Go Dutch with high-yield Chesnara

The completion in May of the acquisition of the Waard Group, which comprises three Dutch closed-book insurance companies and a servicing company, gives Chesnara a foot in the door of the Netherlands life assurance market. Management believes the opportunities to consolidate and run off closed Dutch life assurance books are similar to the opportunities that Chesnara has a history of so profitably exploiting in the UK. And given that Chesnara's growth in the closed-book side of its business is linked to it acquisitions, its ability to source deals from a new market should significantly enhance prospects.

Chesnara chief John Deane, who took up the job at the start of 2015, explains his business strategy in three streams: maximising the value of in-force business; developing new business, but only where profitable (only Swedish operation Movestic is open to new business at the moment); and completing value-adding acquisitions in the £50m-£200m range. It is on the last point that the Waard purchase scores on.

Meanwhile, from the perspective of "maximising the value of in-force business", Chesnara continues to do well. The company announced the 10th successive rise in annual dividend at the end of March 2015 and net cash generation rose from £37m to £71m in 2014, which included a £27m bump from the adopted Direct Line Life Insurance business. The "additional synergies" released as part of the deal helped support dividend growth and underline the company's reputation as a canny deal maker. The capital base is strong, too. In 2014, the group increased its solvency ratio from 194 per cent to 284 per cent.

Chesnara's international outpost in Sweden is performing well, too. As the only division open to new business, this operation is a somewhat different beast to the company's other interests. Funds under management grew by 23 per cent in the 2014 calendar year to SKr21.9bn (£1.7bn) and the operation made a significant contribution to first-quarter embedded value growth of £19.5m across the group, a 5 per cent increase on the year-end. That said, exchange rate losses have been a drag on performance recently and a trend in the Swedish market away from unit-linked savings to contracts with guaranteed returns has dampened performance. More recently, guarantees have started to be watered down, which should see pressures on unit-linked sales ease, although the market is expected to remain "suppressed" in 2015.

Guarantees have also been an issue in the UK. The company's S&P business, which provides guarantees in the home market, has suffered as low government bond yields have forced Chesnara to dig into its reserves to support policies, which is weighing on pre-tax profits. But with a company like Chesnara, more important areas for investor focus than profit are embedded value (net asset value adjusted for future expected returns from in-force business) and cash generation, both of which look encouraging.