Chesnara benefitting strongly from economic variances (LON:CSN)

Hardman & Co

Chesnara plc (LON:CSN) is the topic of conversation when Hardman and Co’s Financial Analyst Dr Brian Moretta caught up with DirectorsTalk for an exclusive interview.

Q1: You recently published a note on Chesnara, Market benefits overwhelm operational challenges, in which you described the full-year results. How well did the company do?

A1: The company did very well. On its main measure, Economic Value, earnings were £57.8m, compared with a loss of £37.6m the previous year. Within that, there were strong benefits from economic variances, with strong equity markets and a rise in bond yields both being helpful.

Q2: You mention operational challenges. What were those?

A2: The largest challenge has been in Movestic, the company’s Swedish business. We discussed it in detail in our initiation note last year, but, in short, legislative changes made pension books more vulnerable to transfers out. In addition, a mutual competitor introduced an offer with uneconomical pricing. Lapses in 2021 were higher than anticipated, and Chesnara had to strengthen its assumptions, which also had a cost. We are optimistic Movestic results will improve quickly – the competitor’s offer was not sustainable and has been withdrawn.

There were also some expense overruns elsewhere, but these were much smaller.

Q3: Many investors hold Chesnara for the dividend. What was the news on that?

A3: Base cash generation, which, for CSN, is the movement in its solvency surplus, was down on 2020’s result. The problems in Movestic were augmented by adverse exchange rate movements. Nevertheless, dividends from the other three subsidiaries were more than adequate to cover an increased dividend. The dividend for the year was 22.6p, a 3% increase over the 2021 payment.

Q4: Chesnara has also made progress with its acquisition strategy this year. Can you tell us more about that?

A4: In 2021, it announced the acquisitions of Sanlam’s UK operations and Robein Leven in the Netherlands, with the former being much larger. These have now completed. In February this year, it announced the issue of a £200m bond. This will fund the acquisitions and be used to repay the existing revolving credit facility. The net result is that there will be another £100m available from it for further acquisitions. We can’t be sure about the timing of acquisitions, but we know that Chesnara management is quite conservative. We believe it would only take on the cost of this extra debt if it were optimistic about finding something else in the near future.

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Q5: And what about the immediate prospects?

A5: We believe the operational challenges will abate in 2022. However, equity markets have been weak so far this year. While their excess returns over the risk-fee assumption that Solvency II requires will be a positive contributor in the long run, unless June shows a recovery, then they may be a drag on first-half earnings.

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