S2 - Episode 5: The Business Case: Interview with Steve Murray, CEO of Chesnara plc

Join hosts Mark Wharrier and Phil Clark for an engaging conversation with Steve Murray, Group Chief Executive Officer of Chesnara plc. In this episode, Steve discusses Chesnara’s evolution into a leading European life, pensions and investment company, specialising in the consolidation and management of life and savings businesses across the UK, Sweden and the Netherlands. He shares insights into the company’s three-pillar strategy of maximising value from existing business, acquiring life and pensions businesses, and enhancing value through profitable new business. The conversation explores Chesnara’s disciplined approach to acquisitions, including the transformational acquisition of HSBC Life (UK) and the proposed acquisition of Scottish Widows Europe SA, as well as the opportunities these transactions create for future growth and cash generation. Steve also reflects on leadership, capital allocation, customer outcomes, dividend growth, and the long-term trends shaping the life and pensions sector as Chesnara continues to scale its platform and deliver value for policyholders and shareholders alike.

Transcript

SPEAKER_00 0:16

Welcome to the business case in partnership with the leading investor presentation Help Engage Investor. This is the podcast where we dive deep into the stories behind the UK's leading companies. I'm Mark Morrier.

SPEAKER_02 0:29

And I'm Phil Clark. And in each episode, we'll be sitting down with top business leaders to uncover their career journeys, the challenges they faced, and the insights that have shaped their success.

SPEAKER_00 0:42

We've spent our careers analyzing and investing in UK companies, meeting managements to understand the business case. And now we want to share those insights with you. We will hear about the companies that are guests lead and how they are positioned for the future.

SPEAKER_02 0:58

But we also want to find out what makes these business leaders tick, the highs and the lows that they've experienced, and the lessons of management that might apply to your life.

SPEAKER_00 1:10

Please remember this podcast is not investment advice and is for informational and educational purposes only.

SPEAKER_02 1:17

Today's podcast guest is Steve Murray, the CEO of Cesnara. Steve brings to life uh the Cesnara business model, which is really consolidating life insurance books and then squeezing uh synergies and efficiencies from those businesses. He um he really pitches this at the right level. We don't get into too much detail around the minutiae of insurance, but it's a it's a great listen. Hope you enjoy it. Today we're joined by Steve Murray, the CEO of Cesnara, a FTSE 250 listed life insurance consolidator that is operating across the UK and Europe. The business has been listed since 2006, and in that time, Cesnara has built a strong track record of acquisitions and notably has delivered consistent dividend growth every year since the IPO. Steve became the CEO in 2021 and has overseen an acceleration in deal activity, positioning Cesnara as a scaled player in a consolidating market. Steve, welcome to the Business Case Podcast.

SPEAKER_01 2:27

Thank you very much. Great to be here.

SPEAKER_02 2:29

Great. Well, just to get us everyone up to speed, and for our listeners that aren't necessarily specialists in the insurance market, what does Cesnara do today and what are the core ingredients behind its success?

SPEAKER_01 2:41

Yeah, so at a very high level, what Cesnara does today is we provide products to around 1.4 million customers across the United Kingdom, Sweden, and the Netherlands. And we're helping those customers save for their futures, invest in certain solutions, and we also protect people's lives through life insurance products as well. Most of those customers, as you alluded to in your intro, have come to us through acquisition. So the business was set up back in the day actually to be a consolidator, to go in and find books of business or companies, bring those assets, bring those customers into the group, hopefully run them efficiently and provide a nice dividend for our for our shareholders. And we've done that very successfully over the last 20 years or so. So we've we've had around 16 acquisitions in that period and a material scaling up, particularly in the last five years. Okay. Great.

SPEAKER_00 3:30

Right, Steve, well, before we uh dig into the model a little bit further, um let's just sort of step back and talk about um your background. Because I see from your your CV, you've uh worked at Royal London, Standard Life. Um, you know, what did you learn during those formative uh experiences and insurance, perhaps that have really uh colored how you manage the business today?

SPEAKER_01 3:52

Yeah, I mean it's interesting. My my learning experiences probably through life have tended to be as much through failures rather than the uh the successes. So um if I think about some of the things that certainly were quite challenging in larger organizations at times, it was sort of getting everybody unified behind a new idea or a new thing, particularly when that was in competition against 20, 30, 40 other things that organizations were working on. So actually seeing how leaders sort of did that and got buy-in from people, not just sort of on day one, but kept sort of coming back to that and getting that sort of strong alignment was that was a real strong formative experience. And quite often you would see people coming forward with fantastically interesting ideas, but for some reason not being able to sort of get the buy-in for that. So that was um a real big experience for me. Um, I think as well, a stronger focus on returns. So the business that I joined uh when I joined Standard Life at the back end of 2004 was a mutual, but was having to go through a strategic review ultimately, which ended up with it having to materially repair its balance sheet. Uh and my personal view is you you probably saw in parts of that business either an over-expansion or uh or a lack of discipline around the way that they were deploying capital. So really focusing not just on the short-term uh returns, maybe not on a sales metric which shows you beaten your competitors, but really thinking short, medium, and longer terms. And that's something that insurance companies should be very good at because we're looking after customers for very long periods of time, quite often from the start of their adult life right the way uh through until um until the end of it. So those would be some of the sort of early formative um experiences for me. And then this is probably a little bit twee, I suspect lots of people say this, but just the importance of having great people to work with and around you and that have got a shared vision and belief, that are prepared to work hard, uh, will leave some of the politics sort of um out of the organization and want to get stuff done. And that's something I've had the huge fortune to work with incredibly talented people and working on some really interesting things, both in acquisitions and strategically. And I've certainly tried to take that forward into Cesnara.

SPEAKER_00 6:06

Now it's interesting. Um, you both work both in the mutual world and the listed world. Um, you know, any differences um you know in terms of uh how both models work and perhaps which one you know is is the best environment for long-term decisions?

SPEAKER_01 6:23

It's a it's a great question. Um so look, I think if when you look at the mutual model, the decision making is ultimately a little bit more straightforward because you're removing an additional stakeholder being the shareholder. Um so, and actually, if you look at sort of globally, there are some huge mutual organizations delivering fantastic returns that have been very successful. Slightly strangely in the UK, there are there are less, I think, than there probably should be. I mean, Royal London's a great example of a very successful mutual that continues to go from strength to strength under uh Barry's uh leadership, who's uh uh as well as having been my boss's uh count as a friend uh as uh as as well. I think the challenge, though, at times for mutuals is not having to stand up in front of a third party every quarter, every half, every year, and say, this is how we're deploying capital, this is how we're um delivering returns, here's how we're managing the risks, and then sitting in front of you know guy guys like you and your old jobs and sort of saying, Well, this is this is the strategy, here's how we're competing, and those sorts of things, it can sometimes mean I think that people are a bit less disciplined around how they're generating um returns. So both both uh models can uh can thrive. I really enjoyed my time at Royal London, it was a brilliant place um to work. At Cesnara, we always, when we speak to investors, we say we love the discipline of sitting in front of investors and sort of having to sing for our supper on a regular basis and say, here's why we believe the company continues to be a great one to invest in. Um and we like the dividend as well, of uh the discipline, sorry, of having a dividend to pay as well. We think that sort of keeps us really honest about that that sort of capital discipline.

SPEAKER_02 8:06

Great. Well, Steve, let's get into the the model and you know where where you can create value and and drive value. Um, you know, you said you said in your opening remarks, or you were responding to my question, you know, you're fundamentally you're a consolidator of of life books, yeah, and that's what you've been created to do, and obviously you've got a good track record for that. At a really high level, what's the core strategic log logic behind being a consolidator? Because it feels like it's quite a hot market at the moment.

SPEAKER_01 8:38

Yeah, there's I mean there's certainly a lot of interest at the um at the moment. The the the sort of the overall competitive environment is probably um less competitive than when I joined Ces Nara. In in part, I think so. In the UK, we've seen a lot of insurers and also private markets providers looking to get into this bulk purchase annuity space. And what that is at its heart is um insurance companies, in effect, providing companies with an insurance policy that says if you have defined benefit um pension liabilities, the insurance company will look after those, deliver a return, and make sure that those pensioners get the money that they should going forward. And as part of that trade, the insurance company is believing that they can make a sort of higher return than uh than than the than the sort of the base core liabilities that are that are sort of coming across. So we've seen a lot of capital being attracted into that space. And it's probably meant in that sort of purer consolidation space. There's still plenty of people sort of looking at that across Europe, but we've actually seen the competition lessen, perhaps because they think that there's better returns for them there. And these organizations have got huge multi-billion um balance sheets, and that's not a space that we feel we can compete in. The reason it's interesting for us in an organization our size is I think you see very large financial services companies that will be continuing to sort of refine their strategy, looking for different ways to deploy capital. And as they do that, there'll be product lines or strategies that they started five, ten years ago that become less core. And we can provide a really good solution for that by coming along and saying, look, if you've got a book of business that's got 40,000, 50,000 policyholders or more, the recent deal that we did with HSBC was a much larger deal. We can bring those customers in safely, look after them, manage them efficiently, and potentially save either those companies some cost if they're doing a sort of technology replatform, or they can free that capital up to deploy somewhere else. And because there tends to be a bit of a friction cost around that, you tend to see normally you can acquire these books of business at a discount to book. So if we can run that business efficiently and also find other ways to generate synergies, we're providing a great solution for the corporate, a very strong sort of custodian for customers, and we can make a nice return from that for shareholders. And I think the business has done a great job of that over the last 20 odd years, certainly long before I joined. And we've seen a little bit of a step up in that rate, I think, as more assets have been coming to the market over about the last five years.

SPEAKER_02 11:12

Yeah, we'll we'll get into capital allocation a little bit later on sort of what makes a deal look successful. But it but if we just again thinking about how you drive value, again, again, as an outsider looking in, it fit seem to me like there's sort of three main areas where you have synergy or or basically a potential competitive advantage. And maybe if we can go through them one by one, sure. You may disagree with the three. Uh funding advantage feels like there's a there's potentially scale benefit around cost of capital, so be interested to get your take. Investment returns, so whether as a sophisticated operator, there are opportunities for you to drive higher returns. And then I think the third one, maybe the most obvious one, looks like operating efficiency. Yeah. And that's maybe when you know when you've got cost synergy around the platform. So could we take those one in a time in terms of how it works in practice for you? And if there's a AN other that you would throw into the mix, please do.

SPEAKER_01 12:08

Yeah, no, I was gonna say I'll probably just for just for fun, I'll I'll throw a fourth in as well. So yeah, so so efficiency is certainly a lever that that we have, and there's that there's actually two elements to that. So the way that insurance companies sort of look at the books of business that they that they run is we make assumptions about what will happen within that book over, say, it's 40, 50 year lifetime. And that includes assumptions around the cost per policy that it that um that that we think we can uh run those books for and efficiency. So if we're acquiring a book of business and it has a cost per policy of £100 and we can run that at 95, potentially there's some upside that we can create. But the other way that we can also create upside is if we can be more certain about what the cost per policy is for that book over a longer period of time, we have to hold less capital against that as well. So there are sort of two things uh that come together without getting sort of too technical around that. So, so for us, what we're trying to do is is is evaluate the level of efficiency that's all already there. Can we bring those books of business onto our platforms without a large IT development? Do we understand those products? Do we have the teams already that can scale up and sort of do all the work that you need to do to sort of manage those? And also then when we look at the sort of tail of those books, can we ensure that our cost base is variable enough that if we don't bring further scale into the business, when those books run off, our costs run off at a similar rate to those to those books? So that that is certainly uh an area of uh of synergy. And I think we've done a good job as an organization in terms of the discipline around cost management. We've signed a deal in the UK recently with a new technology uh provider, uh SSC, a large um American tech firm, that should make that uh that job easier in the long term for us to do in the in the UK. So that's certainly one area. Second second one I would absolutely agree with is there's potential upside if we can generate returns above a risk-free rate. So when we um work out the the sort of balance sheet under uh uh our regulatory reserve rules known as Solvency two, we do a sort of NPV calc, which is you take the assets and liabilities on your boot, you run them uh off over time, discounting them back, which I suspect a number of um investors um do. As part of that, we assume a risk-free rate of return. Now, a number of the policy holders uh that that we look after money for, their monies will be invested in equities or corporate bonds, whatever it might be, through sort of unit link products. So if the returns there are greater than risk-free, we make an additional margin, we get more assets, and that can compound up uh quite significantly over the lifetime of a book. And then secondly, for the risk business that we run, so if it's a life insurance business, we're taking premiums from somebody, and then if they have a life event, we give them a lump sum back uh for most of the products. In terms of the premiums that we take in, if we can make a good investment return on that, again, there's some upside for us potentially available when we run the uh when we're on those sort of books off over time. Um and we've seen within Cesnara, particularly because about three-quarters of our business has been unit-linked, where we take charges on the assets under administration, if you're seeing a lot of those assets being invested by the policyholder and equities, we tend to see the revenues of those sort of grow above a risk-free rate of return over time. So that can be quite a material area of upside.

SPEAKER_02 15:40

Before you go into the third one, just so I understand, are there are there real scale advantages by I guess what I'm trying to drive at is the consol is the consolidation open up additional opportunities above and beyond almost like your BAU business? Like are is there efficiencies um more uh sophistication that you can introduce and therefore you get the the benefit from driving scale and consolidation?

SPEAKER_01 16:06

Yeah, so so I suppose on the efficiency side, um so firstly, some of the things that we do. So um if I talk about the deal with SSNC, and I I won't go into the detailed commercials, but if if we bring more scale onto that platform, ultimately we get a better rate in terms of the unit cost and they make more money. So it should be a really synergistic relationship. Exactly. So you so you get some of that benefit, and then this sort of secondary benefit is there'll be certain costs which are fixed within our organization, and if we have more policies, you can sort of spread that cost more broadly. And again, those can be quite meaningful. Um, and the way as well with insurance companies that um the insurance balance sheet works is we have to hold capital against certain risks. So if we can reduce the costs associated with certain portfolios, we can get a real compounding impact and have to hold um less capital. On the investment side, I think where you start to see some of those benefits, and we're seeing this now, is as you get to bigger scale, I think you can bring in a little bit more sophistication around your investment strategies. Um you probably see that a little bit more then in terms of one of the third areas of synergy, which is that the more risk that you have in your book of business, you tend to get better offsets and diversification benefit and mixing of risks and things like that. So you tend to get a little bit of natural capital synergy coming through. And there's it also gives us a broader set of actions that we can take as an insurance company. So, uh, as an example, I have to hold or the business has to hold a lot of capital against something known as a mass lapse event. So, what the regulations uh ask us to do is to say if 40% of our enforced book was to leave tomorrow, what would happen to the business and how much capital do you need to hold against that sort of event? Now I can find a counterparty, it might be a good self that says, I don't think that's gonna happen. So I'm happy to take some of that risk and enter into an insurance contract with you. Right. Um, and we can get some material capital benefits. So there are lots and lots of examples of that, whereas you get a bit of a bigger book of business, you've got more of these actions that you can take either to de-risk the book or accelerate the release of capital. And we have a sort of playbook within the organization that we'll we'll sort of work through and take actions. It might be hedging of foreign exchange risk or things like that that we can take. And you tend to find if you've got a sort of bigger bucket of things, you can actually take more of these actions more regularly. So got it.

SPEAKER_02 18:35

And just one final question just on the cost per policy. Just sitting here, it strikes me that your your confidence level on your cost per policy today is probably going to be lower than maybe it was five years ago just because of technology, the pace of change, AI, I mean, probably to the benefit of you, but does it feel like that in the business that actually your visibility or or confidence level on what your cost base will be is changing?

SPEAKER_01 19:04

I I think you do go through cycles where you'll be you'll have things sort of happening in the market that that either gives you a greater or lesser degree of confidence. So I suppose if you think about, I mean, COVID's probably the best example of this when if you saw sort of inflation rates and things and where they were sort of moving. Now, now again, what was interesting for our business, because we uh as an insurance company, one of the things we have to do is stress the hell out of the balance sheet all the time. And you're looking at uh as insurance people, we tend to look at the downside first before considering the uh the upside. So we're real fun at dinner parties and things like that, um, you know, making sure you put things on coasters and all that sort of stuff. But but um the so so actually when one of the things that we were concerned about during that period, if we saw inflation going up and up and up, but ultimately that wasn't then going to flow through into what you could charge your customers, so you've got to sort of disjoint what then happens in terms of the way that you're able to manage your your sort of cost base effectively. So, even though actually the last period from a macro perspective, we've we've seen in inflation rates moving around quite materially, it's nowhere near as severe as in recent years where we've sort of stressed the balance sheet. So I think while there's a bit of uncertainty there, there's enough things within our model, within the commercial contracts that we have, and probably the value levers that we've got available that we've got a good degree of confidence. And then we do see things like AI, we we see that ultimately as a net benefit. And also also, it's it's probably the first time, pretty much I think in my career, and um, you know, I I've I've been doing this for sort of the best part of 25 years, where this sort of technological development is is as accessible and affordable for a company my size as it is for a sort of global multinational. And that we find that really exciting. So if you're able to buy this technology on a per license basis, deploy that quite quickly into your organization. I mean, Microsoft are putting this tech immediately on your on your desktop with very little sort of incremental license cost. Um, we think we're a pretty nimble and agile organization. So we think that could be quite interesting. And if we can grow the company substantially and obviously not grow the cost space at the same rate, that should be um that could be very track, very attractive to us from a sort of commercial perspective. So I I think you're absolutely right to say that there's there's probably more going on in the world than there ever has been before, including uh including things like things like AI. I suppose when we sort of make that strategic assessment, net net, we see overall probably that causing a higher degree of certainty around things like the expense space than maybe we have done in in certain cycles that we faced before.

SPEAKER_00 21:39

Right. Well, let's move on to the broader industry structure and regulation. And we had we had a pact before the call, not to dive too deep into solvency two. Otherwise, uh this may become quite a uh sedative uh podcast. Um but in terms of regulation, it feels as though it's a it's a tailwind for consolidators. Um but you know. What is the regulator really trying to achieve, and how does that shape the opportunity set for Cesnara?

SPEAKER_01 22:06

So when we look at the regulators that we deal with across the Netherlands, Sweden, uh, the UK, and more recently, we're we're in the process of entering Luxembourg as well. So the so the CAA. So these are all big grown-up regulators. There's there's very high standards of regulation in all these territories, and we we like that. We think that's the environment. Exactly. So there's a bit of a barrier to entry, but also as well, we're not trying to sort of pull lots of value levers sort of aggressively. We're not looking for a private equity type return on what we're doing. So actually having those sort of high standards of regulation and make and I think what regulators are really trying to do is make sure that the commercial incentives for insurance companies are aligned with customers as far as you can you can allow those. And they're very focused on ensuring customers get good outcomes and not just in the short term, but looking right the way across the lifetime of the of the book. And I think what they've been worried about is particularly through ownership structures, if there's a very large misalignment between a customer's interest in 40 years' time and somebody's interest of maximizing value in five years' time, how might that manifest itself for customers? So I think there's been a strong focus on that. Um, you mentioned Somsi2. I mean, what Somsi 2 was really trying to do is to give regulators confidence that there was more harmony around the way their assets and liabilities were being valued across Europe and making sure that the sort of capital that was there for customers and extremists was absolutely there and and and regulators could could sort of measure that more consistently. And I think the regime's done a very good job at that. It's probably actually meant that the sector's overcapitalized, if anything, but from a customer perspective, that's very good because I think you're you know you're seeing balance sheets probably the strongest that there have been. Um, and then in the UK, if you think about some of the action that regulators have been taking, it's been trying to perhaps deal with practices that have been going on in the past that that really aren't fit for purpose in the in the current market. Um and it and again, that should be a net positive for um for customers and for organizations like ourselves. We're we're very, very we're we're far more focused actually on existing customers. We write a little bit of new business in all of the territories that we're in, but the vast majority of what we do is looking after customer interests day by day. And if we can do a really good job at that, it gives us the right to acquire other books because regulators have a right to tell us no, you're not you're not a you're not a good counterparty. Uh, and then thirdly, it means that we can continue to write new business. So so we're we're very strongly aligned with that sort of regulatory focus. But at its highest level, I think it's pretty simple what the regulators are trying trying to do, even though there's been quite a period of dramatic regulatory change in our sector over the last 10 years.

SPEAKER_00 24:54

It should work well because for the customer, in that you know, this is your day job, this is your priority. Whereas, take for instance the business you bought from HSBC, I'd be surprised if that's in the top 50 or 60 business units within the whole organization. So clearly it doesn't get a lot of focus.

SPEAKER_01 25:11

Yeah, and and I think um that you know that that that ultimately um if you listen to what uh George, who's the CEO there, was saying, that that was driving the uh the spozzal, you know, that had been a business that they'd been good good custodians of for a long period of time. And that was a business that actually came out of Midland Bank back in the day. If um if you're as old as I am, you might remember having the uh the bank account from Midland when you were uh when Griffin Saver. Griffin Saver. Um but but it but it had never grown to be a significant part of that overall HSPC um HSPC group. When you bring that into Cesnar, it's a very significant part of um of what we're doing. That you know, over 450,000 customers, you know, more than doubles the size of our UK um business. So so I mean, just just in terms of scale, of course, we're gonna have more focus um net on those those uh those customers, and we're we're really determined to do a very, very good job uh job for them.

SPEAKER_00 26:08

So how do you see the competitive landscape at the moment? You've done 16 acquisitions so far. You know, how many potential deals are out there over the next 10, 15, 20 years?

SPEAKER_01 26:19

Yeah, it it's it's one of the things I think that people tend to misunderstand a little bit about our space actually is that market opportunity. So um anybody that's followed the insurance sector for for a little while, the first big consolidator in UK insurance was Resolution, run by Supply Cowdery. Um that team did a did a very good job, um, delivered a lot of value for shareholders. But when they used to stand up in front of the city, they would sort of say there's about 13 back books, uh so legacy books of business that are available in this market. Um, and so far we've acquired two, and then we've acquired three, four, five. And and this idea how many left? That's right, absolutely. So quite often when we speak to investors, particularly those that remember the success of that model, they say, Well, is there really anything left to do? Um, and actually the reality is that the market is replenishing itself on a regular basis as these large companies change strategy or say, look, we you might be a North American company and say, Well, we're trying to do something in UK insurance and it's never really got to scale, or actually the returns now that are available there, we think we can get more from Asia, whatever, whatever it might be. So, so when we try and size the market, I mean, from our perspective, it's sort of infinite at our size because there are so many um either companies within their own right or slithers of portfolios within large organizations that we think are available. And that's why we've been able to do 16 acquisitions in the last um uh the last sort of 20 years or so, and and around half of those within the last um five years, because we're we're starting to see, I think, larger organizations being more and more disciplined about the things that they're going to be focused on and do well and and and not. So um, and and when we look at that sort of opportunity set, that's both within the existing territories that we're in. Uh, we're about to enter a new market in the shape of Luxembourg. There may be other adjacent markets within sort of Western Europe for us to look at. So we're we're really positive about the size, um, size of that market. What we have seen certainly since I joined, so one of the when when um when I was sort of uh pitching for my uh for my current role uh going through the process of being recruited, one of the things that I said to the board that was a risk to the acquisition strategy was a lot of private markets capital that might be looking to come into our space. So I was just coming out of Royal London and we had been um beaten to the punch by Bang Capital in uh trying to acquire Liverpool Victoria. You know, all of this is in the in the press. Um, and the bit that worried me was, you know, Royal London was a very large insurance company. We had a lot of scale in administration. We also had a pretty big asset manager that was good to generate some synergies from gathering LV's assets and moving those. And we had somebody that had no synergies at all available to them through uh cost synergies, capital synergies that was in a position that they could meet, if not slightly outbid us. And I was saying if that is then flowing through into pricing in the market, that concerns me in terms potentially of our ability to compete or where valuations might be going. Ultimately, we haven't really seen that private capital entering our space. We've tended to see that going into this bulk purchase annuity space a little bit more. So Brookfield have just bought Just Group for a nice premium. Uh Apollo have just bought PIC in our in our space as well. So you're certainly seeing lots of capital entering that space. So that's meant actually there's been a little bit more competition for assets than we might have thought. And then you've probably seen the most successful consolidator in the UK, uh, Phoenix, now we've branded as Standard Life, doing larger deals, and they've just done a large deal with Aegon UK. So again, for the sort of deal size that we've been looking at, which has probably been you know 500 million uh and and below, the competition for assets in that space has been a little bit less than I'd expected when I interesting.

SPEAKER_00 30:14

So it's become a bit of a sweet spot because of the other attraction.

SPEAKER_01 30:18

I think so. I think so. And and we're we're still, you know, I I wake up every morning uh sort of positively paranoid, as it were, that you you sort of look for the things that that might distract you strategically and impact you and and certainly touch wood at the moment. Um we're not seeing lots of people sort of looking to enter our space, and we think there's uh we think there's still a good degree of opportunity for us there.

SPEAKER_02 30:38

So maybe we can get into the uh MA discussion a little bit more here, Steve. I mean uh on the face of it, you you seem to be playing a nice arbitrage. You know, you you're you're you're buying big businesses for £10 but for £7.50, give or take, you're trading at one time's book, you're you're you're typically a 25% discount, I think, on books that you've you've bought, not every deal, but in in aggregate. Um how sustainable is that arbitrage? Because I mean capital markets are normally quite efficient, but it seems that you've been able to kind of carve out this sustained period of of playing the arbitrage.

SPEAKER_01 31:13

Yeah, so I suppose if I look back historically, you've you've tended to find through most cycles that you've seen that sort of dynamic at play. And I and I think I think there's some sort of good reasons for that that that certainly give me confidence that that sort of dynamic can continue. So um I think very often, so when we're looking at sort of books of business coming to market, um you know, at times they're a very small part of a much larger group. There's a sort of friction cost that a group is trying to avoid, so that might be additional technology cost, or it might be a drag and return or whatever it might be. So there tends to be there's a benefit of selling something long-core. There is, absolutely. Um and and at the same time, there is a cost for us in terms of bringing that bringing that business on. There's there's obviously risk around us getting some of the assumptions wrong. So I think that's that's why you're absolutely right to say that more often than not, there's been a discount to the to the book value. And actually, even in the the occasions where there hasn't been, there tends to have been something within that book that that means when you bring it on to your own book of business, you're you're ultimately you're paying, you're you're still um you're getting a big discount when you manage it. So that might be a book of business that's got a very high cost per policy, and you're happy to pay above book because you know when you bring it on you'll you'll generate some some cost energies. Um so what so what would change that dynamic? I mean, it might be ultimately that organizations decide they're only willing to sell at book for whatever raise, whatever reason. Well, in that case, the deal probably isn't gonna happen. Whereas if anything, I think we've seen an acceleration of the trend of people looking to offload these um these books of business and certainly simplify um the models that they have. And that I suppose if you if you sort of flip that round then into how investors would look at Ces Nara. So if we can buy at a discount, so if I if I can buy a book at sort of 75 pence in the pound, if I'm running it um as efficiently as the previous insurance company and they get all their maths right, there should be somewhere approaching 25p of upside. And if I can generate more cost efficiency or capital synergies, or I get some of the investment return upside that you talked about earlier on, that should mean actually that there's a reasonable amount of value there for us to create from those deals. And that's why I think then that you see successful consolidators, and I would put us in that bracket, um, not trading at a significant discounted book that you actually see that value recognize. I clearly believe we should be at a premium because there's no sort of franchise value in there, but that's up to me to demonstrate with the market and investors over time.

SPEAKER_02 33:49

So And in terms of key metrics that you're looking at when you're when you're evaluating some of your deals, I mean c clearly cash return on cash invested is absolutely central. But what what what are some of the other metrics that you're looking at? And what why do you think that cash return is the right lens when maybe compared to some other more traditional valuation methods?

SPEAKER_01 34:08

Yeah, I mean when I when I started the the the sort of the valuation approach tended to be uh the embedded value, and the embedded value calculation was a mysterious calculation that lots of people didn't really understand, and you could make whatever assumptions that you liked. And then if uh a business was writing uh new business, you'd you'd sort of put a four to six times multiple on that new business, and that was sort of established practice. And it it's sort of fundamentally ignored in most instances the fact that there could be no capital resources being generated and returned as as part of that because the embedded value ultimately never crystallized and turned into sort of cash and capital. So I think that's why for us that sort of that cash dynamic is very, very important. And and looking at it both sort of short, medium, and long term. So the couple of deals that we've announced in the last 12 months, one of the things that we tried to show investors was what the total sort of lifetime cash and capital generation looked like for the book. So it gave them an idea of the total sort of uh the value uh pool that might be available and then how that cash was likely to merge in the first five years. So you could then say, well, first five years I get this, rest of the time I'm gonna get this sort of number. So it sort of allowed investors to get a sense of the overall return versus the consideration paid. For us, um, we're very proud of the dividend track record that we have. So being able to convince ourselves that the acquisitions that we're making are supportive for the dividend policy, but also going to create capital that we can reinvest in the business onto things like MA as well, is is important. And then we we stress the hell out of those cash flows. So really making sure that the risk-adjusted return that we're getting is in the is in the right sort of space. We do still look at um a sort of value metric. So in insurance companies, that tends to be something called own funds, which is this net present value calculation that I talked about. Because if if you have lots of capital coming off the business but the value is going down very quickly, you're just sort of emptying the bath quickly and everything's running out the bottom of the plug hole. Whereas if you can show capital generation and stable and if not growing value, you know, those two things together should mean actually that you you really are creating lots of value for shareholders. And then the other metric that we look at is uh as well is the solvency ratio of the group. So do we have the right capital resources that in a stress event mean that we can absorb those and sort of move on and plan for the future? So those are, I mean, there's a number of other things that we triangulate, but those would be three of the key metrics that that we certainly look at.

SPEAKER_02 36:43

I guess if you're fundamentally buying books in runoff, which ultimately you are, then you want to just layer on more and more books of business to elongate out the cash flow profile. Yeah. Yeah. And just, I mean, I think you said to Mark earlier that the the number of MA opportunities for you are limitless. I think I think that was what I think that was what you said. How how should investors or our audience think about your capacity to do more MA bandwidth in terms of capital, leverage, management time? Like how what's the right sort of cadence of deal flow for you?

SPEAKER_01 37:16

Yeah, I mean it's it's a question that we get very regularly from our uh from our investors, and um and it's a good question for us to get. I mean, it's funny when I first started the question was can you do MA? Now it's like now can you do more? And you've announced this one when's the next one. Um and uh so we so we enjoy those conversations. So so if we look at where I suppose the financial resources of the group are as a as a start, so we we guided investors back in March as part of our full year results presentation and said we have readily readily deployable capital resources of around 100 million that we can sort of deploy uh immediately. And then if it was something larger than that, we would look to either the debt markets or the broader sort of equity markets to to support MA. Um, over the last period, we've we've um we've had some fantastic support from shareholders. We had 140 million rights issue uh last year, which I think was pretty much the only strategic rights issue in the um in the market at uh certainly over the course of last year. Very well supported by by shareholders. And as part of that, the conversations that we've had with those investors that have been saying, you know, subject to the uh getting the chance to look at the opportunity, you know, we would like to support you again going forward. Um, and similarly on the debt side, we we raised um uh a bond in February uh 2022 that's got a coupon of 4.75%. That was very attractive just before uh the Ukraine war. So um we could we can pretend that we're incredibly smart people. I would say we were quite smart, but very lucky uh in terms of the timing of that coming to market. And then last year we also raised um another bond uh around 150 million, with this sort of net coupon on that being somewhere between six and seven percent. But overall, when we look at the returns that that we're able to generate, that sort of financing piece, um, we think we've got a lot of good opportunities um there for us. From an operational perspective, um what we want to make sure in the UK is that we migrate um the last deal that we did in the market, so the HSPC Life UK business successfully and safely over the course of this year. So I think if there was a deal that required uh a migration onto our systems now, we would be well, we would absolutely be saying no to that until we've safely navigated that most of the time with MA processes, you tend to find from initiation to completion, it's about nine to twelve months. So we're certainly looking at opportunities now and we'd be in a position to to onboard other books uh in 2027. And then in terms of our other markets, we've got operational capacity now. Right. So that gives us a lot of sort of flexibility um both financially, uh financially and operationally to look at further MA.

SPEAKER_02 39:52

Yeah. When um you were talking to Mark earlier about your sort of career journey and lessons learned, you said a lot of it's about learning from mistakes as well as successes. How rigorous is your kind of post-deal review process and where where are there any that had of the deals that haven't necessarily gone quite quite as you would have hoped?

SPEAKER_01 40:12

Yeah, no, we we do go through a rigorous process and and there's at least two or three parts to that. So, what we'd like to do, if you think about the sort of stages of a deal, what you tend to do is you tend to sign and announce a deal. There's a period of time where you're preparing for regulatory completion and you complete and you sort of integrate. So um post-signing, we do uh we do a very quick um lessons learned of how the process went, the sort of analysis, ways of working, all that sort of stuff. We then do something after completion, and then somewhere around the a year anniversary of the deal, we then do a sort of further deep dive and say bringing all that together and then seeing how the assumptions that we put in the model are sort of panning out. Are there any sort of key lessons learned? And it's just incredibly important for I think anything in life really that you're trying to sort of learn from what you do. But I think particularly for our model, if you can keep hold of the things that you've done well and then learn from the things that haven't gone so well, then that could be great. Um in terms of the deals that we've done, there's there's nothing immediate I'd point to um where we've seen sort of a material issue. There'll there'll always be sort of some assumptions that you've made which were which were sort of right or wrong. And actually, if I look at my um career, unfortunately, I have been involved in deals that haven't delivered a lot of uh a lot of value, lots that have, but um, but some that haven't as well. Um and and those those tended to be actually where you were sort of buying some capability to get into a new market, yeah, and and all you know, your assumptions were a little bit bullish and it never really sort of came off, or the organization didn't really pile in behind it.

SPEAKER_03 41:48

Yeah.

SPEAKER_01 41:49

For for for our books where you're sort of buying enforced books where you've got a reasonable amount of experience, where where I've seen historically deals not work so well is where you've got a material assumption wrong. So you you thought that people would live for a certain period of time and they didn't, or you assumed a higher rate of return on your investments and you and you didn't. Whereas I think where I've seen in my career sort of, you know, the complete write-off of some investments has just been, you know, well, we thought this market was going to open up, it didn't, we just need to now shut the whole thing down. So fortunately, we haven't been in that uh position as a as a firm.

SPEAKER_02 42:23

Uh and and just picking you up on the dividend, um what one of the topics and debates that Mark and I often have is around the value of dividend from an equity market perspective. And obviously, there's there's there was historically this big diversification with the US and UK. US investors were now interested in dividend and put it all back into the business, or if you can't buy back your own shares, UK was very much dividend. There's been a blending, maybe. You you're obviously very proud that you have a progressive dividend, dividend growth every year for 20 years, I think, since the listing. How how do you balance, as Chief Exact, how do you balance that that returning cash versus reinvesting in clearly a very broad set of opportunities that you've just talked about for the last 10 minutes?

SPEAKER_01 43:05

Yeah, absolutely. Um I mean it's it's one of the key things that we we debate and focus on. I'd be very interested in where you guys landed, by the way, because if you've got the answer, I'd be I'd be very interested in it. Um and actually it's funny, the um so we we were in the States last year, so as we got a little bit bigger, we've been going out to the to the US and and ultimately they were saying that we were idiots for playing for paying uh a dividend. That was the starting point.

SPEAKER_03 43:28

Yes.

SPEAKER_01 43:29

Um now what we said to them is it with Chesn Ces Nara, we're we continue to be in this fortunate position that we see really strong cash and capital generation coming from the the business that supports the dividend. You've seen that over 21 years now. It's the the best um dividend growth track record in UK European insurance, and um people make fun of me sometimes because I tend to mention that quite a lot. Um first time on the podcast. Well, it might not be the last. Um but but at the same time, we still have ample capital resources. To reinvest back in the business, particularly off the back of some of the capital raisings that I spoke about before. So, in many ways, we're sort of saying to investors you can you can have a bit of your cake and eat it as well. Because I think in because the trajectory of that dividend has been pretty steady and stable, so you've tended to see us increase the dividend by about 3%. And why 3%? Well, that's tended to be somewhere above the sort of underlying rates of inflation if you take longer-term inflation rates, and we think investors have been really pleased around that. Um, at the same time, you've then seen the dividend cover tending to be a little bit better than one time, so capital resources um available. What we have been clear with investors is that if we saw a conflict between those things, and I think particularly that could come about if there was something much larger, we would engage early uh around that conversation. But even the HSBC Life deal, which is the biggest deal in our history, there was no contention at all between those two things. They were very complementary. Now, could there could there be in the future? Possibly, but actually at the moment, when we look at the capital framework that we that we run, um it supports this continued uh track record of dividend. And when we do our capital planning, we assume that dividend um continues going uh going forward, uh, but at the same time isn't constraining the growth of uh the organization as well. And that's probably one of the things about insurance companies that maybe people don't always understand is that stability and regularity of capital generation really allows you to plan on a on a very long-term basis. Yeah.

SPEAKER_00 45:31

Well, you you mentioned uh resolution uh earlier, and obviously we know Phoenix, which has now big adopted the standard life name again. And it's interesting, they've been through quite an evolution of being starting off being quite strict closed book consolidators, then um you know evolving into more writing new business, and that's become a larger part of the um kind of the annual capital allocation. Do you think you know you do write a little bit of new business at the moment, but do you think that could be could become a bigger part of the the kind of the composite of growth going forwards?

SPEAKER_01 46:03

Yeah, so what one of the things that I did change when I when I joined is I rather than saying we're going to be closed or open, I think we we sort of changed that conversation to be much more about capital allocation as as you've alluded to. So I'm quite open-minded to to sort of writing new business if I can demonstrate that it makes a good return on capital. And if I was sort of critical of parts of the insurance sector over the last 20, 30 years, um I'm not sure that people have been as disciplined around the return from business. Um, if I take Standard Life as an example, you know, part of the reason why ended up having to come to the market and raise capital is because I'm not sure they really understood what the return was from some of that new business. And we're offering fantastic rates of return for customers, but ultimately at a rate that was uneconomical uh on a longer term basis. So um, and I suppose if you think about how Cesnara started and when we floated and it was that sort of consolidation vehicle looking after back books, we're we're not having to satisfy a large sales force, a large marketing team that's been there for the last 40 years. So I think we can we can look at new business sort of quite unemotionally. Yeah. Um, and we've done that actually with the HSBC Life UK um deal. So there were sort of two product lines that that business ran. One was a broad set of life insurance products, uh, and one is uh an onshore uh unit-linked investment bond that you can buy through um IFAs on their on their platforms. It's quite a nice sort of tax-efficient solution. And we looked at the returns available, you know, our capabilities, and we decided to keep the onshore uh bond open, and we've closed um the protection business because we ultimately couldn't satisfy ourselves that there was going to be a sustainable return sort of coming from that business. So I'm absolutely open-minded about sort of expanding uh new businesses and those opportunities to do that and and and and return. What we've said to investors is you shouldn't expect that sort of new business number to double and triple in scale unless there was something that came in through an acquisition that would would sort of transform that. So we see more growth and better returns ultimately from keeping writing new business in some of the areas that we do, but from acquisition. Uh, and that's not to say at all that Phoenix and Standard Life aren't doing the right thing. Um, they have a broader suite of things that they can do in the UK uh on new business and believe they can generate that return. For us, we think we have this sort of market opportunity and a set of capabilities, which mean we're better placed to make return from acquisitions. Yeah.

SPEAKER_00 48:32

Well, well, let's talk about sort of life as a public company because we've had a few um guests on the podcast: cohort, defence company, Tri-Tax, uh, real estate, uh, and Granger, which are great examples of what the stock market is for. And I would put Cesnara in that category as well, in terms of you've used it for public profile, uh, for credibility, and occasionally tapping the market when you need capital, um, when an opportunity comes along. But it's not without its challenges uh being a listed company, particularly in London, given liquidity, you know, divestments, outflows, etc. How have you found being um a quoted company? And I suppose are there any you know, if you could be sort of policymaker for a day, you know, are there any changes you would make um that would help listed companies and you know make our companies more attractive to investors?

SPEAKER_01 49:21

Yeah. I mean, firstly, look, I'd I'd agree with a number of the benefits that you talked about, and and some of them I had certainly underestimated, particularly until recently. So the credibility that you have as a listed company, particularly a UK one, um I wouldn't I wouldn't understand understate that sort of internationally. Um and when we speak to regulators and when we speak to um you know firms that potentially are looking at as selling assets, the fact that they can go and do pretty extensive due diligence on us, they know the sort of corporate governance standards that we're adopting and meeting. Um there's a sort of height, uh sort of kite mark of quality uh I think associated. And that I'd also I'd also underestimated the impact of getting into FTSE 250. Okay. I'd seen that as a sort of um that being the result of things that we were doing, but there's been a little bit of a halo um effect of that, and we've seen quite a material improvement in the liquidity of the stock as more tracker funds are sort of um flowing us. So so I think because we were probably coming from a situation where, as a sort of small cap, our liquidity was pretty limited to that sort of increasing. Of course, we would like to see more trading, more liquidity. Um, we know that a number of the big UK income funds that are that have been holding us have been in outflow for a long time now, and it's been a really challenging time for them, and we've been fortunate to have continued to have seen very, very good support from them. So anything that makes investing in those funds and in the UK market more attractive, we would see as a as a very positive thing. I think there's been a lot of chat around getting people more interested in investing in private markets. Slightly selfishly, I would say, well, let's sort the public markets uh first or at the same time. Um some of the changes that have been made at the listing rules for us as a consolidator have been helpful. So the increase in the class one that that that for me was uh was a positive change. Some of the conversation around ISAF, personally, I would be supportive of having a differential between the tax benefit that you get if you're investing in a in an equity-based ISA versus cash. Um, I think there's a sort of risk reward there, and I think ultimately if that encouraged people to invest a little bit more in UK listed companies, and I'm saying UK listed rather than UK-based. I mean, up until recently, two thirds, two-thirds of our value were in was in uh was in Europe. Um and I think there's been a little bit of a misnomer in the debate about being particularly bothered where a company is actually making its uh making its money. So the little things like that I think which encourage investors to to take some risk in the market would be a as a positive. And and I and I I suspect would be quite surprised at how some of those small changes could flow through materially. I mean, about 25% of our shareholders are retail investors, and they're they want, you know, I think they want to invest in in UK-based um and UK listed companies. And and uh certainly the dinner parties and things I go to, people talk proudly around the investments that they have in in companies listed here. So let's try and give them as much encouragement as possible to do more of that.

SPEAKER_00 52:24

So, well, your 20 on the uh uh annual dividend growth chart. I mean that that takes lots of boxes for certain types of private investors as a part of their portfolio.

SPEAKER_01 52:34

Yeah, no, it it it it certainly does. And um and look, it's uh we take the responsibility very seriously of being a public company where pensioners are giving us money and institutions are sort of trusting us to make a return for them.

SPEAKER_02 52:46

So Well Steve, we're coming towards the end of what's been a great discussion, so thank you. But just to kind of wrap things up, if you were going to try and distill it, what what what what is the business case for a life insurance consolidator?

SPEAKER_01 53:01

So for me, you get a high degree of certainty in the capital generation of from a for a business like ours, an amount of stability I think that most people don't uh don't understand. That supports this progressive, long-standing dividend policy that gives investors great inflation protection. And at the same time, what we see is a very material growth opportunity. And if you'd started looking at the business five years ago versus now, the balance sheet is almost double the size. The cash cash generation is is more than uh more than double, and we're starting 2026 in in a very strong position, and we're seeing lots of good opportunities to to grow. So um good capital generation, uh a very nice yield, one of the best dividend track records that you'll see in any stock and a material growth opportunity. I mean, what isn't there to love about that for investors? Certainly ticks a lot of boxes.

SPEAKER_02 53:53

And for those investors that are interested in what you just said there in terms of the the value, you know, the benefits of of the or the business case for for Cesnara, what are sort of some of the key indicators that they should be looking for over the next, you know, to track your progress and and see if you're being successful over the next couple of years?

SPEAKER_01 54:11

Yeah, so we uh we refined some of the operating metrics that we had at the at the start of this year. So operating capital generation is a is a key number for investors to look at. So can we sort of uh can we keep that? Can we grow it? Um some of the numbers that we've put out into the market as well from the acquisitions where we've been clear about the expected sort of cash and capital generation from those. I encourage investors to look at that. And then as I talked earlier on, we would also be saying if you're able to sort of keep and grow that operating capital generation, and then also show that the the value pool of the business is stable and growing as well. Those are two very good sort of health indicators we think for a business like ours. And that it's always important alongside that that we look at the solvency of the group so that customers and investors uh and regulators have got a high degree of confidence in the sustainability of the business as well. So those would be sort of three things I would point to for investors.

SPEAKER_02 55:06

Well, Steve, that's a great way to end the podcast. Thank you very much for coming on the Business Case Podcast. Thank you guys. Good talking to you. Thank you. Great. So, Mark, uh Steve Murray there. Uh delightful chap to talk to, really engaging conversation. What were your key takeaways from on Ces Noro?

SPEAKER_00 55:23

Yeah, I really enjoyed um chatting to Steve. Um, it's a fiendishly complex industry, uh, if you've ever looked at some of the regulatory disclosures in this sector. Um, but he communicated um the business case behind it very effectively. And I think it is an industry that's gone through a lot of change. Um it was interesting talking about you know his time at Standard Life, you know, when it was a mutual, and um you know, in many ways it was a very unsophisticated industry, and there was a lot of black box and a lot of trust us. But you've just seen a huge swathe of um regulatory interventions, disclosure, capital ratios, solvency two. So I think it's a much safer industry that than it used to be. Um but you know what I like about this industry is it it's solving a problem. There are lots of big financial companies out there that have these small subsidiaries that they just don't want anymore, and this is a logical um consolidator.

SPEAKER_02 56:18

Yeah, I that was my probably my biggest takeaway is that is that Steve and the Chisnara business are really focusing on their core. And it must be such an easy pitch to walk up to one of these big financial services businesses and say, you know, this is 110th on the list of businesses that are important in your portfolio, we'll take it off your hands for you. You know, it's probably just a sort of an irritant. And you know, he talked about an unlimited number of deal opportunities out there. I really liked how he talked about the you know post-deal review process just to sort of make sure that they were keeping themselves honest. And you know, if you've got firepower, credibility, a balance sheet, capability, and you really know what you're doing and why you're doing it, and if there's a whole load of deals out there, I mean it feels like that kind of pipeline of deal flow is going to be there for quite a long while, which probably is as long as they can continue to deliver the returns, that's great from a cash flow point of view. It's great from that dividend that you know Steve was really proud of. I liked um the other the other sort of takeaway I took was there are clearly tangible scale benefits for this business, and they're really taking advantage of that. And actually, on the lessons learned, I think that sort of stay stay within your guardrails. Was kind of I heard Steve talk about that loud and clear, and where he's made some mistakes in the past has been when they've tried to go into a new business and and it hasn't, you know, they've they've been a bit too heroic in some of the assumptions. The other thing I thought was great was he he he made a really positive pitch for being a UK listed business. Uh we don't quite hear that enough, and obviously we're trying to beat the drum for uh UK PLC, but um I think it is quite easy to underestimate the value of that listing and and the the conversations that it opens up for you with regulators, with suppliers. And I have seen that in in real life. So uh it was nice to be re reminded of that by uh Steve.

SPEAKER_00 58:17

Yeah, and look, this is a company that's not going to be raising equity every year, but occasionally a deal will come along that makes a lot of sense, and you know, our market is still functional enough uh to be able to raise it. Um so again, a great example of uh you know what a listed company um can can benefit from the listing.

SPEAKER_02 58:35

The um I thought the other thing that just really reminded me of the discussion was um we've obviously had the discussion with Icora royalties and that building of layering of of of kind of income streams um to sort of push value out to the right or sort of sort of longevity out to the right. Quite similar, uh obviously very different businesses, but but there was a similarity there which was sort of quite interesting given we've had those two conversations in quite short um space with one another.

SPEAKER_00 59:04

Good. Well, um hope you enjoyed that conversation. Uh lots more interesting chief executives coming up in the next few weeks. Um do uh leave us a review, uh leave some feedback, and if you have any uh particular guest suggestions, uh feel free to get in in touch with us on LinkedIn.