcomes for all stakeholders.

RISK MANAGEMENT

Managing risk is a key part of our business model. We achieve this by understanding the current and emerging risks to the business, mitigating them where appropriate and ensuring they are appropriately monitored and managed.

HOW WE MANAGE RISK

RISK MANAGEMENT SYSTEM

The risk management system supports the identification, assessment, and reporting of risks along with coordinated and economical application of resources to monitor and control the probability and/or impact of adverse outcomes within the board's risk appetite or to maximise realisation of opportunities.

Strategy: The risk management strategy contains the objectives and principles of risk management, the risk appetite, risk preferences and risk tolerance limits.

Policies: The risk management policies implement the risk management strategy and provide a set of principles (and mandated activities) for control mechanisms that take into account the materiality of risks.

Processes: The risk management processes ensure that risks are identified, measured/ assessed, monitored and reported to support decision making.

Reporting: The risk management reports deliver information on the material risks faced by the business and evidence that principal risks are actively monitored and analysed and managed against risk appetite.

Chesnara adopts the "three lines of defence" model adjusted as appropriate across the group taking into account size, nature and complexity, with a single set of risk and governance principles applied consistently across the business.

In all divisions we maintain processes for identifying, evaluating and managing all material risks faced by the group, which are regularly reviewed by the divisional and group Audit & Risk Committees. Our risk assessment processes have regard to the significance of risks, the likelihood of their occurrence and take account of the controls in place to manage them. The processes are designed to manage the risk profile within the board's approved risk appetite.

Group and divisional risk management processes are enhanced by stress and scenario testing, which evaluates the impact on the group of certain adverse events occurring separately or in combination. The results, conclusions and any recommended actions are included within divisional and group ORSA Reports to the relevant boards. There is a strong correlation between these adverse events and the risks identified in 'Principal risks and uncertainties'. The outcome of this testing provides context against which the group can assess whether any changes to its risk appetite or to its management processes are required.

ROLE OF THE BOARD

The Chesnara board is responsible for the adequacy of the design and implementation of the group's risk management and internal control system and its consistent application across divisions. All significant decisions for the development of the group's risk management system are the group board's responsibility.

Risk and Control Policies

Chesnara has a set of Risk and Control Policies that set out the key policies, processes and controls to be applied. The Chesnara board approves the review, updates and attestation of these policies at least annually.

Strategy and Risk Appetite

Chesnara group and its divisions have a defined risk strategy and supporting risk appetite framework to embed an effective risk management framework, culture and processes at its heart and to create a holistic, transparent and focused approach to risk identification, assessment, management, monitoring and reporting.

The Chesnara board approves a set of risk preferences which articulate, in simple terms, the desire to increase, maintain, or reduce the level of risk taking for each main category of risk. The risk position of the business is monitored against these preferences using risk tolerance limits, where appropriate, and they are taken into account by the management teams across the group when taking strategic or operational decisions that affect the risk profile.

Risk Identification

The group maintains a register of risks which are specific to its activity and scans the horizon to identify potential risk events (e.g. political; economic; technological; environmental, legislative & social).

On an annual basis the board approves the materiality criteria to be applied in the risk scoring and in the determination of what is considered to be a principal risk. At least quarterly the principal and emerging risks are reported to the board, assessing their proximity, probability and potential impact.

Own Risk and Solvency Assessment (ORSA)

On an annual basis, or more frequently if required, the group produces a group ORSA Report which aggregates the divisional ORSA findings and supplements these with an assessment specific to group activities. The group and divisional ORSA policies outline the key processes and contents of these reports.

The Chesnara board is responsible for approving the ORSA, including steering in advance how the assessment is performed and challenging the results.

Risk Management System Effectiveness

The group and its divisions undertake a formal annual review of and attestation to the effectiveness of the risk management system. The assessment considers the extent to which the risk management system is embedded.

The Chesnara board is responsible for monitoring the Risk Management System and its effectiveness across the group. The outcome of the annual review is reported to the group board which make decisions regarding its further development.

Covid-19

During 2020 the Covid-19 pandemic had a global impact on demographic, social and economic factors. Recognising that, as we move into 2021, there is potential risk of related operational disruption and economic volatility, the information in the following tables has been updated to reflect the ongoing Covid-19 pandemic.

principal risks and uncertainties

The following tables outline the principal risks and uncertainties of the group and the controls in place to mitigate or manage their impact. It has been drawn together following regular assessment, performed by the Audit & Risk Committee, of the principal risks facing the group, including those that would threaten its business model, future performance, solvency or liquidity. The impacts are not quantified in the tables. However, by virtue of the risks being defined as principal, the impacts are potentially significant. Those risks with potential for a material financial impact are covered within the sensitivities.

PR1 - INVESTMENT AND LIQUIDITY RISK
DESCRIPTION	Exposure to financial losses or value reduction arising from adverse movements in currency, investment markets, counterparty defaults, or through inadequate asset liability matching.
RISK APPETITE	The group accepts this risk but has controls in place to prevent any increase or decrease in the risk exposure beyond set levels. These controls will result in early intervention if the amount of risk approaches those limits.
POTENTIAL IMPACT	Market risk results from fluctuations in asset values, foreign exchange rates and interest rates and has the potential to affect the group's ability to fund its commitments to customers and other creditors, as well as pay a return to shareholders. Chesnara and each of its subsidiaries have obligations to make future payments, which are not always known with certainty in terms of timing or amounts, prior to the payment date. This includes primarily the payment of policyholder claims, reinsurance premiums, debt repayments and dividends. The uncertainty of timing and amounts to be paid gives rise to potential liquidity risk, should the funds not be available to make payment. Other liquidity issues could arise from counterparty failures/credit defaults, a large spike in the level of claims or other significant unexpected expenses. Worldwide developments in Environmental, Social, and Governance (ESG) responsibilities and reporting have the potential to influence market risk in particular, for example the risks arising from transition to a carbon neutral industry, with corresponding changes in consumer preferences and behaviour.
KEY CONTROLS		RECENT CHANGE / OUTLOOK
- Regular monitoring of exposures and performance; - Asset liability matching; - Maintaining a well-diversified asset portfolio; - Holding a significant amount of surplus in highly liquid "Tier 1" assets such as cash and gilts; - Utilising a range of investment funds and managers to avoid significant concentrations of risk; - Having an established investment governance framework to provide review and oversight of external fund managers; - Regular liquidity forecasts; - Considering the cost/benefit of hedging when appropriate; - Actively optimising the risk / return trade-off between yield on fixed interest assets compared with the associated balance sheet volatility and potential for defaults or downgrades; and - Giving due regular consideration (and discussing appropriate strategies with fund managers) to longer term global changes that may affect investment markets, such as climate changes.		Influenced mainly by the Covid-19 pandemic, sustained low interest rates combined with increasingly volatile credit spreads provides an additional challenge in terms of achieving a suitable return on fixed interest investments relative to risk. It has also increased the perceived risk of downgrades or defaults on lower grade credit assets. Chesnara has ESG as a regular agenda item on the appropriate committee agendas across the group including the Board, with a group-wide ESG strategy and underlying principles established in 2020 to provide top down guidance and consistency where appropriate.

PR2 - REGULATORY CHANGE RISK (INCLUDING BREXIT)
DESCRIPTION	The risk of adverse changes in industry practice/regulation, or inconsistent application of regulation across territories.
RISK APPETITE	The group aims to minimise any exposure to this risk, to the extent possible, but acknowledges that it may need to accept some risk as a result of carrying out business.
POTENTIAL IMPACT	Chesnara currently operates in three regulatory domains and is therefore exposed to potential for inconsistent application of regulatory standards across divisions, such as the imposition of higher capital buffers over and above regulatory minimum requirements. Potential consequences of this risk for Chesnara is the constraining of efficient and fluid use of capital within the group, or creating a non-level playing field with respect to future new business/acquisitions. Regulatory developments continue to drive a high level of change activity across the group, with items such as operational resilience, climate change and IFRS17 being particularly high profile. Such regulatory initiatives carry the risk of expense overruns should it not be possible to adhere to them in a manner that is proportionate to the nature and scale of Chesnara's businesses. The group is therefore exposed to the risk of: - incurring one-off costs of addressing regulatory change as well as any permanent increases in the cost base in order to meet enhanced standards; - erosion in value arising from pressure or enforcement to reduce future policy charges; - erosion in value arising from pressure or enforcement to financially compensate for past practice; and - regulatory fines or censure in the event that it is considered to have breached standards or fails to deliver changes to the required regulatory standards on a timely basis.
KEY CONTROLS		RECENT CHANGE / OUTLOOK
Chesnara seeks to limit any potential impacts of regulatory change on the business by: - Having processes in place for monitoring changes, to enable timely actions to be taken, as appropriate; - Maintaining strong open relationships with all regulators, and proactively discussing their initiatives to encourage a proportional approach - Being a member of the ABI and equivalent overseas organisations and utilising other means of joint industry representation; - Performing internal reviews of compliance with regulations; and - Utilising external specialist advice and assurance, when appropriate. Regulatory risk is monitored and scenario tests are performed to understand the potential impacts of adverse political, regulatory or legal changes, along with consideration of actions that may be taken to minimise the impact, should they arise.		The jurisdictions which Chesnara operates in are currently subject to significant change arising from political, regulatory and legal change. These may either be localised or may apply more widely, following from EU-based regulation and law, or the potential unwinding of this following the UK's decision to leave the EU. Chesnara has not been directly impacted by the effects of the end of the Brexit transition period given its existing group Structure, though the main unknown is regarding group Regulatory Supervision. The group has considered any restructuring which could be required to align to changes in the requirements of cross border regulatory supervision. In extremis, Chesnara could consider the re-domiciling of subsidiaries or legal restructure of the business, should this result in a more commercially acceptable business model in a changed operating environment. In addition, there are a number of potential secondary impacts such as economic implications, and the effect of any regulatory divergence as the PRA progresses SII-equivalent regulation for the UK businesses. Chesnara will monitor the consultation and discussions arising under EIOPA's Solvency II Review, and in the context of Brexit and the UK's ultimate position regarding SII equivalence.

PR3 - ACQUISITION RISK
DESCRIPTION	The risk of failure to source acquisitions that meet Chesnara's criteria or the execution of acquisitions with subsequent unexpected financial losses or value reduction.
RISK APPETITE	Chesnara has a patient approach to acquisition and generally expects acquisitions to enhance EcV and expected cash generation in the medium term (net of external financing), though each opportunity will be assessed on its own merits.
POTENTIAL IMPACT	The acquisition element of Chesnara's growth strategy is dependent on the availability of attractive future acquisition opportunities. Hence, the business is exposed to the risk of a reduction in the availability of suitable acquisition opportunities within Chesnara's current target markets, for example arising as a result of a change in competition in the consolidation market or from regulatory change influencing the extent of life company strategic restructuring. Through the execution of acquisitions, Chesnara is also exposed to the risk of erosion of value or financial losses arising from risks inherent within businesses or funds acquired which are not adequately priced for or mitigated as part of the transaction.
KEY CONTROLS		RECENT CHANGE / OUTLOOK
Chesnara's financial strength, strong relationships and reputation as a "safe hands acquirer" via regular contact with regulators, banks and target companies enables the company to adopt a patient and risk-based approach to assessing acquisition opportunities. Operating in multi-territories provides some diversification against the risk of changing market circumstances in one of the territories. Consideration of additional territories within Western-Europe remains on the agenda, if the circumstances of entry meet Chesnara's stated criteria. Chesnara seeks to limit any potential unexpected adverse impacts of acquisitions by: - Applying a structured board approved risk-based Acquisition Policy including CRO involvement in the due diligence process and deal refinement processes; - Having a management team with significant and proven experience in mergers and acquisitions; and - Adopting a cautious risk appetite and pricing approach.		Chesnara has completed a portfolio acquisition in the Netherlands during 2020 and has agreed to complete another during the first half of 2021, also in the Netherlands, whilst maintaining the established disciplines within the Acquisition Policy.

PR4 - DEMOGRAPHIC EXPERIENCE RISK
DESCRIPTION	Risk of adverse demographic experience compared with assumptions.
RISK APPETITE	The group accepts this risk but restricts its exposure, to the extent possible, through the use of reinsurance and other controls. Early warning trigger monitoring is in place to track any increase or decrease in the risk exposure beyond a set level, with action taken to address any impact as necessary.
POTENTIAL IMPACT	In the event that demographic experience (rates of mortality, morbidity, persistency etc.) varies from the assumptions underlying product pricing and subsequent reserving, more or less profit will accrue to the group. The effect of recognising any changes in future demographic assumptions at a point in time would be to crystallise any expected future gain or loss on the balance sheet. If mortality or morbidity experience is higher than that assumed in pricing contracts (I.e. more death and sickness claims are made than expected), this will typically result in less profit accruing to the group. If persistency is significantly lower than that assumed in product pricing and subsequent reserving, this will typically lead to reduced group profitability in the medium to long-term, as a result of a reduction in future income arising from charges on those products. The effects of this could be more severe in the case of a one-off event resulting in multiple withdrawals over a short period of time (a "mass lapse" event).
KEY CONTROLS		RECENT CHANGE / OUTLOOK
Chesnara performs close monitoring of persistency levels across all groups of business to support best estimate assumptions and identify trends. There is also partial risk diversification in that the group has a portfolio of annuity contracts where the benefits cease on death. Chesnara seeks to limit the impacts of adverse demographic experience by: - Aiming to deliver good customer service and fair customer outcomes; - Having effective underwriting techniques and reinsurance programmes, including the application of "Mass Lapse reinsurance", where appropriate; - Carrying out regular investigations, and industry analysis, to support best estimate assumptions and identify trends; - Active investment management to ensure competitive policyholder investment funds; and - Maintaining good relationships with brokers, which is independently measured via yearly external surveys that considers brokers attitude towards different insurers.		New legislation introduced at the start of 2020, and enhanced at the start of 2021, made it easier for customers to transfer insurance policies in Sweden. Even before the legislation passed, this resulted in higher transfer activity in the market, particularly driven by brokers. Movestic adjusted its future transfer assumptions to reflect an expectation of increased transfers out. Covid-19 increased the number of deaths arising in 2020 and this will continue into 2021 and potential beyond. The effect of this is expected to be more pronounced in older lives rather than in the typical ages of the assured lives in the Chesnara books. Chesnara does not expect a material impact on its mortality experience in the long-term, and has not revised any 2020-year end valuation assumptions to reflect any material increase in mortality costs. Any negative impacts regarding term claims would be partially offset by an opposite impact on annuities.

PR5 - EXPENSE RISK
DESCRIPTION	Risk of expense overruns and unsustainable unit cost growth.
RISK APPETITE	The group aims to minimise its exposure to this risk, to the extent possible, but acknowledges that it may need to accept some risk as a result of carrying out business.
POTENTIAL IMPACT	The group is exposed to expenses being higher than expected as a result of one-off increases in the underlying cost of performing key functions, or through higher inflation of variable expenses. A key underlying source of potential increases in regular expense is the additional regulatory expectations on the sector. For the closed funds, the group is exposed to the impact on profitability of fixed and semi-fixed expenses, in conjunction with a diminishing policy base. For the companies open to new businesses, the group is exposed to the impact of expense levels varying adversely from those assumed in product pricing. Similar, for acquisitions, there is a risk that the assumed costs of running the acquired business allowed for in pricing are not achieved in practice, or any assumed cost synergies with existing businesses are not achieved.
KEY CONTROLS		RECENT CHANGE / OUTLOOK
For all subsidiaries, the group maintains a regime of budgetary control. - Movestic and Scildon assume growth through new business such that the general unit cost trend is positive; - The Waard Group pursues a low cost-base strategy using a designated service company. The cost base is supported by service income from third party customers; - Countrywide Assured pursues a strategy of outsourcing functions with charging structures such that the policy administration cost is more aligned to the book' s run off profile; and - With an increased current level of operational and strategic change within the business, a Policy of strict Project Budget Accounting discipline is being upheld by the group for all material projects.		Chesnara has an ongoing expense management programme and various strategic projects aimed at controlling expenses. Recent examples include the Fund Manager Rationalisation project in the UK and the IT transformation project within Scildon. Completion of two recent portfolio acquisitions within the Waard Group provides support towards ongoing fixed costs. As governments intervene to stabilise their economies in response to Covid-19, there is potential to shift towards high inflation, once social distancing measures are relaxed and the economy recovers. Higher inflation would increase Chesnara's expected longer-term cost base.

PR6 - OPERATIONAL RISK
DESCRIPTION	Significant operational failure/business continuity event.
RISK APPETITE	The group aims to minimise its exposure to this risk, to the extent possible, but acknowledges that it may need to accept some risk as a result of carrying out business.
POTENTIAL IMPACT	The group and its subsidiaries are exposed to operational risks which arise through daily activities and running of the business. Operational risks may, for example, arise due to technical or human errors, failed internal processes, insufficient personnel resources or fraud caused by internal or external persons. As a result the group may suffer financial losses, poor customer outcomes, reputational damage, regulatory intervention or business plan failure. Part of the group's operating model is to outsource support activities to specialist service providers. Consequently, a significant element of the operational risk arises within its outsourced providers.
KEY CONTROLS		RECENT CHANGE / OUTLOOK
The group perceives operational risk as an inherent part of the day-to-day running of the business and understands that it can't be completely eliminated. However, the Company's objective is to always control or mitigate operational risks, and to minimise the exposure when it's possible to do so in a convenient and cost effective way. Chesnara seeks to reduce the impact and likelihood of operational risk by: - Monitoring of key performance indicators and comprehensive management information flows; - Effective governance of outsourced service providers including a regular financial assessment. Under the terms of the contractual arrangements the group may impose penalties and/or exercise step-in rights in the event of specified adverse circumstances; - Regular testing of business continuity plans; - Regular staff training and development; - Employee performance management frameworks; - Promoting the sharing of knowledge and expertise; and - Complementing internal expertise with established relationships with external specialist partners.		All parts of the business continue to strengthen aspects of operational resilience as part of their annual business plans, and have documented robust plans for operational resilience covering: - Alternate physical working locations; - Data back-ups (with suitable network isolation); - Alternate systems/applications; - Crisis Management Team Terms of Reference; and - Crisis communication strategies. In response to Covid-19, Chesnara, its subsidiaries and outsourced service providers have all adapted to remote working conditions, utilising communication technology as required and implementation of additional controls. There is potential for Covid-19 to influence the operating environment on a long term basis and drive changes in competitor, regulator or counterparty (e.g. broker) behaviours. Scildon is part way through an IT transformation project in order to deliver improved functionality and operational efficiencies. With the scale of the transformation, this potentially increases Scildon's operational risk during and immediately after delivery of the project. It also has potential to result in project cost overruns, should the delivery take longer than planned. Suitable controls are in place to monitor and manage these risks, as appropriate.

PR7 - IT / DATA SECURITY & CYBER RISK
DESCRIPTION	Risk of IT/ data security failures or impacts of malicious cyber-crime (including ransomware) on continued operational stability.
RISK APPETITE	The group aims to minimise its exposure to this risk, to the extent possible, but acknowledges that it may need to accept some risk as a result of carrying out business.
POTENTIAL IMPACT	Cyber risk is a growing risk affecting all companies, particularly those who are custodians of customer data. The most pertinent risk exposure relates to information security (i.e. protecting business sensitive and personal data) and can arise from failure of internal processes and standards, but increasingly companies are becoming exposed to potential malicious cyber-attacks, organisation specific malware designed to exploit vulnerabilities, phishing attacks etc. The extent of Chesnara's exposure to such threats also includes third party service providers. The potential impact of this risk includes financial losses, inability to perform critical functions, disruption to policyholder services, loss of sensitive data and corresponding reputational damage or fines.
KEY CONTROLS		RECENT CHANGE / OUTLOOK
Chesnara seeks to limit the exposure and potential impacts from IT/data security failures or cyber-crime by: - Embedding the Information Security Policy in all key operations and development processes; - Seeking ongoing specialist external advice, modifications to IT infrastructure and updates as appropriate; - Delivering regular staff training and attestation to the information security policy; - Regular employee phishing tests and awareness sessions; - Ensuring the Board encompasses Directors with information technology and security knowledge; - Conducting penetration and vulnerability testing, including third party service providers; - Executive committee and Board level responsibility for the risk, included dedicated IT security committees with Exec membership. - Having established Chesnara and supplier business continuity plans which are regularly monitored and tested; - Ensuring Chesnara's outsourced IT service provider maintains relevant information security standard accreditation (ISO27001); and - Monitoring network and system security including; firewall protection, antivirus and software updates. In addition, a designated Steering Group provides oversight of the IT estate and Information Security environment including: - Changes and developments to the IT estate; - Performance and security monitoring; - Oversight of Information Security incident management; - Information Security awareness and training; - Development of Business Continuity plans and testing; and - Overseeing compliance with the Information Security Policy.		Chesnara continues to invest in the incremental strengthening of its operational resilience and has introduced additional automated controls to protect our data and infrastructure with regular monitoring to detect and prevent counter cyber-attacks. No reports of material data breaches. The move to remote working, as a result of Covid-19, has the potential to increase cyber risk for businesses and therefore various steps have been taken to enhance security, processes and controls to protect against this.

PR8 - NEW BUSINESS RISK
DESCRIPTION	Adverse new business performance compared with projected value.
RISK APPETITE	Chesnara does not wish to write new business that does not generate positive new business value (on a commercial basis) over the business planning horizon.
POTENTIAL IMPACT	If new business performance is significantly lower than the projected value, this will typically lead to reduced value growth in the medium to long-term. A sustained low level performance may lead to insufficient new business profits to justify remaining open to new business.
KEY CONTROLS		RECENT CHANGE / OUTLOOK
Chesnara seeks to limit any potential unexpected adverse impacts of acquisitions by: - Monitoring quarterly new business profit performance; - Investing in brand and marketing, - Maintaining good relationships with brokers, - Offering attractive products that suit customer needs, - Monitoring market position and competitor pricing, adjusting as appropriate, - Maintaining appropriate customer service levels and experience; and - Monitoring market and pricing movements		Covid-19 caused some volatility in new business volumes across markets as well as in individual business' volumes during 2020 as a result of restrictions on face to face sales meetings and customer demand. Competition has increased in the Swedish market resulting in lower transfers in and higher transfers out. This activity has been further enabled to a degree by new legislation in Sweden. There is potential for the economic impacts of Covid-19, such as lower interest rates, to adversely affect new business profitability too and this is being closely monitored.

DIRECTORS' REsponsibilities STATEMENT

With regards to this preliminary announcement, the Directors confirm to the best of their knowledge that:

- The financial statements have been prepared in accordance with International Reporting Financial Standards as adopted by the EU and give a true and fair view of the assets, liabilities, financial position and profit for the Company and the undertakings included in the consolidation as a whole;

- Pursuant to Disclosure and Transparency Rules Chapter 4, the Chairman's Statement and Management Report include a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties faced by the business.

On behalf of the Board

Luke Savage John Deane

Chairman Chief Executive Officer

29 March 2021 29 March 2021

INDEPENDENT AUDITOR'S REPORT TO THE SHAREHOLDERS OF CHESNARA PLC ON THE PRELIMINARY ANNOUNCEMENT OF CHESNARA PLC

As the independent auditor of Chesnara plc we are required by UK Listing Rule LR 9.7A.1(2)R to agree to the publication of Chesnara plc's preliminary announcement statement of annual results for the period ended 31 December 2020.

The preliminary statement of annual results for the period ended 31 December 2020 includes disclosures required by the Listing Rules and any additional content such as highlights, Chairman's Statement, component business review a consolidated statement of comprehensive income, balance sheet and statement of cash flows.

The directors of Chesnara plc are responsible for the preparation, presentation and publication of the preliminary statement of annual results in accordance with the UK Listing Rules.

We are responsible for agreeing to the publication of the preliminary statement of annual results, having regard to the Financial Reporting Council's Bulletin "The Auditor's Association with Preliminary Announcements made in accordance with UK Listing Rules".

Status of our audit of the financial statements

Our audit of the annual financial statements of Chesnara plc is complete and we signed our auditor's report on 29^th March 2020. Our auditor's report is not modified and contains no emphasis of matter paragraph.

Our audit report on the full financial statements sets out the following key audit matters which had the greatest effect on our overall audit strategy; the allocation of resources in our audit; and directing the efforts of the engagement team, together with how our audit responded to those key audit matters and the key observations arising from our work:

Valuation of insurance liabilities

Key audit matter description

Across the group, there are two matters relating to insurance liabilities which we have identified as key audit matters:

Valuation of Save & Prosper Cost of Guarantees: The matter relating to insurance contract liabilities, which we have identified as a key audit matter, is the valuation of Save & Prosper ("S&P") Cost of Guarantees ("CoG"). The key audit matter identified has been classified as a fraud risk due to the complexity in the valuation of this liability.

The assessment and calculation of the CoG reserves for policies written by S&P is complex and can lead to material impacts on the valuation of the CoG. These reserves are calculated using a stochastic model based on a variety of possible economic scenarios, which are sensitive to the inherent volatility in bond and equity markets, which are key inputs into the model.

Historically, the residual cost to shareholders arising from the CoG has fluctuated as a result of movements in bond yields and equity markets. The value of the CoG was £18.8m at 31 December 2020 (31 December 2019: £17.3m). This increase was primarily due to lower than expected asset returns over 2020, which decreased policyholder asset shares, and therefore increased the residual cost to shareholders. The value is determined by management's third party actuarial expert, and management compare this valuation against an in-house derived estimate using an approximation model to validate its reasonableness.

See note 3(a) to the financial statements for management's consideration of this critical accounting judgement and key sources of estimation and uncertainty, and note 30 for disclosure of the calculation methodology and the charge to income for the current and prior year.

Adequacy of Scildon reserves: Scildon measures the majority of its insurance contract liabilities using historical market rates of interest along with a number of other parameters and assumptions.

IFRS 4 requires an insurer, at the end of each reporting period, to assess whether its recognised insurance liabilities are adequate, using current estimates of future cash flows (the "Liability adequacy test", or "LAT"). Given Scildon's accounting policy makes use of historical market interest rates, there is a heightened risk that its reserves under IFRS 4 are not adequate.

We therefore view the initial parameter setting process and liability adequacy test as key audit matters, specifically in relation to the mortality, lapse and expense assumptions which feed into the test, given that the insurance liabilities are most sensitive to these factors.

During the year, a fall in interest rates due to the impact of COVID-19 on the global economy, has been a significant driver in the increase of the Best Estimate Liabilities ("BEL") used within the LAT. The test performed over the adequacy of the Scildon reserves, by management, identified a deficit of £10.0m between the BEL and the IFRS reserves, thus resulting in an additional reserve being created. The BEL are also impacted by expected cost savings and new business levels included within the expense assumptions, relating to a new IT system implementation project within the Scildon component.

At such a point that such assumptions are not considered to be achievable, to the extent that the LAT assessment continues to bite, there will be a direct impact on the level of required IFRS reserves. This is due to the IFRS reserves now being aligned to the BEL. The relevant assumptions, and the impact on Scildon reserving is documented within note 30 to the financial statements.

We have also deemed there to be a risk of fraud, due to the inherent risk of management overriding internal controls around the setting of the parameters used to calculate the reserves at inception.

The accounting policy adopted by the group is documented within note 2h to the financial statements.

How the scope of our audit responded to the key audit matter

In respect of the valuation of Save & Prosper Cost of Guarantees:

· we gained an understanding of the internal controls around the reserving process, with specific reference to the S&P CoG;

· we performed procedures to assess the objectivity, competence, capabilities and independence of management's actuarial expert;

· we challenged the key movements in the S&P CoG reserve over the period, as well as any changes in the approach taken by management's actuarial expert in determining the reserve. We tested the movements in the CoG analysis of change by considering market and policy value movements in the period between 31 December 2019 and 31 December 2020;

· we challenged management's actuarial expert on the testing performed on the Economic Scenario Generator ("ESG") model output used as an input to the CoG model. Together with our actuarial specialists we assessed the economic inputs to the model for reasonableness;

· we tested management's estimation model at each quarter-end since the 31 December 2019 audited position. We independently sourced and reconciled inputs to the model for each of the periods and assessed whether the result produced by management using the estimation model was within an acceptable tolerance; and

· where manual adjustments have been made by management we have challenged the derivation and purpose of such adjustments with involvement from our actuarial specialists by evaluating supporting documents and calculations.

In respect of the adequacy of Scildon reserves:

· we gained an understanding of the key controls around the setting of the assumptions feeding into the LAT;

· performed analytics on policy cash flow data, in order to identify outliers and movements compared to the prior period;

· for a sample of policies, we recalculated the reserve at a policy level, using our independent replication model, and compared the results to those produced by management;

· with the involvement of actuarial specialists, we challenged the mortality, lapse and expense assumptions which feed into the test, by evaluating experience, supporting documents and calculations. We have also challenged the interest rate assumptions, given they are a significant driver of the LAT deficit in the current period, by evaluating relevant supporting documents and calculations; and

· assessed the expected cost savings and new business levels included within the expense assumptions, relating to a new IT system implementation project. This included evaluating information provided by Group and Scildon management including the associated Business Plans, and through direct challenge of management's actuarial expert and the appointed actuary.

Key observations

Based on the audit procedures performed, we consider that the S&P Cost of Guarantees reserve is appropriate.

We also concluded that the initial parameter setting process and Liability Adequacy Test performed by management were reasonable, supporting the adequacy of Scildon's insurance contract liabilities

Valuation of the Scildon Acquired Value in Force ("AVIF") intangible asset

Key audit matter description

Following the acquisition of Scildon, Chesnara recorded an Acquired Value In Force (AVIF) intangible asset of £66.0m on the group balance sheet, reflecting the capitalised future profit in the Scildon business. The carrying value of the intangible asset at the balance sheet date was £21.6m (2019; £56.0m)

Management is required to assess the impairment of the Scildon AVIF intangible balance at least annually, in line with the relevant requirements of IAS 36 Impairment of assets and IFRS 4 Insurance Contracts, and this process involves significant judgement.

In response to the performance of Scildon, impacted by the impact of COVID-19 on investment returns, management performed an additional impairment test at 30 June 2020, resulting in an £11.6m impairment. A further impairment of £15.0m has been recorded in the remaining period to 31 December 2020 - see note 3(a) to the financial statements for management's considerations of the AVIF impairment assessment.

The AVIF is assessed for impairment against the discounted value in force ("VIF") arising on the underlying portfolio. Our key audit matter is pinpointed to the discount rate used by management to discount the future policyholder cash flows underpinning the VIF.

Due to the highly judgemental nature of this balance, we identified manipulation of this assessment as an area of potential fraud.

See note 3(a) to the financial statements for management's consideration of significant accounting judgements. The accounting policy adopted by the group and the acquired in-force business intangible are disclosed within the financial statements within note 2(o) and note 19 respectively.

How the scope of our audit responded to the key audit matter

In respect of the Scildon AVIF we performed the following procedures:

· we gained an understanding of the internal controls in place to monitor and mitigate the risk of inappropriate management adjustments to the key assumptions;

· we have constructed a range of independent discount rates based on alternative industry data in order to challenge the rate applied by management;

· with the involvement of actuarial specialists we have challenged the Scildon cashflows as used within management's impairment assessment, assessing whether the parameters and judgements used are consistent with those used within the modelling of the Scildon BEL. In particular our challenge focussed around the investment return assumptions driving the reduction in expected future cashflows; and

· we have assessed the disclosure of the aforementioned impairment within note 3(a) to the financial statements.

Key observations

Based on the audit procedures performed, we consider the discount rate used in the base VIF, which is used to assess the impairment of the Scildon AVIF intangible balance, to be appropriate.

Valuation of the Movestic Deferred Acquisition Costs ("DAC") intangible asset

Key audit matter description

Acquisition costs relating to investment contracts comprise directly attributable incremental acquisition costs, which vary with, and are related to, securing new contracts, and are recognised as an asset to the extent that they represent the contractual right to beneﬁt from the provision of investment management services. The asset is presented as a deferred acquisition cost asset, and is amortised over the expected term of the contract, as the fees relating to the provision of the services are recognised.

There are a number of key judgement areas within this balance, both in terms of the amortisation period selected for the DAC and also in management's assessment of the asset for impairment. The impairment assessment is most sensitive to mortality, transfers, surrenders, and expenses

As at year end 2020, the DAC balance held on the group balance sheet totalled £69.1m (2019; £63.9m), of which £58.5m (2019; £53.3m) relate to the Movestic component. Due to the significance of the balance and the uncertainty brought about by regulatory changes in Sweden driving an increase in transfers out, we identified a key audit matter related to the Movestic DAC. Through the annual impairment test of the DAC, management identified and reported an impairment of £1.0m relating specifically to single premium occupational pension policies written between 2012 and 2017. See note 3(b) to the financial statements for further details.

Due to the potential for management to introduce inappropriate bias to judgements made in the impairment assessment, we have determined that there is a risk of misstatement due to fraud.

The accounting policy relating to deferred acquisition costs, and details of the balance and movement have been disclosed within the financial statements within note 2 (h) iii and note 18 respectively.

How the scope of our audit responded to the key audit matter

In respect of the Movestic DAC:

· we gained an understanding of the internal controls in place around the setting of the amortisation profile, and the impairment test;

· we have assessed the rationale for the expense ledger balances capitalised, and performed tests of detail around contracts to assess the valuation of the DAC;

· we have agreed the DAC sub-ledger to the General Ledger, and created an expectation of the DAC balances, also performing a subsequent investigation into any differences;

· with the involvement of actuarial specialists we have challenged the amortisation profile adopted by management, by constructing a range of independent amortisation profiles based on alternative data; and

· with the involvement of actuarial specialists we have challenged the reasonableness of managements assumptions within the impairment test, including; mortality, transfers, surrenders, and expenses. We have challenged such assumptions by evaluating experience, supporting documents and calculations.

Key observations

Through the procedures performed, we consider the assumptions in determining the DAC valuation to be appropriate.

Implementation of Countrywide Assured plc Fund Manager Rationalisation ("FMR")

Key audit matter description

Countrywide Assured plc used various fund managers to manage its day-to-day fund management requirements. During 2019 the company decided to rationalise to a single fund manager. The changes in fund manager and certain aspects of investment administration services completed in September 2020 with processes and controls embedding over the course of Q4 2020 / Q1 2021. As part of the change in fund manager, certain aspects of the fund structure were also simplified.

In addition to the operational changes required as a result of changing fund manager and investment administration services, changes to the financial reporting processes and controls over investment accounting were also required. These included changes to processes and controls over the preparation of accounting entries to the general ledger in response to the changes in fund structure and reporting received from the single fund manager.

The impacted balances within Countrywide Assured plc, as at 31 December 2020 were as follows:

• Equity securities - £4.0m

• Holding in collective investment schemes - £2,073.3m

• Debt securities - £208.3m

These are included within the consolidated balances and disclosed further in note 24 to the financial statements and the operational changes are discussed further within the Strategic report on page 34.

How the scope of our audit responded to the key audit matter

We obtained an understanding of relevant controls over the valuation and existence of financial assets impacted by the FMR related changes to processes.

In respect of the FMR:

· we revisited our risk assessment considerations in response to the changes;

· we independently obtained custodian confirmations for 100% of the equity securities, holdings in collective investment schemes and debt securities;

· we assessed whether the investment records agree with the holdings of the custodian by inspecting the reconciliations;

· we performed detailed testing on a sample of valuations to independent pricing sources;

· we performed detailed testing on a sample of realised gains and losses impacting on net investment return;

· we assessed whether the trial balances agree to the underlying investment records held by the company by inspecting the reconciliations; and

· we assessed the competence of the fund manager as a service organisation, including evaluating the service auditor report that provides details of the control environment for the services provided to Countrywide Assured plc.

Key observations

Based on the audit procedures performed, we consider that the investment related balances are appropriate.

These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we did not provide a separate opinion on these matters.

Procedures performed to agree to the preliminary announcement of annual results

In order to agree to the publication of the preliminary announcement of annual results of Chesnara plc we carried out the following procedures:

(a) checked that the figures in the preliminary announcement covering the full year have been accurately extracted from the audited or draft financial statements and reflect the presentation to be adopted in the audited financial statements;

(b) considered whether the information (including the management commentary) is consistent with other expected contents of the annual report;

(d) considered whether the preliminary announcement includes a statement by directors as required by section 435 of CA 2006 and whether the preliminary announcement includes the minimum information required by UKLA Listing Rule 9.7A.1;

(e) where the preliminary announcement includes alternative performance measures ("APMs"), considered whether appropriate prominence is given to statutory financial information and whether:

· the use, relevance and reliability of APMs has been explained;

· the APMs used have been clearly defined, and have been given meaningful labels reflecting their content and basis of calculation;

· the APMs have been reconciled to the most directly reconcilable line item, subtotal or total presented in the financial statements of the corresponding period; and

· comparatives have been included, and where the basis of calculation has changed over time this is explained.

(f) read the management commentary, any other narrative disclosures and any final interim period figures and considered whether they are fair, balanced and understandable.

Use of our report

Our liability for this report, and for our full audit report on the financial statements is to the company's members as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for our audit report or this report, or for the opinions we have formed.

Stephen Williams FCA (Senior statutory auditor)

For and on behalf of Deloitte LLP

Statutory Auditor

Edinburgh, United Kingdom

29 March 2021

IFRS FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME


Year ended 31 December	2020	2019
	£000	£000
Insurance premium revenue	293,365	268,331
Insurance premium ceded to reinsurers	(42,907)	(44,215)
Net insurance premium revenue	250,458	224,116
Fee and commission income	92,698	92,895
Net investment return	254,568	1,090,640
Other operating income	40,181	37,838
Total revenue net of investment return	637,905	1,445,489
Insurance contract claims and benefits incurred
Claims and benefits paid to insurance contract holders	(420,031)	(445,265)
Net decrease/(increase) in insurance contract provisions	6,869	(176,541)
Reinsurers' share of claims and benefits	48,178	38,064
Net insurance contract claims and benefits	(364,984)	(583,742)
Change in investment contract liabilities	(110,878)	(664,463)
Reinsurers' share of investment contract liabilities	1,340	5,424
Net change in investment contract liabilities	(109,538)	(659,039)
Fees, commission and other acquisition costs	(23,625)	(21,750)
Administrative expenses	(70,952)	(67,811)
Other operating expenses
Charge for impairment of acquired value of in-force business	(27,623)	-
Charge for amortisation of acquired value of in-force business	(9,562)	(10,445)
Charge for amortisation of acquired value of customer relationships	(63)	(70)
Other	(5,062)	(5,635)
Total expenses net of change in insurance contract provisions and investment contract liabilities	(611,409)	(1,348,492)
Total income less expenses	26,496	96,997
Share of profit of associate	-	1,072
Post completion gain on portfolio acquisition	388	788
Financing costs	(2,299)	(2,751)
Profit before income taxes	24,585	96,106
Income tax expense	(3,394)	(16,964)
Profit for the year	21,191	79,142
Items that will not be reclassified to profit and loss:
Foreign exchange translation differences arising on the revaluation of foreign operations	22,618	(18,684)
Revaluation of land and building	(464)	144
Other comprehensive income for the year, net of tax	22,154	(18,540)
Total comprehensive income for the year	43,345	60,602
Basic earnings per share (based on profit for the year)	14.12p	52.77p
Diluted earnings per share (based on profit for the year)	14.03p	52.47p

CONSOLIDATED BALANCE SHEET


31 December	2020	2019
	£000	£000
Assets
Intangible assets
Deferred acquisition costs	69,051	63,885
Acquired value of in-force business	61,655	90,823
Acquired value of customer relationships	409	431
Goodwill	-	43
Software assets	8,508	5,988
Property and equipment	8,718	7,043
Investment in associates	-	6,481
Investment properties	1,124	1,020
Reinsurers' share of insurance contract provisions	197,068	188,452
Amounts deposited with reinsurers	37,026	37,330
Financial assets
Equity securities at fair value through income	10,180	432,645
Holdings in collective investment schemes at fair value through income	6,714,303	5,524,504
Debt securities at fair value through income	1,098,559	1,458,917
Policyholders' funds held by the group	332,117	299,375
Mortgage loan portfolio	344,918	32,187
Derivative financial instruments	830	2,076
Total financial assets	8,500,907	7,749,704
Insurance and other receivables	45,048	53,936
Prepayments	13,349	8,353
Reinsurers' share of accrued policyholder claims	12,716	14,132
Income taxes	4,566	5,394
Cash and cash equivalents	105,351	107,956
Total assets	9,065,496	8,340,971
Liabilities
Insurance contract provisions	3,958,037	3,610,415
Other provisions	613	521
Financial liabilities
Investment contracts at fair value through income	4,035,040	3,694,316
Liabilities relating to policyholders' funds held by the group	332,117	299,375
Lease contract liabilities	2,844	2,527
Borrowings	66,955	88,163
Derivative financial instruments	3	547
Total financial liabilities	4,436,959	4,084,928
Deferred tax liabilities	19,086	22,500
Reinsurance payables	2,863	3,207
Payables related to direct insurance and investment contracts	96,337	87,136
Deferred income	3,355	3,907
Income taxes	9,427	9,964
Other payables	50,107	41,728
Bank overdrafts	1,645	1,174
Total liabilities	8,578,429	7,865,480
Net assets	487,067	475,491
Shareholders' equity
Share capital	43,768	43,767
Share premium	142,085	142,053
Other reserves	30,772	8,618
Retained earnings	270,442	281,053
Total shareholders' equity	487,067	475,491

Approved by the board of directors and authorised for issue on 29 March 2021 and signed on its behalf by:

Luke Savage John Deane

Chairman Chief Executive Officer

Company Number: 04947166

CONSOLIDATED STATEMENT OF CASH FLOWS


Year ended 31 December	2020	2019
	£000	£000
Profit for the year	21,191	79,142
Adjustments for:
Depreciation of property and equipment	637	538
Amortisation of deferred acquisition costs	12,845	11,547
Impairment of acquired value of in-force business	27,623	-
Amortisation of acquired value of in-force business	9,562	10,445
Amortisation of acquired value of customer relationships	63	70
Amortisation of software assets	1,292	1,442
Depreciation on right of use assets	757	704
Interest on lease liabilities	55	63
Share based payment	492	593
Tax paid	3,128	16,494
Interest receivable	(2,987)	(1,596)
Dividends receivable	(1,929)	(2,250)
Interest expense	2,244	2,688
Impairment losses	1,019	-
Fair value gains on financial assets	(138,119)	(201,937)
Share on profit of associate	-	(1,072)
Increase in intangible assets related to insurance and investment contracts	(15,316)	(14,058)
Interest received	5,335	2,011
Dividends received	3,241	2,942
Changes in operating assets and liabilities:
Increase in financial assets	(150,789)	(799,774)
(Increase)/decrease in reinsurers' share of insurance contract provisions	(6,981)	23,809
Decrease/(increase) in amounts deposited with reinsurers	304	(2,981)
Decrease in insurance and other receivables	6,763	7,640
Increase in prepayments	(4,227)	(1,474)
Increase in insurance contract provisions	233,055	145,907
Increase in investment contract liabilities	36,539	685,502
Increase/(decrease) in provisions	39	(307)
Decrease in reinsurance payables	(523)	(6,912)
Increase/(decrease) in payables related to direct insurance and investment contracts	7,451	(2,472)
Increase/(decrease) in other payables	6,188	(3,119)
Net cash generated/(utilised by) from operations	58,952	(46,415)
Income tax paid	(6,456)	(878)
Net cash generated/(utilised by) from operating activities	52,496	(47,293)
Cash flows from investing activities
Development of software	2,734	(3,097)
Purchases of property and equipment	(857)	(98)
Net cash generated/(utilised) by investing activities	1,877	(3,195)
Cash flows from financing activities
Proceeds from issue of share capital	1	-
Proceeds from the issue of share premium	32	-
Repayments of borrowings	(26,094)	(18,465)
Repayment of lease liabilities	(695)	(646)
Dividends paid	(32,294)	(31,316)
Interest paid	(2,295)	(2,570)
Net cash utilised by from financing activities	(61,345)	(52,997)
Net decrease in net cash and cash equivalents	(6,972)	(103,485)
Net cash and cash equivalents at beginning of year	106,782	214,254
Effect of exchange rate changes on net cash and cash equivalents	3,896	(3,987)
Net cash and cash equivalents at end of the year	103,706	106,782

Note: Net cash and cash equivalents includes overdrafts.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY


Year ended 31 December 2020
	Share capital	Share premium	Other reserves	Treasury shares	Retained earnings	Total
	£000	£000	£000	£000	£000	£000
Equity shareholders' funds at 1 January 2020	43,767	142,053	8,618	-	281,053	475,491
Profit for the year	-	-	-	-	21,191	21,191
Issue of share capital	1	-	-	-	-	1
Issue of share premium	-	32	-	-	-	32
Dividends paid	-	-	-	-	(32,294)	(32,294)
Foreign exchange translation differences	-	-	22,618	-	-	22,618
Revaluation of land and buildings	-	-	(464)	-	-	(464)
Share based payment	-	-	-	-	492	492
Equity shareholders' funds at 31 December 2020	43,768	142,085	30,772	-	270,442	487,067


Year ended 31 December 2019
	Share capital	Share premium	Other reserves	Treasury shares	Retained earnings	Total
	£000	£000	£000	£000	£000	£000
Equity shareholders' funds at 1 January 2019	43,767	142,053	27,158	-	232,638	445,616
Profit for the year	-	-	-	-	79,142	79,142
Dividends paid	-	-	-	-	(31,320)	(31,320)
Foreign exchange translation differences	-	-	(18,684)	-	-	(18,684)
Revaluation of land and buildings	-	-	144	-	-	144
Share based payment	-	-	-	-	593	593
Equity shareholders' funds at 31 December 2019	43,767	142,053	8,618	-	281,053	475,491

NOTES TO THE CONSOLIDATED IFRS FINANCIAL STATEMENTS

1. Basis of presentation

The preliminary announcement is based on the group's financial statements for the year ended 31 December 2020, which are prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.

2. Significant accounting policies

The accounting policies applied by the group in determining the IFRS basis results in this report are the same as those previously applied in the group's consolidated financial statements.

3. Operating segments

The group considers that it has no product or distribution-based business segments. It reports segmental information on the same basis as reported internally to the chief operating decision maker, which is the board of directors of Chesnara plc.

The segments of the group as at 31 December 2020 comprise:

CA: This segment represents the group's UK life insurance and pensions run-off portfolio and comprises the original business of Countrywide Assured plc, the group's principal UK operating subsidiary, and of City of Westminster Assurance Company Limited which was acquired in 2005 and the long-term business of which was transferred to Countrywide Assured plc (CA) during 2006. This segment also contains Save & Prosper Insurance Limited which was acquired on 20 December 2010 and its then subsidiary Save & Prosper Pensions Limited. The S&P business was transferred to CA during 2011. This segment also contains the business of Protection Life, which was purchased on 28 November 2013 and the business of which was transferred to CA effective from 1 January 2015. CA is responsible for conducting unit-linked and non-linked business, including a with-profits portfolio, which carries significant additional market risk, as described in note 6 'Management of financial risk'.

Movestic: This segment comprises the group's Swedish life and pensions business, Movestic Livförsäkring AB ('Movestic') and its subsidiary and associated companies, which are open to new business and which are responsible for conducting both unit-linked and pensions and savings business and providing some life and health product offerings.

Waard Group : This segment represents the group's closed Dutch life and general insurance business, which was acquired on 19 May 2015 and comprised the three insurance companies Waard Leven N.V., Hollands Welvaren Leven N.V. and Waard Schade N.V., and a servicing company, Waard Verzekering. During 2017, the book of policies held within Hollands Welvaren Leven N.V. was successfully integrated into Waard Leven and consequently Hollands Welvaren Leven N.V. was deregistered on 19 December 2018. The Waard Group's policy base is predominantly made up of term life policies, although also includes unit-linked policies and some non-life policies, covering risks such as occupational disability and unemployment. On 1 October, the Waard Group acquired a small portfolio of c6,000 policies from Monuta insurance, which consists of term and savings policies. On 21 November 2019, the Waard Group completed a deal to acquire a portfolio of term life insurance policies and saving mortgages insurance policies. The completion took place on the 31 August 2020, at which stage Waard Group obtained control.

Scildon: This segment represents the Group's open Dutch life insurance business, which was acquired on 5 April 2017. Scildon's policy base is predominantly made up of individual protection and savings contracts. It is open to new business and sells protection, individual savings and group pension contracts via a broker-led distribution model.

Other group activities: The functions performed by the parent company, Chesnara plc, are defined under the operating segment analysis as Other group activities. Also included therein are consolidation and elimination adjustments.

The accounting policies of the segments are the same as those for the group as a whole. Any transactions between the business segments are on normal commercial terms in normal market conditions. The group evaluates performance of operating segments on the basis of the profit before tax attributable to shareholders of the reporting segments and the group as a whole. There were no changes to the measurement basis for segment profit during the year ended 31 December 2020.

(i) Segmental income statement for the year ended 31 December 2020


	CA (UK)	Movestic (Sweden)	Waard Group (Netherlands)	Scildon (Netherlands )	Other Group Activities (UK)	Total
	£000	£000	£000	£000	£000	£000
Insurance premium revenue	40,653	16,296	12,768	223,648	-	293,365
Insurance premium ceded to reinsurers	(16,650)	(6,674)	(577)	(19,006)	-	(42,907)
Net insurance premium revenue	24,003	9,622	12,191	204,642	-	250,458
Fee and commission income	23,336	20,229	88	49,045	-	92,698
Net investment return	85,717	89,539	5,735	73,367	210	254,568
Other operating income	11,703	28,037	441	-	-	40,181
Segmental revenue, net of investment return	144,759	147,427	18,455	327,054	210	637,905
Net insurance contract claims and benefits incurred	(72,311)	(952)	(10,362)	(281,359)	-	(364,984)
Net change in investment contract liabilities	(18,515)	(91,023)	-	-	-	(109,538)
Fees, commission and other acquisition costs	(350)	(22,918)	(684)	(2,974)	-	(26,926)
Administrative expenses:
Amortisation charge on software assets	-	(1,438)	-	(209)	-	(1,647)
Depreciation charge on property and equipment	-	(124)	(53)	(470)	-	(647)
Other	(17,388)	(12,258)	(3,131)	(27,390)	(8,491)	(68,658)
Operating expenses	(500)	(4,565)	-	-	3	(5,062)
Financing costs	(1)	(1,209)	(2)	-	(1,087)	(2,299)
Profit/(loss) before tax and consolidation adjustments	35,694	12,940	4,223	14,652	(9,365)	58,144
Other operating expenses:
Charge for impairment of acquired value of in-force business	(1,000)	-	-	(26,623)	-	(27,623)
Charge for amortisation of acquired value of in-force business	(2,423)	(2,640)	(720)	(3,779)	-	(9,562)
Charge for amortisation of acquired value of customer relationships	-	(63)	-	-	-	(63)
Fees, commission and other acquisition costs	-	2,126	-	1,175	-	3,301
Segmental income less expenses	32,271	12,363	3,503	(14,575)	(9,365)	24,197
Post completion gain on portfolio acquisition	-	(5)	393	-	-	388
Profit/(loss) before tax	32,271	12,358	3,896	(14,575)	(9,365)	24,585
Income tax (expense)/credit	(6,081)	(235)	(883)	2,301	1,504	(3,394)
Profit/(loss) after tax	26,190	12,123	3,013	(12,274)	(7,861)	21,191

(ii) Segmental balance sheet as at 31 December 2020


	CA (UK)	Movestic (Sweden)	Waard Group (Netherlands)	Scildon (Netherlands)	Other Group Activities (UK)	Total
	£000	£000	£000	£000	£000	£000
Total assets	2,564,764	3,874,967	437,099	2,127,539	64,646	9,069,015
Total liabilities	(2,429,712)	(3,764,907)	(391,590)	(1,954,287)	(41,452)	(8,581,948)
Net assets	135,052	110,060	45,509	173,252	23,194	487,067
Investment in associates	-	-	-	-	-	-
Additions to non-current assets	-	13,028	2,396	3,929	-	19,353

(iii) Segmental income statement for the year ended 31 December 2019


	CA (UK)	Movestic (Sweden)	Waard Group (Netherlands)	Scildon (Netherlands)	Other Group Activities (UK)	Total
	£000	£000	£000	£000	£000	£000
Insurance premium revenue	46,913	18,336	2,071	201,011	-	268,331
Insurance premium ceded to reinsurers	(17,972)	(9,007)	(128)	(17,108)	-	(44,215)
Net insurance premium revenue	28,941	9,329	1,943	183,903	-	224,116
Fee and commission income	25,376	21,291	16	46,212	-	92,895
Net investment return	310,711	563,534	6,838	209,037	520	1,090,640
Other operating income	11,690	26,148	-	-	-	37,838
Segmental revenue, net of investment return	376,718	620,302	8,797	439,152	520	1,445,489
Net insurance contract claims and benefits incurred	(211,479)	(2,848)	(278)	(369,137)	-	(583,742)
Net change in investment contract liabilities	(95,876)	(563,163)	-	-	-	(659,039)
Fees, commission and other acquisition costs	(1,015)	(22,665)	(234)	(2,666)	-	(26,580)
Administrative expenses:
Amortisation charge on software assets	-	(1,405)	-	(206)	-	(1,611)
Depreciation charge on property and equipment	-	(121)	(52)	(464)	-	(637)
Other	(19,775)	(11,673)	(3,326)	(25,086)	(5,703)	(65,563)
Operating expenses	(702)	(4,941)	-	-	8	(5,635)
Financing costs	(1)	(1,384)	(4)	-	(1,362)	(2,751)
Share of profit from associates	-	1,072	-	-	-	1,072
Profit/(loss) before tax and consolidation adjustments	47,870	13,174	4,903	41,593	(6,537)	101,003
Other operating expenses:
Charge for amortisation of acquired value of in-force business	(3,226)	(2,769)	(663)	(3,787)	-	(10,445)
Charge for amortisation of acquired value of customer relationships	-	(70)	-	-	-	(70)
Fees, commission and other acquisition costs	-	2,350	-	2,480	-	4,830
Segmental income less expenses	44,644	12,685	4,240	40,286	(6,537)	95,318
Post completion gain on portfolio acquisition	-	-	788	-	-	788
Profit/(loss) before tax	44,644	12,685	5,028	40,286	(6,537)	96,106
Income tax (expense)/credit	(7,555)	(438)	(1,428)	(9,247)	1,704	(16,964)
Profit/(loss) after tax	37,089	12,247	3,600	31,039	(4,833)	79,142

(iv) Segmental balance sheet as at 31 December 2019


	CA (UK)	Movestic (Sweden)	Waard Group (Netherlands)	Scildon (Netherlands)	Other Group Activities (UK)	Total
	£000	£000	£000	£000	£000	£000
Total assets	2,669,705	3,466,925	148,289	1,977,223	78,829	8,340,971
Total liabilities	(2,532,017)	(3,372,615)	(103,275)	(1,801,519)	(56,054)	(7,865,480)
Net assets	137,688	94,310	45,014	175,704	22,775	475,491
Investment in associates	-	6,481	-	-	-	6,481
Additions to non-current assets	-	13,511	391	4,623	-	18,525

4. Borrowings


Group 31 December
	2020 £000	2019 £000
Bank loan	39,010	52,525
Amount due in relation to financial reinsurance	27,945	35,638
Total	66,955	88,163
Current	43,347	24,024
Non-current	23,608	64,139
Total	66,955	88,163


Company 31 December
	2020 £000	2019 £000
Bank loan	39,010	52,525
Current	15,402	14,849
Non-current	23,608	37,676
Total	39,010	52,525

The bank loan as at 31 December 2020 comprises the following:

- on 3 April 2017 tranche one of a new facility was drawn down, amounting to £40.0m. This facility is unsecured and is repayable in ten six-monthly instalments on the anniversary of the draw down date. The outstanding principal on the loan bears interest at a rate of 2.00 percentage points above the London Inter-Bank Offer Rate and is repayable over a period which varies between one and six months at the option of the borrower. The proceeds of this loan facility were utilised, together with existing Group cash, to repay in full, the pre-existing loan facilities totalling £52.8m.

- on 3 April 2017 tranche two of the new loan facility was drawn down, amounting to €71.0m. As with tranche one, this facility is unsecured and is repayable in ten six-monthly instalments on the anniversary of the draw down date. The outstanding principal on the loan bears interest at a rate of 2.00 percentage points above the European Inter-Bank Offer Rate and is repayable over a period which varies between one and six months at the option of the borrower.

- In April 2018 we converted our existing debt arrangement with RBS into a syndicated facility. This will provide access to higher levels of debt financing from a wider panel of lenders, which in turn will enable us to fulfil our appetite of financing future deals up to the maximum levels of gearing set out in our debt and leverage policy, without being restricted by the lending capacity of one individual institution. This facility enables Chesnara to access an increased level of funds efficiently, which in turn supports our acquisition strategy.

The fair value of the sterling denominated bank loan at 31 December 2020 was £15.0m (31 December 2019: £21.0m).

The fair value of the euro denominated bank loan at 31 December 2020 was £24.1m (31 December 2019: £31.7m).

The fair value of amounts due in relation to financial reinsurance was £27.5m (31 December 2019: £37.5m).

Bank loans are presented net of unamortised arrangement fees. Arrangement fees are recognised in profit or loss using the effective interest rate method.

5. Earnings per share

Earnings per share are based on the following:


Year ended 31 December	2020	2019

Profit for the year attributable to shareholders (£000)	21,191	79,142
Weighted average number of ordinary shares	150,062,807	149,972,471
Basic earnings per share	14.12p	52.77p
Diluted earnings per share	14.03p	52.47p

The weighted average number of ordinary shares in respect of the year ended 31 December 2020 is based upon 150,065,457 shares. No shares were held in treasury.

There were 1,026,664 share options outstanding at 31 December 2020 (2019: 859,641). Accordingly, there is dilution of the average number of ordinary shares in issue in respect of 2019 and 2020.

6. Retained earnings


Group Year ended 31 December
	2020 £000	2019 £000
Retained earnings attributable to equity holders of the parent company comprise:
Balance at 1 January	281,053	232,638
Profit for the year	21,191	79,142
Share based payment	492	593
Dividends
Final approved and paid for 2018	-	(20,178)
Interim approved and paid for 2019	-	(11,142)
Final approved and paid for 2019	(20,814)	-
Interim approved and paid for 2020	(11,480)	-
Balance at 31 December	270,442	281,053

The interim dividend in respect of 2019, approved and paid in 2019 was paid at the rate of 7.43p per share. The final dividend in respect of 2019, approved and paid in 2020, was paid at the rate of 13.87p per share so that the total dividend paid to the equity shareholders of the parent company in respect of the year ended 31 December 2019 was made at the rate of 21.30p per share.

The interim dividend in respect of 2020, approved and paid in 2020, was paid at the rate of 7.65p per share to equity shareholders of the parent company registered at the close of business on 9 October 2020, the dividend record date.

A final dividend of 14.29p per share in respect of the year ended 31 December 2020 payable on 24 May 2021 to equity shareholders of the parent company registered at the close of business on 9 April 2021, the dividend record date, was approved by the directors after the balance sheet date. The resulting total final dividend of £21.4m has not been provided for in these financial statements and there are no income tax consequences.

The following summarises dividends per share in respect of the year ended 31 December 2019 and 31 December 2020:


Year ended 31 December
	2020 P	2019 P
Interim - approved and paid	7.65	7.43
Final - proposed/paid	14.29	13.87
Total	21.94	21.30

7. Related parties

(a) Identity of related parties

The shares of the company were widely held and no single shareholder exercised significant influence or control over the company.

The company has related party relationships with:

(i) key management personnel who comprise only the directors of the company;

(ii) its subsidiary companies;

(iii) its associated company;

(iv) other companies over which the directors have significant influence; and

(v) transactions with persons related to key management personnel.

(b) Related party transactions

(i) Transactions with key management personnel.

Key management personnel comprise of the directors of the company. Key management compensation is as follows:


	2020 £000	2019 £000
Short-term employee benefits	1,198	1,495
Post-employment benefits	70	70
Share-based payments	492	598
Total	1,760	2,163

The share-based payments charge comprises £0.2m (2019: £0.2m) of Short-term Incentive Scheme (STI), and £0.3m (2019: £0.4m) related to Long-term Incentive Scheme (LTI), which is determined in accordance with IFRS 2 'Share based Payment'

In addition, to their salaries the company also provides non-cash benefits to directors, and contributes to a post-employment defined contribution pension plan on their behalf, or where regulatory contribution limits are reached, pay an equivalent amount as an addition to base salary.

The following amounts were payable to directors in respect of bonuses and incentives:


	2020 £000	2019 £000
Annual bonus scheme (included in the short-term employee benefits above)	392	694

These amounts have been included in Accrued Expenses as disclosed in note 40. The amounts payable under the annual bonus scheme were payable within one year.

(ii) Transactions with subsidiaries

The company undertakes centralised administration functions, the costs of which it charges back to its operating subsidiaries. The following amounts which effectively comprised a recovery of expenses at no mark up were credited to the Statement of Comprehensive Income of the company for the respective periods:


Year ended 31 December
	2020 £000	2019 £000
Recovery of expenses	3,684	3,533

(iii) Transactions with associate

Movestic Livförsäkring AB and its associate Modernac SA.


Year ended 31 December
	2020 £000	2019 £000
Reinsurance premiums paid	-	(68)
Reinsurance recoveries received	-	2,071
Reinsurance commission received	-	(42)
	-	1,961
Amounts outstanding as at balance sheet date	-	-

Movestic Livförsäkring AB had the no amounts outstanding at the balance sheet date following the liquidation of Modernac.

(iv) Transactions with persons related to key management personnel

During the year, there were no transactions with persons related to key management personnel.

8. Portfolio acquisition

On 21 November 2019, Waard completed a deal to acquire a portfolio of term life insurance policies (TLI) and saving mortgages insurance policies (SMI) from Belgian insurance provider Argenta Assuranties N.V. (Aras). The SMI portfolio was accompanied by supporting financial assets via unit-linked investments in a client mortgage fund. Waard obtained control at the date of completion, which was 31 August 2020. The portfolios were successfully migrated on 5 September 2020 (27,664 TLI and 12,551 SMI in total policies 40,185).

The transaction has given rise to a post completion gain on acquisition of £0.4m calculated as follows:


				Fair value
				£000
	Assets
	Client Mortgage fund			319,641
	Acquired Value In Force			2,296
	Deferred tax asset			5,815
	Total assets			327,752
	Liabilities
	Insurance contract provisions			300,697
	Deferred tax liabilities			5,819
	Total liabilities			306,516
	Net assets			21,236

	Net assets acquired			21,236
	Total consideration, paid in cash			20,848

	Post completion gain on portfolio acquisition			388

Post completion gain on portfolio acquisition: A post completion gain of £0.4m was recognised in relation to this acquisition and has been reported on the face of the statement of comprehensive income.

Acquisition-related costs : The portfolio was acquired for base a purchase price £25.4m as of 1 July 2019. For the period between cut-off date until the completion date of 31 August 2020, a roll-forward period was agreed. The purchase price as at 31 August 2020 was £20.8m. No advisory expenses directly related to the deal were accounted for by Waard. These expenses were borne by affiliated companies Chesnara PLC and Chesnara Holdings B.V. As a result, no addition to the consideration was paid.

The assets and liabilities acquired are included within changes in insurance provisions and financial assets within operating cash flows on the face of the cash flow statement.

FINANCIAL CALENDAR

30 March 2021

Results for the year ended 31 December 2020 announced

08 April 2021

Ex-dividend date

09 April 2021

Dividend record date

23 April 2021

Last date for dividend reinvestment plan elections

18 May 2021

Annual General Meeting

24 May 2021

Dividend payment date

26 August 2021

Half year results for the 6 months ending

30 June 2021 announced

KEY CONTACTS

Registered and Head Office

2^nd Floor, Building 4

West Strand Business Park

West Strand Road

Preston

Lancashire

PR1 8UY

Tel: 01772 972050

www.chesnara.co.uk

Advisors

Ashurst LLP

Broadwalk House

5 Appold Street

London

EC2A 2HA

Addleshaw Goddard LLP

One St Peter's Square

Manchester

M2 3DE

Auditor

Deloitte LLP

Statutory Auditor

The Hanover Building,

Corporation Street,

Manchester,

M4 4AH

Registrars

Link Group

10th Floor

Central Square

29 Wellington Street

Leeds

LS1 4D L

Joint Stockbrokers and

Corporate Advisors

Panmure Gordon

One New Change

London

EC4M 9AF

Investec Bank plc

30 Gresham Street

London

EC2V 7QP

Bankers

National Westminster Bank plc

135 Bishopsgate

London

EC2M 3UR

The Royal Bank of Scotland

8th Floor, 135 Bishopsgate

London

EC2M 3UR

Lloyds Bank plc

3rd Floor, Black Horse House

Medway Wharf Road

Tonbridge

Kent

TN9 1QS

Public Relations Consultants

FWD

145 Leadenhall Street

London

EC3V 4QT

ALTERNATIVE PERFORMANCE MEASURES

Throughout this report we use alternative performance measures (APMs) to supplement the assessment and reporting of the performance of the group. These measures are those that are not defined by statutory reporting frameworks, such as IFRS or Solvency II.

The APMs aim to assess performance from the perspective of all stakeholders, providing additional insight into the financial position and performance of the group and should be considered in conjunction with the statutory reporting measures such as IFRS and Solvency II.

The following table identifies the key APMs used in this report, how each is defined and why we use them.

APM	What is it?	Why do we use it?
Economic Value (EcV)	EcV is a financial metric that is derived from Solvency II Own Funds It provides a market consistent assessment of the value of existing insurance businesses, plus adjusted net asset value of the non-insurance business within the group. We define EcV as being the Own Funds adjusted for contract boundaries, risk margin and restricted with-profit surpluses. As such, EcV and Own Funds have many common characteristics and tend to be impacted by the same factors.	EcV aims to reflect the market-related value of in-force business and net assets of the non-insurance business and hence is an important reference point by which to assess Chesnara's value. A life and pensions group may typically be characterised as trading at a discount or premium to its Economic Value. Analysis of EcV provides additional insight into the development of the business over time. The EcV development of the Chesnara group over time can be a strong indicator of how we have delivered to our strategic objectives.
Economic Value (EcV) earnings	The principal underlying components of the Economic Value earnings are: - The expected return from existing business (being the effect of the unwind of the rates used to discount the value in-force); - Value added by the writing of new business; - Variations in actual experience from that assumed in the opening valuation; - The impact of restating assumptions underlying the determination of expected cash flows; and - The impact of acquisitions.	By recognising the market-related value of in-force business (in-force value), a different perspective is provided in the performance of the group and on the valuation of the business. Economic Value earnings are an important KPI as they provide a longer-term measure of the value generated during a period. The Economic Value earnings of the group can be a strong indicator of how we have delivered against all three of our core strategic objectives.
EcV operating earnings	This is the element of EcV earnings (see above) that are generated from the company's ongoing core business operations, excluding any profit earned from investment market conditions in the period and any economic assumption changes in the future.	EcV operating earnings are important as they provide an indication of the underlying value generated by the business. It can help identify profitable activities and also inefficient processes and potential management actions.
EcV underlying operating earnings	EcV operating earnings (see above) exclusive of any individually material (positive or negative) items of an exceptional or non-recurring nature, that would not fall under normal business as usual operations.	This helps management and investors identify the underlying performance of the business as usual operations of the company.
EcV economic earnings	This is the element of EcV earnings (see above) that are derived from investment market conditions in the period and any economic assumption changes in the future.	EcV economic earnings are important in order to measure the additional value generated from investment market factors.
Commercial new business profit	A more commercially relevant measure of new business profit than that recognised directly under the Solvency II regime, allowing for a modest level of return, over and above risk-free, and exclusion of the incremental risk margin Solvency II assigns to new business.	This provides a fair commercial reflection of the value added by new business operations and is more comparable with how new business is reported by our peers, improving market consistency.
Group cash generation	Cash generation is used by the group as a measure of assessing how much dividend potential has been generated, subject to ensuring other constraints are managed. Group cash generation is calculated as the movement in the group's surplus own funds above the group's internally required capital, as determined by applying the group's capital management policy, which has Solvency II rules at its heart.		Cash generation is a key measure, because it is the net cash flows to Chesnara from its life and pensions businesses which support Chesnara's dividend-paying capacity and acquisition strategy. Cash generation can be a strong indicator of how we are performing against our stated objective of 'maximising value from existing business'.
Divisional cash generation	Cash generation is used by the group as a measure of assessing how much dividend potential has been generated, subject to ensuring other constraints are managed. Divisional cash generation represents the movement in surplus own funds above local capital management policies within the three operating divisions of Chesnara. Divisional cash generation is used as a measure of how much dividend potential a division has generated, subject to ensuring other constraints are managed.		It is an important indicator of the underlying operating performance of the business before the impact of group level operations and consolidation adjustments.
Commercial cash generation	Cash generation is used by the group as a measure of assessing how much dividend potential has been generated, subject to ensuring other constraints are managed. Commercial cash generation excludes the impact of technical adjustments, modelling changes and exceptional corporate activity; representing the underlying commercial cash generated by the business.		Commercial cash generation aims to provide stakeholders with enhanced insight into cash generation, drawing out components of the result relating to technical complexities or exceptional items. The result is deemed to better reflect the underlying commercial performance, show key drivers within that.
Funds under management (FuM)	FuM reflects the value of the financial assets that the business manages, as reported in the IFRS Consolidated Balance Sheet.		FuM are important as it provides an indication of the scale of the business, and the potential future returns that can be generated from the assets that are being managed.
Operating profit, excluding AVIF impairment	A measure of the pre-tax profit earned from a company's ongoing core business operations, excluding any profit earned from investment market conditions in the period and any economic assumption changes in the future. This also excludes any intangible asset adjustments that are not practicable to ascribe to either operating or economic conditions.		Operating earnings are important as they provide an indication of the underlying profitability of the business. It can help identify profitable activities and also inefficient processes and potential management actions.
Economic profit, excluding AVIF impairment	A measure of pre-tax profit earned from investment market conditions in the period and any economic assumption changes in the future. This also excludes any intangible asset adjustments that are not practicable to ascribe to either operating or economic conditions.		Economic earnings are important in order to measure the surplus generated from investment market factors.
Acquisition value gain (incremental value)	Acquisition value gains reflect the incremental Economic Value added by a transaction, exclusive of any additional risk margin associated with absorbing the additional business.		The EcV gain from acquisition will be net of any associated increase in risk margin. The risk margin is a temporary Solvency II dynamic which will run off over time.
Leverage / gearing	A financial measure that demonstrates the degree to which the company is funded by debt financing versus equity capital, usually presented as a ratio. It is defined as bank debt divided by bank debt plus equity, as measured under IFRS.		It is an important measure as it indicates the overall level of indebtedness of Chesnara and it is also a key component of the bank covenant arrangements held by Chesnara.

GLOSSARY

AGM	Annual General Meeting.
ALM	Asset Liability Management - management of risks that arise due to mismatches between assets and liabilities.
APE	Annual Premium Equivalent - an industry wide measure that is used for measuring the annual equivalent of regular and single premium policies.
CA	Countrywide Assured plc.
CALH	Countrywide Assured Life Holdings Limited and its subsidiary companies.
BAU Cash Generation	This represents divisional cash generation plus the impact of non-exceptional group activity.
BLAGAB	Basic life assurance and general annuity business
Cash Generation	This represents the operational cash that has been generated in the period. The cash generating capacity of the group is largely a function of the movement in the solvency position of the insurance subsidiaries within the group and takes account of the buffers that management has set to hold over and above the solvency requirements imposed by our regulators. Cash generation is reported at a group level and also at an underlying divisional level reflective of the collective performance of each of the divisions prior to any group level activity.
Commercial Cash Generation	Cash generation excluding the impact of technical adjustments, modelling changes and exceptional corporate activity; the underlying commercial cash generated by the business.
Divisional Cash Generation	This represents the cash generated by the three operating divisions of Chesnara (UK, Sweden and the Netherlands), exclusive of group level activity.
DNB	De Nederlandsche Bank is the central bank of the Netherlands and is the regulator of our Dutch subsidiaries.
DPF	Discretionary Participation Feature - A contractual right under an insurance contract to receive, as a supplement to guaranteed benefits, additional benefits whose amount or timing is contractually at the discretion of the issuer.
Dutch Business	Scildon and the Waard Group, consisting of Waard Leven N.V., Waard Schade N.V. and Waard Verzekeringen B.V.
Economic Profit	A measure of pre-tax profit earned from investment market conditions in the period and any economic assumption changes in the future (alternative performance measure - APM).
EcV	Economic Value is a financial metric that is derived from Solvency II Own Funds that is broadly similar in concept to European Embedded Value. It provides a market consistent assessment of the value of existing insurance businesses, plus adjusted net asset value of the non-insurance business within the group.
FCA	Financial Conduct Authority.
FI	Finansinspektionen, being the Swedish Financial Supervisory Authority.
Form of Proxy	The form of proxy relating to the General Meeting being sent to shareholders with this document.
FSMA	The Financial Services and Markets Act 2000 of England and Wales, as amended.
Group	The company and its existing subsidiary undertakings.
Group Cash generation	This represents the absolute cash generation for the period at total group level, comprising divisional cash generation as well as both exceptional and non-exceptional group activity.
Group Own Funds	In accordance with the UK's regulatory regime for insurers it is the sum of the individual capital resources for each of the regulated related undertakings less the book-value of investments by the group in those capital resources.
Group SCR	In accordance with the UK's regulatory regime for insurers it is the sum of individual capital resource requirements for the insurer and each of its regulated undertakings.
Group Solvency	Group solvency is a measure of how much the value of the company exceeds the level of capital it is required to hold in accordance with Solvency II regulations.
HCL	HCL Insurance BPO Services Limited.
IFRS	International Financial Reporting Standards.
IFA	Independent Financial Adviser.
KPI	Key performance indicator.
Leverage (gearing)	A financial measure that demonstrates the degree to which the company is funded by debt financing versus equity capital, usually presented as a ratio.
London Stock Exchange	London Stock Exchange plc.
LTI	Long-Term Incentive Scheme - A reward system designed to incentivise executive directors' long-term performance.
Movestic	Movestic Livförsäkring AB.
Modernac	Modernac SA , a previously associated company 49% owned by Movestic.
New business	The present value of the expected future cash inflows arising from business written in the reporting period.
Official List	The Official List of the Financial Conduct Authority.
Operating Profit	A measure of the pre-tax profit earned from a company's ongoing core business operations, excluding any profit earned from investment market conditions in the period and any economic assumption changes in the future (alternative performance metric - APM).
Ordinary Shares	Ordinary shares of five pence each in the capital of the company.
ORSA	Own Risk and Solvency Assessment.
Own Funds	Own Funds - in accordance with the UK's regulatory regime for insurers it is the sum of the individual capital resources for each of the regulated related undertakings less the book-value of investments by the company in those capital resources.
PRA	Prudential Regulation Authority.
QRT	Quantitative Reporting Template.
ReAssure	ReAssure Limited.
Resolution	The resolution set out in the notice of General Meeting set out in this document.
RMF	Risk Management Framework.
Scildon	Scildon NV.
Shareholder(s)	Holder(s) of Ordinary Shares.
Solvency II	A fundamental review of the capital adequacy regime for the European insurance industry. Solvency II aims to establish a set of EU-wide capital requirements and risk management standards and has replaced the Solvency I requirements.
Standard Formula	The set of prescribed rules used to calculate the regulatory SCR where an internal model is not being used.
STI	Short-Term Incentive Scheme - A reward system designed to incentivise executive directors' short-term performance.
SCR	In accordance with the UKs regulatory regime for insurers it is the sum of individual capital resource requirements for the insurer and each of its regulated undertakings.
Swedish Business	Movestic and its subsidiaries and associated companies.
S&P	Save & Prosper Insurance Limited and Save & Prosper Pensions Limited.
TCF	Treating Customers Fairly - a central PRA principle that aims to ensure an efficient and effective market and thereby help policyholders achieve fair outcomes.
TSR	Total Shareholder Return, measured with reference to both dividends and capital growth.
UK or United Kingdom	The United Kingdom of Great Britain and Northern Ireland.
UK Business	CA and S&P.
VA	The volatility adjustment is a measure to ensure the appropriate treatment of insurance products with long-term guarantees under Solvency II. It represents an adjustment to the rate used to discount liabilities to mitigate the effect of short-term volatility bond returns.
Waard	The Waard Group

NOTE ON TERMINOLOGY

As explained in the IFRS financial statements, the principal reporting segments of the group are:
CA	which comprises the original business of Countrywide Assured plc, the group's original UK operating subsidiary; City of Westminster Assurance Company Limited, which was acquired by the group in 2005, the long-term business of which was transferred to Countrywide Assured plc during 2006; S&P which was acquired on 20 December 2010. This business was transferred from Save & Prosper Insurance Limited and Save & Prosper Pensions Limited to Countrywide Assured plc on 31 December; and Protection Life Company Limited which was acquired by the group in 2013, the long-term business of which was transferred into Countrywide Assured plc in 2014;
Movestic	which was purchased on 23 July 2009 and comprises the group's Swedish business, Movestic Livförsäkring AB and its subsidiary and associated companies;
The Waard Group	which was acquired on 19 May 2015 and comprises two insurance companies; Waard Leven N.V. and Waard Schade N.V.; and a service company, Waard Verzekering; and
Scildon	which was acquired on 5 April 2017; and
Other group activities	which represents the functions performed by the parent company, Chesnara plc. Also included in this segment are consolidation adjustments.

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