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's and Countrywide Assured's Long-Term Issuer Default Ratings (IDR) of 'A-. The Outlooks on the ratings are Stable.
The ratings reflect Chesnara's strong capitalisation, company profile and earnings.
Key Rating Drivers
Strong Capitalisation: Our assessment of Chesnara's capital position is mainly driven by the insurer's strong Solvency 2 (S2) ratio. Its S2 coverage ratio improved to 195% at end-June 2022 from 152% at end-2021, mainly due to a GBP200 million Tier 2 note issue in February 2022. Our view is also reinforced by an 'Extremely Strong' score on Fitch's Prism Factor-Based Capital Model (Prism FBM) based on both end-2021 and end-2020 figures.
High Leverage: Chesnara's Fitch-calculated financial leverage ratio (FLR) weakened to 35% at end-1H22 from 30% at end-2021 (on a pro-forma basis, including the February 2022 notes), largely due to IFRS loss in 1H22 as a result of financial market movements. Its debt leverage comprises Tier 2 notes, which supports cash resources available for acquisitions. We expect the FLR ratio to improve following the completion of its Conservatrix acquisition in early 2023, and to trend downwards to around 30% thereafter on organic capital generation and further acquisitions.
Our FLR calculation does not adjust for asset-and-liability valuation-accounting mismatches in the group's Dutch business, leading to a slightly higher FLR ratio than would otherwise be the case. These mismatches will not apply under the new IFRS17 reporting standard, which comes into force in 2023.
Company Profile Limited by Size: Chesnara is a life and pensions consolidator with operating businesses in the UK (Countrywide), Sweden (Movestic) and the Netherlands (Scildon and Waard). Our assessment of the group's company profile benefits from an established record of life-insurance book acquisitions, and also strong new business market shares, but is limited by the group's 'Less Favourable' operating scale. Chesnara continues to grow, having completed the Sanlam Life & Pensions and Robein Leven purchases in 1H22 and announced its proposed acquisition of Conservatrix's insurance portfolio in the Netherlands in July 2022. The latter acquisition will add GBP0.5 billion of assets under management (AUM) to the Chesnara's end-June AUM of GBP11.2 billion.
Strong Financial Performance: Chesnara's financial performance has been strong in recent years, despite a weaker 2020 due to market volatility arising from the pandemic. Chesnara's net income return on equity (ROE) was 6% in 2021 with a five-year average of 10%. Chesnara reported a GBP68 million IFRS loss in 1H22 mainly due to the financial market weakness and accounting mismatch relating to Dutch subsidiaries. In the group's Dutch subsidiaries insurance liabilities, unlike assets, were not adjusted for higher interest rates, resulting in the IFRS loss in 1H22.
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 to above 30% on a sustained basis
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A significant improvement in the company profile, through substantially increased size and scale, for example.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
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
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
CHESNARA PLC 
