Chesnara plc (CSN) Earnings Call Transcript & Summary

Welcome to the Cheznara Half year 2026 Results Presentation. I'm Steve Murray, Group Chief Executive; and with me is Tom Howard, our Group CFO. So what will we cover today? I'll begin with a short overview of what's been delivered in the period. Tom will then step through the financials in more detail, which now include CheznaraLife, formerly known as HSBC Life U.K. for the first time under our ownership. I'll then finish with some further detail of what's been delivered in 2026 and what to expect going forward. We'll have plenty of time for questions at the end of our presentation, starting with the people here with us in RBC's London offices. And for those joining online, you can type your questions into the Q&A function via your browsers. The group has delivered another very strong set of financial results over the first half of 2026, including a substantial increase in the group's operating capital generation. Tom will run through these financial results in more detail shortly, including an overview of where our H1 position is relative to the full year 2025 pro forma estimates that we shared in March. Our focused 3-pillar strategy set out on this slide has continued to serve the group well. We completed the acquisition of HSBC Life U.K. in January, which is now rebranded as Ceznara Life U.K. And we've been delighted with the early performance of the business under our ownership with GBP51 million of operating capital generation and $20 million of cash remittances already delivered. The next phase of integration and migration activity has been continuing at pace with the migration of data from HSBC on track for delivery by the end of 2026. The U.K. business has also completed the migration and associated Part VII of the second Canada Life portfolio we acquired with these policies now running on our new U.K. platform. This is the fifth successfully completed migration in recent years. We announced the proposed acquisition of Scottish Widows Europe in February this year and have completed a significant amount of the preparation required for the expected change of control around the end of 2026. We've continued to proactively evaluate and execute management actions in the period. And we've also taken further steps to integrate teams and processes across our Dutch business following the merger of our Dutch entities last year. This has helped support Skilldin's largest ever cash remittance. And the addition of Cheznara Life U.K. to the group has materially increased the contribution from new business in the first half of the year. Movestic has also added around $700 million of assets under administration and expanded its distribution reach, including a new partnership in Norway. The best track record of continuous dividend growth in U.K. and European insurance continues. As previously highlighted to investors, we're announcing a 6% increase in the interim 2026 dividend up to 8.16p per share. This represents a one-off acceleration of the group's historic dividend growth trajectory and follows the 6% increase to the full year 2025 dividend that we announced in March. So let me hand over to Tom, who will take us through the financial results in more detail.

Thanks, Steve, and good morning, everyone. So I'm delighted to be reporting a set of very strong results for the first half of 2026. Today's results for the first time incorporated CheznaraLife following completion of the acquisition in January. Operating capital generation increased significantly by 79% to $96 million, and cash remittances increased by 31% to $73 million. The results reflected robust operating performance from each of our business units, incremental value from Casanare Life and a contribution from capital optimization actions. Own funds increased by 14% to $976 million and the Solvency II coverage ratio of 185% is comfortably above the upper end of our operating range. And this is also above the pro forma guidance of 180% that we provided to you at the full year. And our sources of future value continue to go from strength to strength. Assets under administration increased to $21 billion, and adjusted operating profits grew by 46% to $31 million. The IFRS balance sheet also grew with the contractual service margin increasing significantly from GBP 131 million to $327 million, reflecting the integration of the Tesaro Life book. This significantly increases the stock of future insurance profits available to the group. And this very strong performance underpins today's announcement of a 6% increase in the interim dividend to 8.16p per share. So as I mentioned a moment ago, we're reporting a significant increase in the group's OCG results today. OCG of $33 million arose from robust operating performance across our business units, broadly in line with the prior year results of $32 million. Performance benefited from stronger new business results and our ongoing focus on cost control, with partial offsets from adverse mortality experience in the Netherlands in Q1 and adverse persistency experience in Sweden. Our ongoing program of capital optimization actions delivered a further $12 million in benefits through the extension of existing foreign exchange hedging arrangements at group center. And as I liked at our full year results, we expect that ongoing capital optimization actions will be a recurring source of OCG for the group, and they will, on average, comprise around 30% of the annual OCG results. Finally, the acquisition of the Casanare Life book generated significant additional capital benefits for the group. These benefits arose as we embedded the Cesar Life risk profile into our existing U.K. reinsurance arrangements and into the group's solvency capital framework. These impacts are nonrecurring in nature and increase the group's OCG by a further GBP51 million. And we continue to have a strong pipeline of capital management actions to support the 5-year and the lifetime cash flow guidance we provided to you at the time of the acquisition. Turning to the balance sheet. Over the half year, OCG contributed 73 percentage points to the group's solvency coverage ratio. Nonoperating capital items provided a further 5 percentage point benefit with positive investment variances from favorable markets, more than offsetting the impact of integration and restructuring costs over the period. After allowing for the completion of the Casanare Life acquisition, the group's solvency coverage ratio of 185%, is higher than the pro forma guidance of 180% that we provided to you at our full year '25 results. And it also remains significantly above the upper end of our operating range of 140% to 160%. And as a result, we retain headroom to support M&A and other growth opportunities. And we also expect the solvency coverage ratio to remain above the upper end of this range after allowing for the impact of the Scottish Manos Europe acquisition, subject, of course, to market conditions and any other significant developments through the second half of this year. The groups on funds increased by 14% to GBP 976 million. As I referenced earlier, operating performance was robust and broadly in line with the prior year. Favorable market conditions supported growth in the value of the group's assets under administration, positively contributing to the nonoperating results. And the most significant component of the owned funds growth arose from the Casanare Life acquisition, with group owned funds increasing by GBP 79 million on day 1. And we expect owned funds growth to emerge for further synergies as the integration and migration activities continue, and we'll provide further details on our progress at our year-end results. Group central liquidity stands at GBP 271 million after relying for the funding of the Cesar Life acquisition earlier this year. Over the half, group center balances benefited from higher levels of cash remittance on the business unit center. Total remittances increased by 31% to GBP 73 million. including GBP 30 million from the Netherlands driven in part by merger synergies and GBP 20 million from JaznaraLife.. Moving next to IFRS. The IFRS capital base grew significantly by 22% to GBP 850 million. Adjusted operating profit increased by 41% to $31 million, reflecting robust operating performance across our business units. Favorable market conditions also support that the investment results, further improving the IFRS profit before tax after relying for the impact of integration and restructuring costs. Tax charges were higher in the period but this increase was driven solely by higher policyholder tax relating to investment gains on U.K. bond policies. These charges are deducted by Cesar at source on behalf of our customers, so the net impact to our P&L is broadly ill. Finally and importantly, the group's contractual service margin increased significantly from GBP 131 million at full year $25 million to GBP 327 million of the half year. This increase was primarily driven by the inclusion of the Ceara Life book, where the CSM recognized on acquisition was higher than that assumed in our pro forma estimates. This represents a significant increase to the stock of future profits we expect emerge from the group's insurance business. So in summary, this has been a period of very strong financial performance for Canara -- today's results show growth across all areas of our financial framework and exceed the pro forma guidance that we provided at full year '25. Our sources of future value go from strength to strength, and we have multiple levers at our disposal further optimize the capital base and to deliver strongly against the guidance that we provided to you at the time of the Casanare Life acquisition. And finally, the balance sheet remains strong and resilient, and we retain capacity to invest for further growth. This all bodes well for strong, sustained financial performance into the longer term. So thank you all. And with that, I'll pass back to Steve.

Thanks, Tom. The strategic focus we've had over the last few years has continued into 2026. At our full year 2025 results presentation, I underline the importance of ensuring we deliver the migration and integration of Chesnara Life U.K. well alongside the work required to support the anticipated change of control of Scottish Widows Europe. And I'm pleased to report that we continue to make great progress on both fronts, which I'll cover in slightly more detail shortly. Together, Canara Life U.K. and Scottish Widows Europe are expected to contribute around GBP 1 billion of future lifetime cash flows to the group. Tom highlighted earlier, a number of the actions we've already taken this year to optimize the group's balance sheet further, including Intesa Life. And across the group, we continue to have a very full pipeline of actions at our disposal through into the NIM term. We've also been progressing the next phase of restructuring of our Dutch business where run rate synergies delivered are above our initial estimates, and we expect the remaining anticipated cost savings to come through in the second half of the year. We continue to see a positive M&A pipeline and have already had a number of interesting opportunities to assess and evaluate so far this year. The addition of Canara Life has materially increased the contribution from new business to GBP 12 million. Movestic have continued to see positive net client cash flows into their unit-linked and risk offerings and skilled in has also delivered robust term life sales. Whilst we continue to anticipate the vast majority of our growth will come from M&A, we expect the value for new business for the full year 2026 and to be around double that of the previous year, a useful additional value generator for the group. And finally, the work we're doing to become a more sustainable Canara has also been progressing well. We've continued to reduce emissions from our investment portfolios, along with more proactive investment in more sustainable solutions. I wanted to give a further update on where we are in the integration of Chesnara Life U.K. and the change in control process for Scottish Widows Europe. On ChesNara Life, assets under administration and own funds remain ahead of the estimated pro forma year 2025 numbers that we shared with investors in March. We were able to take certain planned balance sheet actions in H1, which helped support GBP 51 million of OCG and GBP 20 million of cash remittances from the business. We remain firmly on track to deliver the GBP 140 million of cash generation we guided investors to expect in the first 5 years of our ownership. So whilst we only completed the acquisition 5 months ago, we're really pleased with the performance delivered so far. Jackie Ronson, our U.K. CEO and her team have continued to make great progress on our Cesar Life integration and migration program of activity. We've completed the staff consultation required in order for us to take the next steps towards implementing our new U.K. target operating model. We've confirmed who the role holders will be in our combined U.K. leadership team and also completed the first planned to be transfer of staff to SS&C. We remain firmly on track to complete the required data migration from HSBC by the end of 2026. Tom and a separate team working on Scottish Widows Europe have continued to push ahead with the work to deliver change in control and deal completion as well as the planning required for the businesses separation from Lloyds Banking Group. The change of control application has been submitted, and we're progressing through regulatory review with the CAA. Legal completion readiness testing with Lloyds has also been successfully completed with a large number of completion planning activities also substantially progressed. We continue to anticipate change control approval around the end of 2026. The financial framework on the left-hand side of this slide will be familiar to a large number of our investors. It has served us well and continues to form a core part of our deal assessment criteria. And as Thomas highlighted in his presentation, we have material solvency headroom above our target operating range. Our leverage is substantially below the long-term target of 30%, and we have material liquid resources at and we retained significant readily available firepower with a successful track record of financing more material transactions. We continue to see a positive M&A market and pipeline that provides great opportunities to build on our track record of strong deal execution. And in the period, we've already had the chance to work actively on a number of opportunities, both in Europe and the U.K. The 8 deals executed over the last 5 years has provided additional confidence to potential sellers that Jasna as a company they can trust to get deals done. So we delivered a very strong set of financial results, supporting a 6% increase in the interim 2026 dividend. We completed the largest acquisition in our history in January, with the migration of data from HSBC remaining on track for delivery by the end of 2026. We've continued to proactively seek out and execute management actions to optimize the group's balance sheet and resources which have contributed materially to the group's operating capital generation. We continue to anticipate changing control for Scottish Widows Europe around the end of 2026. Our M&A pipeline has remained positive, and we're continuing to actively assess acquisition opportunities. I want to thank colleagues across the group for their continued driving commitment which has delivered a very strong financial performance. The group is in a strong position with further opportunities to grow. And I continue to believe there's a lot to look forward to here at Cara. So that ends our presentation. We'll turn now to questions.

Thank you. We've had a number of questions presubmitted and submitted live. [Operator Instructions] Our first question is OCG in the first half is a huge increase. How much of this is sustainable going forward? And what should we expect for the full year?

Afternoon, everyone. I think that's a question for Tom Howard, our CFO. So over to Tom.

Thanks, Steve. Thanks for the question. Yes, so in the presentation, you'll notice that in the presentation of the OCG number, -- we split it into 3 components. So I'll start with the nonrecurring components of GBP 51 million of that results related to one-off acquisition benefits. So that should be regarded as a one-off benefit from the implementation, the integration of the Casanare Life book. The remainder comprised 2 areas. So the first is recurring OCG. So that is very much sustainable, repeatable OCG that we expect from our business units. So that totaled GBP 33 million. So that will recur at a reasonably similar level for the rest of the year, and we anticipate it will actually increase as we move forward. The second components were management actions. And -- when we were here at full year '25, I think one of the things I talked about was the fact that management actions on recurring management actions were going to be a feature of our results going forward. to be quite specific about it, we expect actually about 30% of our OCG results in any given year to be made up of management actions. So if you take the GBP 33 million recurring you can assume that, that will recur into future. If you take that GBP 12 million of management actions, you can assume that, that will also recur. And then if you look at any given year, the makeup of the results will be about 70% on that recurring bucket and about 30% from those management actions. And I guess, to put that into numbers in terms of how we're thinking about 2026, how that broadly breaks out is you can take the 33, implies about a mid-60s to high 60s outturn for our recurring OCG and the remainder management actions will be in and around 30%, which is that 30% of the total results. to give about 100 before the one-off contribution of GBP 51 million from the Casanare Life acquisition.

Thank you. Could the increasing scale of Phoenix and other consolidators make it harder for Cessna to win the larger transactions?

So we actually see, overall, the competitive environment being far less strong than it was around sort of 5 years ago when I joined the firm in that sort of M&A space. I think you're right to point to the deal that Phoenix now rebranded as Standard Life that for me is an interesting sort of journey back in time with somebody that worked as Standard Life for 15 years and then saw the brand or a moment disappear for a while. But that's sort of a large deal that they've done recently with Aegon U.K. for around GBP 2 billion of consideration probably means actually that there's even less likelihood that they would be looking at deals in our sort of space, which would be that sort of sub-billion level. When we look at the broader sort of market environment, one of the things when I joined Chesnara 5 years ago that had some concern around was perhaps that private equity firms might look more closely at our space. You saw Bank Capital bidding for Liverpool Victoria a number of years ago and paying a sort of premium to own funds, we haven't really seen that appetite come through in our part of the life insurance space, where we have seen private capital providers get involved is more in the bulk purchase annuity space with just group being acquired, for example, by Brookfield and also Apollo buying PIC for a large check of over GBP 5 billion. So when we look at that competitive environment, we think it's one that we can thrive in. We've shown that over the last 5 years with 8 deals executed, and we're continuing to see a positive M&A pipeline when we sort of sit here in 2026. And that's across the deal value scale. We're seeing some interesting smaller acquisitions, but some larger ones as well. And we've already had the opportunity to assess and evaluate a number of opportunities so far this year. So overall, we see a positive picture in that space.

Thank you, Steve. And how much of the HSBC deals expected synergies have actually been delivered so far?

So let me start just to where we are on the time line and Tom can then talk about sort of what's flowed through into the numbers so far, just to sort of remind you about some of the key milestones. So we announced the deal in July last year. We had regulatory approval in January. And then what we've been doing since have been taking the further steps ultimately leading up to the migration of data that we'll need to do from HSBC systems onto our target U.K. platform -- and this morning when we spoke to analysts and investors, and as you heard in my presentation, we remain on track to do that migration by the end of 2026. There will always be some other activity around that. But at that point, you'll see the business very largely move on to sort of one operating platform, one target operating model. We have already combined our leadership teams who are now running the business as the 2 sort of legal entities across 1 leadership team. We've started transferring some people to SS&C. So we're sort of well on track with the integration and migration activity that we need to deliver. Tom, do you just want to get a sense of then how that flows through to some of our metrics and when people might see that.

6 Yes. I mean there are really 3 types of synergies that we expect to generate from the deal and first, we have already seen come through the numbers. So the first or what I would call structural synergies or day 1 synergies from bringing the Cesar Life portfolio in the note Casaro Group portfolio, sorry. And they're almost -- I think I described them earlier sort of almost structural and automatic synergies we get from combining the risks on the balance sheet. So they contributed a large part of the GBP 51 million that we've reported and recognized within the half year. There are to further sources of synergies, which are yet to come. So one related to expenses. So once we work through the migration phase, once we have the business on our new administration platform, we expect to recognize the synergistic benefits from moving to that lower cost base. So that is yet to come. And then secondly, on capital optimization, there are further opportunities for us to optimize both the asset side and the liability side of the balance sheet that we've brought in. And again, we haven't done that in any -- to any great extent over the first half of this year. So they are yet to come. I think in terms of quantum, we're not issuing any guidance right now around the potential level of both of those synergy sources. But as I think we said earlier, would be coming back at full year '26. Just giving you a little bit more color around those 2 areas.

Great. The next question the proposed cut is Widows Europe acquisition looks interesting. What is the expected contribution to OCG was fully integrated?

So I'll maybe start with strategy and then Tom, you can give a center of OCG. So we think it's an interesting deal as well. We're glad that you do. I think it gives us some very interesting strategic opportunities. We see further opportunities in Luxembourg with the sort of tailored businesses there that that we may be able to consolidate, and it also gives us an operating platform and team that potentially can also operate in broader jurisdictions. When Tom and I have been sort of out visiting the business in this period where we're going through in preparation for change of control. We have some sort of vast language skills in that business. There's over 20 languages spoken across a team of around 40 to 45 people, which could then mean that we can operate in adjacent territories. At the time of the deal, just to remind you, we gave a couple of numbers as guidance. Now these were on a cash generation basis versus some of the new metrics we have around operating capital generation, but we talked about overall, around GBP 150 million of lifetime cash generation from the business with about EUR 100 million sort of emerging over the first 5 years. we obviously don't own that business yet. So there's sort of no update to -- so how those cash generation numbers will be delivered but we're looking forward, subject to that regulatory approval, hopefully, to welcome that business in sort of in and around the end of 2026. I don't know, Tom, do you want to make any comment around how cash generation plays to OCG.

Yes. I mean sort of hopefully answered most of my questions which is great. No, I was going to actually go back to that the guidance we issued when we made the announcement back in February. So we talked about that EUR 100 million of cash generation. It's not quite the same as OCG, but it's a fairly close proxy. So really, in terms of thinking about the incremental OCG, it will be you should take the GBP 100 million. It won't emerge evenly over the 5 years because we tend to make choices about when we take certain actions depending on market cycle, et cetera. So it's not going to be quite divided by -- but over that 5 years, the OCG contribution in euro terms won't be far off that GBP 100 million that we issued as guidance. Clearly, as Steve said, we're working through the completion process now. And really until we move to that full completion is a level of not uncertainty, but there will be a level of refinement around those projections and those cash flows. And again, we will sum to the update on the Jazan Life acquisition. We'll provide a further update on that cash flow outlook and the OCG uptick we expect from that deal as we close out that completion process with the regulator.

The next question is for Steve. I know the consistent optimism in your ability to acquire businesses. However, are you yet to acquire a business in Sweden and it is over 4 years since the business was acquired in the Netherlands. Why have you failed to acquire in these markets?

Yes. It's a little less than 4 years since we acquired a business in the Netherlands. So -- the last deal that we did in that market was a deal called consevArterics where we picked up an insurance portfolio there. But you're right to say that we haven't done a deal in the last couple of years in the Netherlands. In terms of the performance in the Netherlands, we've seen another period of robust term life sales, and we've seen an improvement actually in recent years in the margin that we're getting from that business as a result of some of the restructuring that we've been taking on in our Dutch business, where we brought the 2 insurance carriers that we used to have together to drive synergies. And what we've seen this year as well is the largest ever sort of cash remittance from that business since we began ownership, having bought it from LNG almost 10 years ago. So I think there's some very sort of positive signs again around some of the activity that the local team have been driving there. We still see the opportunity for acquisitions in the Netherlands. It's also a platform that could allow us to do -- take some actions on in terms of M&A in adjacent territories. There can be times when there's a little bit less to do. And also, there'll be some deals that we just don't think makes sense. In Sweden, I've talked probably for the last 12 months or so about at least a sort of a couple of assets in that market that we expect potentially to have to consider over the next couple of years. But it is a less active market. We've seen a couple of risk portfolios transacting sort of in that broader Nordics market over the last 6 months, but it's certainly safe to say that it's less active than U.K. Again, if we look at the Swedish performance, we've been very pleased with the net client cash flows that have been coming in the business, around GBP 700 million additional assets under administration now for that business over the over the period, be some good cost management. And we certainly have a platform there that would be ready for consolidation. But you're right to say that the bulk of the activity more recently has been in the U.K. and obviously, the entry into Luxembourg. We think that's one of the benefits of the model that we have that actually we have these multiple sort of territorial sort of options when we think of M&A. And there are adjacent markets as well that we could access. So I certainly was striking a positive tone this morning when we spoke to analysts about the positive M&A pipeline that we're seeing, the opportunity to say we're already looking at. And we're certainly in a position that we believe we can do more given the available firepower and this great track record that we now have over the last 5 years of executing 8 acquisitions.

Thank you. Are you prepared to take on more debt or issue equity if the right large scale acquisition comes along? Or is maintaining the current balance sheet strength more important?

So we -- our ambition is certainly not limited by the readily available resources that are on the balance sheet at the moment and sort of Tom gave a sense of where we're seeing those resources at the moment, and I'll ask him to sort of talk about that and also the debt capacity. And if we see acquisitions -- if you look at the financial framework that we have, we've got material headroom on the solvency side, as I said in my presentation, well above the GBP 140 million to GBP 160 million sort of operating range that we seek to run the business at. We've got strong levels of central liquidity as well. The leverage ratio is well below the 30% target level that we've talked about. So that does certainly mean that this capacity for us to finance small and larger deals. And we are seeing opportunities across the deal range size at the moment in the marketplace. Tom, do you want to talk about some of the numbers there.

Yes. I mean in terms of debt capacity, appetite for debt, one of the things we've been careful around actually over the last couple of years is utilizing a very robust framework to assess M&A. So you'll notice from the numbers today, as Steve says, we've got a very healthy solvency ratio, which means we have quite a bit of solvency headroom but also our leverage ratio is much, much lower than our long-term sort of ambition, which is 30% or less. We're in the low 20s right now. So what that means actually is we can raise debt whilst maintaining the strength of the balance sheet, which I think your question was around sort of is it possible to almost do both at the same time, and I think we can. And it's not just actually in many senses, it's not just the level of solvency service we have. It's also the resilience of the balance sheet to things like changes in the markets in particular. So if you look at the sensitivities of the balance sheet, a lot of different stress factors, you'll see that actually in a whole range of different scenarios, our solvency ratio actually is pretty stable. So that means we can confidently put more debt on the balance sheet, knowing in the background that actually even if the macro turns against us, it doesn't compromise the solvency position, it doesn't adversely affect the leverage ratio. In terms of Quantum, we've got capacity for certainly GBP 150 million, for example, if we were to go out to seek some support from debt markets. And I think that, combined with the cash we have on balance sheet gives us quite a healthy level of funding opportunities before alternative options like an equity raise, for example.