Chesnara plc (LON:CSN) Chief Executive Officer Steve Murray and Chief Financial Officer Tom Howard caught up with Hardman & Co’s Financial Analyst Dr Brian Moretta to discuss the benefits from recent acquisitions, further synergies, the M&A environment, operational performance in Sweden and the Netherlands, AI-led efficiencies, and opportunities for capital management.
Q1: Let’s start on the M&A side because I think we saw a little bigger additions to both the OCG and capital from the acquisition gains and the initial synergies than I initially expected. Can you maybe describe what the sources of these were? How much more there is still to go in these sort of synergies? When do you think we’ll see them coming through?
A1: In terms of the synergies, we’ve made a cracking start, I would say. So, think of the synergies as being early stage synergies as we integrate the business onto the platform.
So, within the OCG result, for example, we had about £51 million of that result related to what I would call structural day one synergies. They’re simply synergies that you generate from bringing the balance of risks from the Chesnara Life business onto the existing Chesnara group risk profile.
Also by harmonising how we calculate things like the solvency capital requirements within the Chesnara Life book and bring those into line with how we do that within the Chesnara group methodology. That’s why I say they’re structural because, in a sense, there isn’t a lot we need to do to actually generate those synergies up front.
Where we will see further synergies coming through will be as we complete the migration process for those products and we move them onto our unit cost of administration, that will be a further source of synergies.
We always have a number of capital management actions, as you know, in the background that we can deploy across both the asset and the liability side of the book as well.
When we discuss this with investors at the half year, the way we positioned it was to say, we have made a very strong start. We will look at the profile or expected profile of cash flows from the acquisition after we work through the migration process, which we expect to conclude later this year, because then we will have a full line of sight then post migration on how we expect that to play out.
So, what we will do is just have a look at that guidance that we should have previously, around five year and the lifetime cash flow projection and we’ll update accordingly.
Q2: You mentioned about Scottish Widows Europe completed around the end of the year, and we know you have an appetite for further deals. Can you talk a little bit about how the environment is just now and what, if anything, has changed over the last few months or a year or so?
A2: I think we’ve spoken about some of the drivers that we see in this space and the fact that it has felt like a more buoyant M&A market from our perspective for a little while now. We aren’t seeing anything changing around that.
So, we’re still seeing large financial services groups and international groups perhaps looking more discerningly at their profiles either to free up capital or to avoid costs when they’re sort of transforming IT platforms.
Maybe they’ve got a business that doesn’t quite fit on that and would cost a lot of money to move. Or they’ve just extended themselves across multiple geographies and 20 years later are looking at that and saying perhaps they haven’t been quite as successful as they were hoping. So, there’s lots of different things flowing through into that M&A market appetite.
I had to change the statement that I made in the half year results. I was going to say that markets have been extraordinary, but I think markets have been extraordinary for about the past five years. We’re not seeing anything substantial from the macro environment, even though over the last few weeks we’ve seen bond markets moving around pretty violently, gilt rates moving around pretty violently as well. That doesn’t seem to be having any impact certainly on the deal flow in the market.
I think probably what’s changed since we’ve started talking about this a few years ago is the fact that we’ve executed more transactions. I think we tend to see people perhaps approach us a little bit more proactively than you might have seen four or five years ago. The fact that we’ve transacted with some of the largest groups in the world and they’ve trusted us with their customers is quite helpful for our story overall. So, we’re seeing good opportunities.
It’s incredibly important that we maintain our discipline and we do deals that are right for our investors. We hope people see that we’ve done a good job there in terms of being good deployers of capital, but we’re certainly seeing no challenges in terms of the opportunities coming into the top of the funnel.
It’s then a case of can you work through that and ultimately strike an acquisition which makes sense for both parties, so we remain optimistic on that. We’ve talked before, I’ve got far too much grey hair to try and predict when these things might land, but investors can certainly be rest assured that there’s good opportunities and we continue to work hard on things and ensure that we’re active in this space.
So, we remain positive.
Q3: In Sweden and Netherlands, we saw some good news, and we also saw a little bit of disappointing operational news. Can you talk a bit more about what’s been going on with these and what’s been going well and perhaps what challenges you’re seeing?
A3: So, let’s start with Sweden.
I think in terms of what’s going well – I alluded to that in my earlier remarks – if you look at the top line, assets under administration, we had about £350 million of positive net flows into Sweden over the first half, which is, I would say, a reasonably strong result. We also benefited from positive market movements over that period.
If we look at the profile of assets under administration and the Swedish business’s contribution to the group’s growth in AUA, it’s actually quite material.
Where we have seen some negative impacts has been further down the line where we’ve looked at individual product by product activity. We’ve seen higher than expected levels of transfers out or lapse activity in occupational pensions and that’s something we’ve seen in the market over the last number of years. It’s a feature of the market and it tends to bounce around a little bit, frankly.
So, there’ll be periods where the observed activity is a little bit higher than the assumptions we’ve got within our models. Equally, there will be sometimes where it’s actually slightly less. What we tend to do is step back at least annually and look at the trending and form a view as to whether we think that what we’re observing on the ground from half year to half year is indicative of a worsening long-term trend.
So far, that’s not been the conclusion we’ve reached, but obviously that’s something we’ll continue to look at.
From a Netherlands perspective, we did see some adverse mortality experience in the first half. Now, that was actually concentrated to the first quarter of the first half so our conclusion on that really was that that is likely to be a seasonal impact.
Again, we often see that, when you’re striking long-term assumptions and you’re looking at experience over a relatively short-term period, you will get that volatility where the observed experience bounces around a little bit relative to that long-term assumption. We look at that like we look at any other type of experience variation that comes through.
So, we’ve actually just had the Dutch mortality studies coming through so we tend to look at the national mortality rates as well as our own portfolio experience.
So again, like that experience and like our expense assumptions and so on, we’ll take a look at those towards the end of this year, and we’ll form a view as to whether we think that short-term experience is indicative of any deterioration in long-term trends.
What I would say is if you look at the two of those impacts and they were the main operational adverse impacts we had in terms of quantum and impact, I think in total they amounted to far less than 1% of our own funds. So, it’s not material in that context, but clearly something that we’ll take a look at, as I say.
Q4: You mentioned the Netherlands and we just completed some integration process there. Are there any further actions you could take to get more efficiencies from existing operations around the group as a whole?
A4: Ther’s always things that we can do. We’ve still got a little bit more to do in the Netherlands.
You’re absolutely right to highlight that we completed the legal integration of the businesses last year and then we’ve got through the bulk of the follow-up operational integration activity. There is still integration of certain processes and things to come so we should see a little bit more benefit hopefully coming through sort of in the second half of this year and into 2027.
I think everybody is talking about utilising AI to generate efficiencies, and we already have a number of initiatives underway across the group where we’re potentially seeing deploying that AI capability, either meaning that we’re not having to put on the same amount of headcount now that we otherwise might look to do or also generating tangible efficiency. So, I think as that ramps up over time, that’s an interesting opportunity for us.
One of the things that we like about that is if I think back 10 years ago to try and generate efficiencies in this way, the upfront spend would have been absolutely huge and disproportionate for an organisation like us.
So whilst people are worried, I think, about the cost of tokens and things going up for us, it means that we have capability on our desktop and incredibly easy, easily accessible that doesn’t have the same upfront sort of infrastructure spend as you’ve seen before. We’re going to be quite discerning about how we utilise that.
We can also deploy some of that capability when we’re looking at migration. So, if we can do that more safely and more quickly and at lower cost, you generate an efficiency both in terms of the resource available and ultimately that works its way through into the deal benefits assessment as well.
As an organisation, we don’t love spending money. On a regular basis, and the business unit teams are doing this, we are looking at ways to find efficiencies from further automation or process changes or just learning from across the group, how we might do things a little bit more efficiently. I think you’ve seen that from us over time that we’ve done a pretty good job of managing that cost base.
So, I think there are always things to do, albeit perhaps not as material as things like the Dutch integration. I think Tom alluded to this in the results, that has been a contributor to the fact that the Dutch business has given us its largest ever cash remittance in the early part of the year, which is another healthy sign of the results of that sort of integration working nicely for us.
Q5: Turning to the capital and the cash side of things. You’ve spoken about possible further management actions to improve cash generation. Can you indicate perhaps what things are possible and over what timescale you’re looking at doing these?
A5: It’s actually relatively straightforward so we look at and we actually have quite a track record in deploying on the liability side of the balance sheet, as I would say.
So reinsurance activity, foreign exchange hedging, for example, were to optimise solvency capital requirements. They tend to be our go-to management actions and certainly have been historically.
And I think there’s more we can do on those. So, you know, we have a five-year-plus programme of capital management actions that we review on an ongoing basis. It’s something we talk to our board about. And, you know, there’s certainly more scope to do more in that area.
One area that we haven’t explored as much, and I do see more scope to do more things around, is on the asset side of the balance sheet.
So, one of the things that has served us extremely well up to this point and for 20-plus years is the fact that we have had and continue to have a defensively positioned balance sheet, and I think that’s something we will certainly continue to have.
There are opportunities to up risk and optimise returns within our risk appetite levels and that’s something that we’re quite actively looking at.
As the group gets bigger and we bring in different types of balance sheets, that actually the opportunity set in that area actually expands pretty considerably so you should expect to see some activity in that area.
In terms of time frame, I talk about five years plus, we have a long-term time horizon, and we’ve got a toolkit of actions that we feel confident we could deploy over at least that five-year time horizon. We don’t tend to pin ourselves down on when and the reason for that is that we like to be quite choosy about the best time to deploy some of those management actions.
Particularly on the asset side of the balance sheet, we’re not sitting here trying to time the markets because I think that’s possibly a fool’s errand but there are certainly sometimes in the cycle where it’s more advantageous to take certain actions than others. So, that’s why you’ll see us taking actions at certain times.
What we won’t be doing is laying out a very prescribed pattern of actions. The one thing we have been saying, however, is regardless of the timing, you should expect that from an OCG perspective, about 30% of our results on an annual basis will derive from recurring management actions.
That gives you a sense of the pattern of deployment that we’re expecting to roll out.
