Fitch Ratings has affirmed Countrywide Assured plc's, an operating company of Chesnara plc, Insurer Financial Strength (IFS) Rating at 'A'. Fitch has simultaneously affirmed Chesnara plc's and Countrywide Assured's (together, Chesnara) Long-Term Issuer Default Ratings (IDR) at 'A-.
The Outlooks on the ratings are Stable.
The ratings reflect Chesnara's strong capitalisation, company profile and financial performance and earnings.
Key Rating Drivers
Strong Company Profile: Chesnara is a life and pensions consolidator with businesses in the UK (Countrywide, operating as closed-book, a pensions and savings, and life cover and critical illness benefit provider), Sweden (Movestic, a unit-linked pension and savings provider) and the Netherlands (Scildon, a risk and investment-linked products provider and Waard, a life and pension business closed to new business). Our assessment of the group's company profile is underpinned by an established record of life-insurance book acquisitions, as well as strong new business market shares in life and pension, but is limited by the group's 'Less Favourable' operating scale versus other insurers.
Growth Through Acquisitions: Chesnara continues to grow its franchise, having completed the Sanlam Life & Pensions and Robein Leven purchases in 2022 and the acquisition of Conservatrix's insurance portfolio in the Netherlands in 2023. In May 2023, Chesnara announced the acquisition of Canada Life UK's onshore individual protection business for GBP9 million, which is internally funded. The latter will add 47,000 protection policyholders, which are expected to transfer to Countrywide Assured in 2024, subject to the completion of a Part VII transfer (a court-sanctioned legal transfer of policies of one company to another).
We view these acquisitions as being in line with the group's strategy and they support our assessment of Chesnara's company profile.
Strong Capitalisation: Fitch's assessment of Chesnara's capital position is driven by the insurer's strong Solvency II (S2) ratio, which improved to 197% at end-2022 from 152% at end-2021, mainly due to a GBP200 million Tier 2 note issue in February 2022. Our view is also supported by an 'Extremely Strong' score on Fitch's Prism Factor-Based Capital Model based on end-2022 financials. In 1H23, Chesnara's S2 position improved further to 205%.
High Leverage: Chesnara's end-June 2023's IFRS 17-based financial leverage ratio (FLR) remained little changed at 29.5% (end-2022: 30%). IFRS 17-based FLR calculations adjust for asset-and-liability valuation-accounting mismatches in the group's Dutch business, leading to a slightly lower FLR ratio than under IFRS 4. Under IFRS 4, Chesnara's Fitch-calculated FLR weakened to 38% at end-2022 from 30% at end-2021 (on a pro-forma basis, including the February 2022 notes), largely due to IFRS loss in 2022 as a result of financial-market movements.
Volatile Financial Performance: Chesnara's financial performance is volatile. Chesnara reported a GBP98 million IFRS loss in 2022 resulting in a net income return in equity (RoE) of -25% (2021: 6%), mainly due to the financial market weakness and accounting mismatch relating to its Dutch subsidiaries. In the Dutch subsidiaries, insurance liabilities, unlike assets, were not adjusted for higher interest rates, resulting in the IFRS loss in 2022. Under IFRS 17 (came in force in 2023), the 2022 loss was much smaller versus the corresponding loss reported under IFRS 4 (GBP33 million). We expect IFRS 17 to reduce accounting mismatch and, consequently, a less volatile financial result.
Good Interest Coverage: On a cash flow basis, Chesnara's fixed-charge coverage (FCC) was around 5x in 2022. We look at cashflow metric to supplement our analysis for cash-generative closed books insurers. FCC based on the reported operating profit decreased to zero in 2022 from 19x in 2021. This reduction reflects the increase in interest costs following the Tier 2 notes issue in February 2022 and weaker operating profit.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Deterioration in the company profile, for example, due to a sustained weakening in new business volumes or failure to complete additional acquisitions over the medium term
A weakening in capitalisation as measured by a fall in the S2 ratio to below 140% on a sustained basis
An increase in FLR on a sustained basis
A weakening in FCC on a sustained basis
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
A significant improvement in the company profile, for example, through substantially increased size and scale
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
CHESNARA PLC 
