Final Results

Chesnara plc Acquisitions fuel strong growth in shareholder value and dividend growth continues 31 March 2011 Chesnara today reported final results for the year ended 31 December 2010. These are the first set of results which include the effect of the acquisition of Save & Prosper Insurance Limited and its subsidiary Save & Prosper Pensions Limited ('Save & Prosper') which was acquired on 20th December 2010. The Group remains committed to offering shareholders an attractive long-term income stream arising from the profits of its life and pensions businesses. Profit on IFRS basis before tax for the year ended 31 December at Â£34.2m including profit of Â£15.9m arising from acquisitions, predominantly that of Save & Prosper, (2009: Â£44.7m, including an acquisition profit of Â£25.1m) and at Â£18.3m excluding the profit arising on acquisitions (2009: Â£19.6m) Earnings per share on IFRS basis of 29.05p, (2009: 45.26p) On EEV basis pre-tax profit for the year of Â£77.0m including the exceptional profit of Â£41.0m arising on acquisitions, predominantly that of Save & Prosper, (2009: Â£78.2m, including an acquisition profit of Â£54.2m) and Â£36.0m excluding the exceptional profit arising on acquisitions (2009: Â£24.0m). Shareholder equity on EEV basis (pre proposed final dividend payment) now Â£ 354.6m - Â£3.09p per share (2009: Â£262.6m - Â£2.59p per share) Group solvency ratio remains well above target at 200% post dividend (2009: 316%). In the UK, Countrywide Assured's solvency ratio remained strong at 213% (2009: 197%) whilst Save & Prosper had a ratio of 268%. Swedish business solvency ratio also remains above target at 188% (2009: 302%) Completed acquisition of operations and certain assets of Aspis FÃ¶rsÃ¤kringar Liv AB ('Aspis'), a relatively small Swedish life and health insurer, in February 2010 Successful re-branding of Swedish business, Moderna, to Movestic with improving sales, however persistency remains challenging Final proposed dividend increased to 10.6p (2009:10.3p). Total dividend for the year increased by 2.8% to 16.4p (2008:15.95p) Board remains confident about future dividend flows Continue to examine value adding acquisition opportunities Graham Kettleborough, Chief Executive said: 'The key event in 2010 was the acquisition of Save & Prosper. This acquisition, secured at a significant 39% discount to its embedded value, brings an immediate uplift to shareholder value and provides an excellent fit with our existing UK operations. Challenges continue in our Swedish business. However, its relaunch, re-branded as Movestic together with the launch of a number of new product features, fund launches and the capabilities secured from the Aspis transaction are providing encouraging signs with regard to sales. Positive investment market conditions have helped, both in the UK and in Sweden, where funds under management have grown significantly, to support the very welcome improvement in embedded value. On the acquisition front we continue to seek suitable opportunities and will continue to be selective and only pursue opportunities which will deliver an acceptable value uplift and/or support Chesnara's future dividend paying capability. The Board are pleased to recommend an increase in the final dividend to 10.6p per share. This gives rise to a total dividend for the year of 16.4p per share which represents a 2.8% increase.' The Board approved this statement on 30 March 2011. Enquiries Graham Kettleborough Chief Executive, Chesnara plc 07799 407519 Michael Henman Cubitt Consulting 0207 367 5100 Notes to editors: Chesnara plc, which listed on the London Stock Exchange in May 2004, is the owner of Countrywide Assured plc ("CA"), Save & Prosper Insurance Save & Prosper') and Movestic LivfÃ¶rsÃ¤kringar AB ('Movestic'). CA is a UK life assurance subsidiary that is substantially closed to new business. In June 2005 Chesnara acquired a further closed life insurance company - City of Westminster Assurance ("CWA") - for Â£47.8m. With effect from 30 June 2006, CWA's policies and assets were transferred into CA plc. Movestic, a Swedish life assurance company which originally focused on pensions and savings, was acquired on 23 July 2009 for Â£20m. The company, which was launched in 2002, continues to write new business and grow its strong position in the Swedish unit-linked market. This position was strengthened in February 2010 with the acquisition of the operations of Aspis FÃ¶rsÃ¤kringar Liv AB which has a risk and health product bias. Save & Prosper Insurance Limited, and its subsidiary, Save & Prosper Pensions Limited were acquired on 20th December 2010 for Â£63.5m in cash. This was funded by raising a new lending facility of Â£40m and the sale of new and treasury shares which raised Â£26.7m. The companies are closed to new business and operate an outsourced business model which is complementary to Chesnara's existing UK operations. Note on terminology The principal reporting segments of the Group are: (1) Countrywide Assured Life Holdings Limited and its subsidiary companies (together 'CA'); (2) Save & Prosper Insurance Limited and its subsidiary company Save & Prosper Pensions Limited (together 'S&P' or 'the S&P companies', as the context requires); and (3) Movestic LivfÃ¶rsÃ¤kring AB and its subsidiary and associated companies (together 'Movestic'). In addition: (i) The operating segments under (1) and (2) above may be referred to as the 'UK businesses' and the operating segment under (3) may be referred to as the 'Swedish business' as the context requires; (ii) The principal operating subsidiary company within the CA segment is Countrywide Assured plc, which is designated as 'CA plc'; and (iii) Where it is necessary to distinguish Movestic LivfÃ¶rsÃ¤kring AB as a separate entity from its subsidiary and associated companies it is designated as 'Movestic Liv'. Change of name Movestic LivfÃ¶rsÃ¤kring AB was formerly known as Moderna FÃ¶rsÃ¤kringar Liv AB. The change of name occurred in November 2010. FINANCIAL HIGHLIGHTS Year ended 31 December IFRS basis 2010 2009 Operating profit/(loss) CA 25.7 24.7 S&P 0.2 - Movestic (2.5) (2.1) Other group activities (3.8) (2.3) Profit arising on business combinations 15.9 25.1 -------- -------- 35.5 45.4 Financing costs (1.3) (0.7) -------- -------- Profit before tax GBP34.2m GBP44.7m ======== ======== Basic earnings per share 29.05p 45.26p Dividend per share (including proposed dividend) 16.40p 15.95p Shareholders' net equity GBP203.3m GBP159.8m ======== ======== European Embedded Value basis (EEV) Operating profit/(loss) Covered business CA 16.0 22.0 S&P 0.2 - Movestic (9.8) (2.9) Other group activities (6.1) 0.9 -------- -------- 0.3 20.0 Investment variances and economic assumption changes CA 7.6 (6.1) S&P (1.5) - Movestic 16.4 10.1 -------- -------- Profit before tax and before exceptional items 22.8 24.0 Exceptional items Profit arising on business combinations 41.0 54.2 Effect of modelling improvements 13.2 - -------- -------- Profit before tax 77.0 78.2 Tax (4.0) 12.1 -------- -------- Profit for the year GBP73.0m GBP90.3m ======== ======== Shareholders' equity on EEV basis Embedded value CA 149.7 157.8 S&P 103.2 - Movestic 121.1 91.5 -------- -------- Embedded value of covered business 374.0 249.3 Acquired embedded value financed by debt (39.3) (4.2) Shareholders' equity in other Group companies 19.9 17.5 -------- -------- GBP354.6m GBP262.6m ======== ======== EEV per share 308.8p 258.7p In contrast with the IFRS basis of reporting, the EEV basis recognises the discounted value of the expected future cash flows, arising from the long-term business contracts in force at the year end, as a component of shareholder equity. Accordingly, the EEV result recognises, within profit, the movement in this component. S&P was acquired on 20 December 2010. Accordingly, the results for S&P set out above are for an 11-day post-acquisition period. CHAIRMAN'S STATEMENT I am pleased to present the seventh annual financial statements of Chesnara plc ('Chesnara'). With ongoing recovery in global investment markets and the acquisition of Save & Prosper Insurance Company Limited and its subsidiary Save & Prosper Pensions Limited (together 'S&P') in December, 2010 has seen further positive developments in the current and future trading prospects and in the financial strength of the Group. With continuing economic uncertainty, it remains pleasing that our results continue to show a high degree of resilience, allowing us to maintain a reliable and progressive dividend policy and to continue our pursuit of further value-enhancing acquisitions. Review of the Business On 20 December 2010, Chesnara completed the acquisition of S&P, a closed UK life assurance and pensions group, which currently manages a portfolio of some 172,000 life assurance and pensions policies. It is complementary to our current UK run-off business and provides the opportunity to extract capital and operational synergies through combining it with our existing UK operations. In early 2010, we also expanded our presence in the Swedish market when we completed the acquisition of the operations and certain assets of Aspis FÃ¶rsÃ¤krings Liv AB ('Aspis'), a Swedish life risk and health insurer. Furthermore, in December 2010 we completed the acquisition of the in-force claims portfolio of Aspis and, therefore, we now service all former Aspis policyholders. These acquisitions widen the scope of our activities in Sweden and underpin our ability to offer a fully-rounded proposition to the Swedish market. S&P was acquired for GBP63.5m, funded by a new debt facility of GBP40m repayable over a 5-year term and by the issue and sale of 10,458,877 new shares and the sale of 2,897,183 shares formerly held in treasury, which together raised gross proceeds of GBP26.7m. We were pleased with the support of our existing investors and welcome some new shareholders to our register. The acquisition was made at a significant discount of 39% to the embedded value on the acquisition date, which gave rise to an accretion to Group embedded value of GBP40.7m. On the IFRS basis of reporting, we have recognised a profit of GBP15.5m arising on acquisition. Furthermore, the acquisition enhances our ability to generate cash surpluses, which will extend the dividend paying capacity of the Group. During the year, global investment market influences have also had a notable impact on the Group's results, with the leading UK equity market indices, for example, posting gains of between 9% and 11%, and the leading Swedish equity market indices gains of between 21% and 23%, over the whole of 2010. While the low interest rate environment has continued to dampen returns on the Group's shareholder funds, this has been more than offset by the favourable impact of rising equity markets on the Group's embedded value. This leads to higher current and prospective deductions from, and fee income arising on, unit-linked funds under management, with the UK businesses' embedded value benefiting to the extent of GBP6.5m pre-tax and the Swedish business's embedded value benefiting to the extent of GBP19.0m pre-tax. On the EEV basis of reporting, excluding the profit of GBP41.0m arising on the acquisition of S&P and Aspis and the beneficial effect of GBP13.2m arising from modelling improvements in Movestic, we have made pre-tax profits of GBP22.8m for the year ended 31 December 2010, compared with GBP24.0m for the year ended 31 December 2009 (excluding profit of GBP54.2m arising on the acquisition of Movestic). Apart from the impact of rising equity markets and the expected return from the unwind of the discount rate; the UK businesses continued to benefit from favourable persistency, mortality and morbidity experience. However, we remain cautious about the underlying persistency assumptions for the UK businesses, while the prospects for the UK economy remain uncertain and pressure on household budgets increases due to tax and likely interest rate increases. While Movestic's EEV was impacted by adverse persistency and expense experience, this was more than offset by favourable investment market effects, the unwind of the discount rate and assumed higher future levels of fee income, following successful re-negotiation of terms with fund managers. There was also a creditable contribution from new business in what proved to be a challenging market. On the IFRS basis, we have achieved a pre-tax profit of GBP34.2m for the year ended 31 December 2010. Excluding GBP15.9m profits arising on the acquisition of S&P and Aspis, the resulting amount of GBP18.3m compares with a pre-tax profit of GBP19.6m (similarly adjusted to exclude GBP25.1m arising on the acquisition of Movestic) for the year ended 31 December 2009. Besides favourable investment market effects of GBP5.0m, the pre-tax result of the UK businesses also benefited from GBP3.0m favourable mortality and morbidity experience. Movestic posted a pre-tax loss of GBP3.7m, which compares with a 5-month post-acquisition loss of GBP2.6m in the previous year and which is broadly in line with expectations, albeit the result was adversely impacted by GBP1.3m losses arising in respect of the Swedish broking subsidiary, where it has been decided to scale down operations. Movestic is expected to incur trading losses for a further two to three years as the business continues to build scale and until profits from an increasing base of in-force investment contracts outweighs the front-end strain of writing new business. Shareholder Value and Returns to Shareholders Total shareholder equity on the EEV basis, pre appropriation of GBP12.2m for the final 2010 dividend, is GBP354.6m (308.8p per share), compared with GBP262.6m (258.7p per share) as at 31 December 2009. This notable uplift reflects principally the positive impact of acquiring the S&P business at a discount of 39% to its embedded value, together with a strong core trading result in both the UK and Swedish businesses, driven by the ongoing recovery in global investment markets. In addition, the weakening of sterling against the Swedish Krona, over the year, gave rise to a further GBP9.5m accretion in embedded value through the recognition of foreign exchange translation gains. The capacity of the Group to pursue its dividend policy relies on the continuing emergence of surplus in the UK businesses and in the ability to distribute that surplus which, in turn, depends on the regulatory solvency position of the UK businesses. I am pleased to report that CA's solvency ratio, post proposed dividends, at 213% (197% as at 31 December 2009) remains in excess of the target of 150% set by CA's Board, while S&P's ratio was at a healthy 268% as at 31 December 2010. The Group's dividend policy takes account of the competing need for funds for the development of the Swedish business which, in turn, depends on the underlying regulatory solvency ratio of Movestic. This was 188% at the end of the year (302% as at 31 December 2009) which is comfortably in excess of the target of 150% set by the Movestic Board. Movestic's solvency ratio declines as the increasing scale of its business requires a higher level of regulatory capital: as the ratio approaches 150%, further planned capital contributions will be made by the Group. The combined Group post dividend solvency ratio was 200% as at 31 December 2010, compared with 316% at 31 December 2009. The fall in the ratio, which remains considerably in excess of the regulatory requirement of at least 100%, reflects the anticipated dilutive effect of the S &P acquisition. Based on the strength of our results and of our capital solvency ratios, the Board has decided to recommend a final dividend of 10.6p per share (2009 final dividend: 10.3p per share), giving rise to total dividends of 16.4p per share for 2010, which represents a 2.8% increase over total dividends of 15.95p per share for 2009. At the recent trading range of 240p and 260p per share, this represents a yield to shareholders of between 6.3% and 6.8%. Outlook The acquisition of S&P has strengthened the long-term position of our UK business. In addition to adding further value to shareholders through the discounted purchase we have the opportunity to, and will progress the release of further value through combining S&P with our existing UK operations. The purchase of the operations and certain assets of Aspis has accelerated the re-branding of our Swedish business. In November, the launch of the new brand - Movestic - was accompanied by a number of new, well-received product features and fund launches. We expect that the acquisition of S&P and the development of our activities in Sweden will provide positive outcomes for shareholders and our teams are well-positioned to deliver these. We also continue to focus on the implications for our businesses of the pan-European Solvency II implementation which is now due to be effective from 1 January 2013. Currently, other than the challenges of the implementation and new operational processes, we do not foresee any major implications as regards capital requirements although a note of caution has to be raised as the rules are, as yet, not fully finalised. The fall-out from the credit crunch and the implications of Solvency II in 2013 continue to give rise to a flow of possible acquisition opportunities. We will continue to be selective and will only pursue opportunities which demonstrate the capability of prolonging our ability to generate a dividend stream and/or of delivering a significant value uplift for shareholders. We wish to welcome our new colleagues in S&P to the Group and thank all our UK and Swedish employees for their continuing dedication and commitment. Peter Mason Chairman 30 March 2011 CHIEF EXECUTIVE'S STATEMENT Developments during 2010 The key development in 2010 was the acquisition of S&P, which we announced on 26 November 2010 and which was completed on 20 December 2010 following shareholder approval at a General Meeting on 16 December 2010. The purchase price of GBP63.5m, funded by a new bank facility of GBP40m and the proceeds of a share placing and of the sale of treasury shares, together amounting to GBP26.7m, represented a significant 39% discount to S&P's Embedded Value on acquisition. Save & Prosper Insurance Limited and its subsidiary Save & Prosper Pensions Limited are UK-based providers of life assurance and pension products and the companies have been closed to new business for over 12 years. The administration of these businesses is outsourced and therefore it already operates in line with Chesnara's preferred model for its UK businesses. This acquisition builds the scale of our UK operations and offers, in addition to the value added for shareholders arising from its purchase at a significant discount to its embedded value, further potential financial synergies as we seek to merge it into our current UK operations. In February 2010 we acquired the operational business of Aspis FÃ¶rsÃ¤krings Liv AB('Aspis'), a Swedish-based life and health risk insurer. Aspis was to have its operating licence revoked due to solvency concerns and we took the opportunity to acquire the in-force portfolio, personnel, intellectual property and systems of Aspis but not the liabilities for existing claims, although we agreed to undertake the administration of these claims on a commercial basis for the Administrator of Aspis. Aspis, which has focussed on risk and health insurance, provides an extremely good fit with the existing Movestic business which formerly focussed on pensions and savings. Movestic has utilised the attributes of Aspis to offer a full solution to corporate pension scheme customers as well as separately marketing a strong range of risk products where appropriate. Further synergies continue to be obtained through the rationalisation of the capabilities of Movestic and Aspis. The rebranding of the merged entity which was launched in November together with new product features and marketing initiatives has been very well received. Late in 2010 we announced that we had acquired the aforementioned existing claims portfolio from the Administrator and, therefore, we now service all former Aspis clients. Businesses in both the UK and Sweden have performed well with positive investment markets assisting, in conjunction with good underlying business performance, in providing strong returns for shareholders. IFRS pre-tax profits, steady at GBP18.3m, compared with GBP19.6m last year (excluding the gains arising on business combinations in both years) and EV increasing by 35% over the year to GBP354.6m - a particularly pleasing outcome - provide strong testament to this. The completion of another successful acquisition has not dulled our appetite to make further value-adding purchases and we continue to review suitable opportunities in the UK and in Western Europe. In particular we believe that the implementation of the Solvency II regime in January 2013 will give rise to further acquisition opportunities. The availability of capital to support acquisitions has improved, as demonstrated by our ability to raise funds to support the S&P acquisition. Should further financing for an attractive opportunity be required, we would, again, consider seeking funding from shareholders via the issue of further equity following their very strong support in the recent S&P transaction - of which we remain appreciative. We look forward to investigating acquisition opportunities as they arise as we continue to believe that we can leverage further value from our existing and newly-acquired capabilities. Future trends and developments In line with our continued primary aim of delivering an attractive long-term dividend yield, we remain focussed on the efficient management of our businesses. The acquisition of S&P and its significant accretion to embedded value are welcome and will add strength and longevity to our ability to generate future dividend payments particularly after the synergies which we expect to arise from merging it with our current UK business are realised. That said, support for dividends from the UK run-off businesses will still diminish over time, albeit from a higher base, as the book inevitably runs down. Therefore, we recognise that further acquisitions which have income generating capability remain necessary to provide dividend growth in the medium term. The EU Solvency II Directive brings challenges both in terms of capital requirements and, not least, in terms of implementation. We believe we remain in relatively good shape and, at this time, we are not expecting any significant adverse capital effects to arise in any of our businesses (including S&P). All our businesses remain exposed to macroeconomic and industry-related factors. Provided that these areas do not adversely impact the prospects of the Group significantly, the short- to medium-term outlook is positive for the ongoing emergence of surplus and, accordingly, for dividend support. FINANCIAL REVIEW Basis of Accounting The Group reports in accordance with International Financial Reporting Standards (`IFRS'). IFRS essentially permits the `grandfathering' of the principles and bases used to measure profit arising on long-term insurance contracts under previously-adopted UK and Swedish GAAP, where the contracts contain significant insurance risk. Profits on contracts where no significant insurance risk subsists are measured using the principles of IAS 39 Financial Instruments: Recognition and Measurement. The Group continues to provide financial information supplementary to the IFRS basis. With effect from reporting periods commencing on 1 January 2006, the Group adopted European Embedded Value (`EEV') principles as the basis for providing this supplementary information. EEV methodology aims to measure the underlying embedded value of the Group's life assurance, pensions and annuity businesses and provides a framework which is intended to improve the comparability and transparency of embedded value reporting across Europe. During 2011 we will consider compliance with the European Insurance CFO Forum Market Consistent Embedded Value (MCEV) Principles (copyright Â© Stichting CFO Forum Foundation 2008). IFRS Result The IFRS result for the year ended 31 December 2010 comprises: Year ended 31 December 2010 Year ended 31 December 2009 Pre-tax Tax Post-tax Pre-tax Tax Post-tax GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 Profit arising on business combinations Movestic - - - 25,056 - 25,056 Aspis 376 - 376 - - - S&P 15,488 - 15,488 - - - CA result 25,692 (4,740) 20,952 24,784 948 25,732 S&P result 224 (63) 161 - - - Movestic result (3,730) 176 (3,554) (2,626) (148) (2,774) Other group (3,882) 160 (3,722) (2,473) 392 (2,081) activities -------- -------- -------- -------- -------- -------- Total result 34,168 (4,467) 29,701 44,741 1,192 45,933 ======== ======== ======== ======== Non-controlling 118 7 interest -------- -------- Total result attributable to shareholders 29,819 45,940 ======== ======== The derivation of the profit arising on business combinations is set out in Note 3 following. The CA result, which is net of an amortisation charge of GBP3.5m in respect of the acquired value of in-force business, continues to be dominated by the strong emergence of surplus from its life and pensions contract portfolio, which is in run-off. Investment market recovery over the year led to net pre-tax gains of some GBP5m. Favourable mortality and morbidity experience was GBP3m pre-tax, while the pre-tax result was also significantly enhanced by the release of GBP3.2m in respect of amounts previously set aside to provide for policyholder claims. A thorough review determined that the business had no further liability in respect of these claims. The pre-tax loss of GBP3.7m attributable to Movestic is stated net of an amortisation charge of GBP1.2m in respect of the acquired value of in-force business and compares with a pre-tax loss of GBP2.6m in the five-month post-acquisition period in 2009. It is also stated net of a write down of assets of GBP0.5m in respect of its IFA subsidiary, Akademiker, where it has been decided to scale down the operations. Taking account of these items, there is a core pre-tax trading loss of some GBP2.0m, which represents a slight improvement over the core pre-tax loss of GBP2.6m reported at the half-year position. This largely reflects gradually improving confidence in investment markets. Movestic, however, is expected to incur trading losses for a further two years, as it continues to build scale and until realised profits from an increasing base of in-force investment contracts outweigh the front-end strain of writing new business. It also faces the challenge of competition which has led to transfers out of the business being higher than expected during the year. The S&P result is in respect of an 11-day post-acquisition period and is not considered to be significant in the context of the total Group result. The result of other group activities, which principally relates to the operations of the parent company, includes GBP3.2m of expenses incurred in connection with the acquisition of S&P. European Embedded Value (EEV) Result Supplementary information prepared in accordance with EEV principles and set out later is presented to provide alternative information to that presented under IFRS. EEV principles assist in identifying the value being generated by the UK and Swedish life and pensions businesses. The result determined under this method represents principally the movement in the UK and Swedish businesses' embedded value, before transfers made to the parent company and ignoring any capital movements. Through including the in-force value of insurance and investment contracts, EEV recognises the discounted profit stream expected to arise from those contracts. The principal underlying components of the EEV result are the expected return from existing business, in both the UK and Swedish businesses, being the unwind of the rate used to discount the related cash flows, and the value added by the writing of new business in the Swedish business. Adjustments are made to the result for variations in actual experience from that assumed for each component of policy cash flows arising in the period and for the impact of restating assumptions for each component of the prospective cash flows. The movement in Group EEV may be summarised as: Year ended 31 December 2010 2009 GBP000 GBP000 GBP000 GBP000 EEV at beginning of year 262,585 182,708 Effect of modelling 13,239 - improvements -------- -------- EEV at beginning of year restated 275,824 182,708 Profit arising on acquisition of Movestic - 54,187 Aspis 376 - S&P 40,667 - Result for the period UK businesses (CA and S&P) New business 685 1,482 Existing business 21,618 14,438 Tax (4,336) 11,893 -------- -------- Post-tax *17,967 27,813 Movestic New business 2,057 783 Existing business 4,492 6,437 Non-covered business (3,674) 1,623 Tax 177 (161) -------- -------- Post-tax 3,052 **8,682 Other group activities net of tax (2,295) (417) Movement on non-controlling interest 118 7 Foreign exchange reserve movement 9,517 5,539 Dividends paid (16,340) (15,934) Share capital issued 22,588 - Disposal of Treasury 3,162 - shares -------- -------- EEV at end of year 354,636 262,585 -------- -------- * Comprises the results of CA and S&P, the latter being for the 11-day post-acquisition period and not considered to be significant in the context of the overall result for the UK businesses. ** The Movestic result for the year ended 31 December 2009 is in respect of the 5-month post-acquisition period. EEV at end of the year is stated before recognition of the final proposed dividend of GBP12.2m in respect of the year ended 31 December 2010 (year ended 31 December 2009: GBP10.5m). The significant foreign exchange reserve movement for the year ended 31 December 2010 arises from the impact of the 9% appreciation of the Swedish Krona against sterling over the year on the translation of the Krona-denominated Movestic embedded value, The profit of GBP40.7m arising on the acquisition of S&P is the excess of the embedded value of S&P at the acquisition date over the purchase consideration of GBP63.5m. This represents a discount of 39% to S&P's embedded value at the acquisition date. The effect of modelling improvements, as shown in the table above, which is in the nature of an exceptional profit, arises from the fact that, during 2010, Movestic introduced a new system for modelling the value of its in-force policies. This provided a capability for (i) more accurately modelling the impact on commission paid on policies becoming paid-up and for (ii) determining future fee income on a case-by-case investment mix basis, whereas previously it had been necessary to adopt high-level estimates. The dominant feature underpinning the results of both the UK and Swedish businesses over the year has been the recovery in investment markets, with leading UK equity indices posting gains of 9-11% over the year and leading Swedish equity indices 21-23%. These gains were particularly strong in the second half of the year following a dull first half. Yields on fixed interest securities and swap rates drifted down over the year, but recovered towards the end of the year, the recovery in Swedish market rates being earlier and stronger than in the UK. Within the UK businesses favourable investment market effects gave rise to pre-tax gains over the year of some GBP6.5m (GBP5.2m net of tax) arising principally from higher deductions from unit-linked funds, which have increased in value. Other significant factors underlying the UK businesses' pre-tax result of GBP22.3m are: (i) unwind of the discount rate on existing business of GBP5.2m (GBP4.2m net of tax); (ii) a new business contribution of GBP0.7m (GBP0.6m net of tax); (iii) continuing favourable mortality and morbidity experience of GBP1.1m (GBP0.9m net of tax); and (iv) continuing favourable persistency experience of GBP6m (GBP4.8m net of tax). In addition, the UK businesses' result was further enhanced by GBP3.2m (GBP2.6m net of tax) in respect of the release to income of certain claims liabilities, as explained within 'IFRS Result' above. Within Movestic favourable investment market effects gave rise to gains over the year of GBP19m (all amounts stated in respect of Movestic are pre- and post-tax, the effective rate of Swedish company tax not being significant). This outcome was enhanced by: (i) GBP6.2m unwind of the discount rate on existing business; (ii) a GBP2.1m new business contribution; (iii) a favourable effect of GBP2.2m arising from the change in investment mix within underlying investor funds; and (iv) a favourable effect of GBP6m arising from higher projected levels of fee income, following negotiation of enhanced terms from investment fund managers. On the adverse side the result was impacted by: (i) unfavourable persistency experience of GBP6.5m, giving rise to an additional adverse impact of GBP11.3m in respect of assumed future persistency rates; and (ii) an expense overrun of GBP2m, giving rise to an additional adverse impact of GBP8.8m in respect of assumed future expense levels. The Movestic non-covered business, which relates principally to its Risk and Health business and to its IFA subsidiary, Akademiker, has posted a combined net loss due to: (i) the impact of losses incurred in the IFA broking subsidiary, together with a write down of related net assets, following the decision to scale down the operation; (ii) a re-allocation of expenses from the covered Pensions and Savings business to the Risk and Health business, following a detailed expenses review, based on activity analysis; and (iii) higher reinsurance financing costs. Shareholders' Equity and Embedded Value of Covered Business - EEV Basis The consolidated balance sheet prepared in accordance with EEV principles may be summarised as: 31 December 2010 Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 Value of in-force business 79,360 41,307 144,748 - 265,415 Other net 70,348 22,673 (24,111) 20,311 89,221 assets -------- -------- -------- -------- -------- 149,708 63,980 120,637 20,311 354,636 ======== ======== ======== ======== ======== Represented by: Embedded value ('EV') of regulated entities 149,708 103,267 121,069 - 374,044 Less: amount - (39,287) - - (39,287) financed by borrowings -------- -------- -------- -------- -------- EV of regulated entities attributable to shareholders 149,708 63,980 121,069 - 334,757 Net equity of - - (432) 20,311 19,879 other Group companies ------- -------- -------- -------- -------- Shareholders' 149,708 63,980 120,637 20,311 354,636 equity ======== ======== ======== ======== ======== 31 December 2009 Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Value of 85,559 - 112,753 - 198,312 in-force business Other net 68,098 - (22,323) 18,498 64,273 assets -------- -------- -------- -------- -------- 153,657 - 90,430 18,498 262,585 ======== ======== ======== ======== ======== Represented by: Embedded 157,854 - 91,478 - 249,332 value ('EV') of regulated entities Less: amount (4,197) - - - (4,197) financed by borrowings -------- -------- -------- -------- -------- EV of 153,657 - 91,478 - 245,135 regulated entities attributable to shareholders Net equity of - - (1,048) 18,498 17,450 other Group companies -------- -------- -------- -------- -------- Shareholders' 153,657 - 90,430 18,498 262,585 equity ======== ======== ======== ======== ======== The tables below set out the components of the value of in-force business by major product line at each period end: 31 December 2010 31 December 2009 CA S&P Movestic Total CA S&P Movestic Total Number of policies 000 000 000 000 000 000 000 000 Endowment 50 8 15 73 55 - 15 70 Protection 52 6 - 58 58 - - 58 Annuities 5 1 - 6 5 - - 5 Pensions 48 143 75 266 51 - 70 121 Other 7 14 - 21 7 - - 7 -------- -------- -------- -------- ------- ------- -------- -------- Total 162 172 90 424 176 - 85 261 -------- -------- -------- -------- ------- ------- -------- -------- 31 December 2010 31 December 2009 CA S&P Movestic Total CA S&P Movestic Total Value of in-force GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm Endowment 34.1 8.3 14.0 56.4 40.2 - 15.2 55.4 Protection 49.1 2.6 - 51.7 48.1 - - 48.1 Annuities 0.5 1.5 - 2.0 3.9 - - 3.9 Pensions 31.1 68.1 131.0 230.2 36.2 - 98.6 134.8 Other 1.7 0.7 - 2.4 0.7 - - 0.7 -------- -------- -------- -------- ------- ------- ------- -------- Total at product level 116.5 81.2 145.0 342.7 129.1 - 113.8 242.9 Valuation adjustments Holding company expenses (8.6) - - (8.6) (9.8) - - (9.8) Other (23.4) (22.0) - (45.4) (26.5) - - (26.5) Cost of capital/ (1.0) (3.7) (0.3) (5.0) (0.8) (1.0) (1.8) frictional costs -------- -------- -------- -------- ------- ------- ------- -------- Value in-force pre-tax 83.5 55.5 144.7 283.7 92.0 - 112.8 204.8 Taxation (4.1) (14.2) - (18.3) (6.4) - - (6.4) -------- -------- -------- ------- ------- ------- -------- -------- Value 79.4 41.3 144.7 265.4 85.6 - 112.8 198.4 in-force post-tax ======== ======== ======== ======== ======= ======= ======== ======== The value-in-force represents the discounted value of the future surpluses arising from the insurance and investment contracts in force at each respective period end. The future surpluses are calculated by using realistic assumptions for each component of the cash flow. 'Other' valuation adjustments in CA principally comprise expenses of managing policies which are not attributed at product level. In S&P they represent the estimated cost of guarantees to with-profits policyholders. Returns to Shareholders The Board's primary aim is to continue to provide a reliable and progressive dividend flow to shareholders within the context of the emergence of surplus in the UK life businesses. Returns to shareholders are underpinned by the emergence of surpluses in, and transfer of surpluses from, the UK life businesses' long-term insurance funds to shareholder funds and by the return on shareholder net assets representing shareholder net equity. These realisations are utilised in the first instance for the repayment and servicing of the bank loan on the basis set out in Note 6 following. The surpluses arise from the realisation of in-force value of the UK businesses, which are in run-off. The return on shareholder net assets is determined by the Group's investment policy. Shareholder funds bear central corporate governance costs which cannot be fairly attributed to the long-term insurance funds and which arise largely in connection with Chesnara's obligations as a listed company. The acquisition of Movestic in July 2009 had a twofold impact on the prospect for shareholder returns. First, as the business was acquired at a significant discount of 73% to its embedded value, there was an immediate accretion of GBP54.2m to shareholder net equity as measured on the European Embedded Value basis. Secondly, in contrast to the UK businesses, which are in run-off, Movestic is open to new business and offers a growth element to total shareholder return. Movestic is expected to become cash generative and, therefore, to have the ability to support the Group's dividend capacity within two to three years. The acquisition of S&P in December 2010, besides giving rise to an immediate accretion of GBP40.7m to shareholder net equity as measured on the EEV basis, following from the fact that it was acquired at a discount of 39% to its embedded value, reinforces the Group's core proposition of realising surpluses from life businesses in run off. Besides extending the time profile over which Chesnara realises such surpluses, S&P offers diversification within the overall Group portfolios, insofar as it includes a significant tranche of with-profits policies and also affords the opportunity to realise synergies by way of transfer of its long-term business funds under the provisions of Part VII of the Financial Services and Markets Act 2000. Between mid November 2009 and early March 2010, the share price strengthened considerably, generally trading in a range of between 185p and 210p per share. This implied a yield, based on total 2009 proposed dividends, of between 7.6% and 8.6%, with the shares trading at a discount of between 19% and 28% to embedded value of GBP262.6m, as reported at 31 December 2009. The improvement followed our interim management statement issued on 19 November 2009, which set out the full extent of the accretive impact of the acquisition of Movestic, while also pointing to an improvement in the fundamentals underpinning the UK businesses. Between early March 2010 and the end of November 2010 the share price averaged some 220p per share. During that period it generally traded within a range of 200p to 250p per share and was subject to sharp fluctuations within the range, generally reflecting wider market conditions. Since the announcement of the acquisition of S&P on 20 December 2010 up to mid-March 2011, the share price has steadily strengthened so that it is now consistently trading within a range of 240p to 260p per share. Based on total proposed dividends for 2010 of 16.4p per share, this implies a yield of between 6.3% and 6.8%, with the shares trading at a discount of between 13% to 19% to the latest published embedded value of GBP354.6m at 31 December 2010. It is also worthy of note that, during 2010, our share price performance has consistently outperformed the Life sector as a whole. Solvency and Regulatory Capital Regulatory Capital Resources and Requirements The regulatory capital of both the UK and Swedish businesses is calculated by reference to regulations established and amended from time to time by the FSA in the UK and by Finansinspektionen in Sweden. The rules are designed to ensure that companies have sufficient assets to meet their liabilities in specified adverse circumstances. As such, there is, in the UK, a restriction on the full transfer of surpluses from the long-term business funds to shareholder funds of CA and S&P, and on the full distribution of reserves from CA and S&P to Chesnara and, in Sweden, on distributions from shareholder funds. Within the UK, the regulations include minimum standards for assessing the value of liabilities, including making an appropriate allowance for default risk on corporate bonds held to match liabilities when assessing the valuation discount rates used for valuing these liabilities. Market turmoil in 2008 led to significant widening of spreads on corporate bonds above gilts, through changed assessment of default risk and liquidity issues, and therefore, with the widening spreads, this issue was of concern to the industry. CA continues to maintain a prudent approach of limiting the assumed liquidity premium for corporate bonds to a maximum of 50bps as at 31 December 2010 (31 December 2009: 50bps). For S&P, where the with-profits funds have a diverse range of assets, the assumed liquidity premium for corporate bonds is limited to 200bps. Additionally, the CA Board continues to maintain their stance that permissive changes to regulations introduced in 2006, in FSA policy statement PS06/14, that would allow a reduction in liabilities are not appropriate for CA at this time. The following summarises the capital resources and requirements of CA for UK regulatory purposes, after making provision for dividend payments from CA to Chesnara, which were approved after the respective period ends: 31 December 2010 2009 GBPm GBPm Available capital resources ('CR') 44.1 43.6 -------- -------- Long-term insurance capital requirement ('LTICR') 19.1 19.8 Resilience capital requirement ('RCR') 1.6 2.3 -------- -------- Total capital resources requirement ('CRR') 20.7 22.1 -------- -------- Target capital requirement cover 30.2 32.0 -------- -------- Ratio of available CR to CRR 213% 197% -------- -------- Excess of CR over target requirement GBP13.9m GBP11.6m -------- -------- The CA Board, as a matter of policy, continues to target CR cover for total CRR at a minimum level of 150% of the LTICR and 100% of the RCR. To the extent that the target capital requirement cover of GBP30.2m as at 31 December 2010 falls short of the GBP40m share capital component of CR, so it follows that GBP9.8m of the reported excess of CR over target requirement is not available for distribution to shareholders except by way of a capital reduction. It can be seen from this information that Chesnara, which relies on dividend distributions from CA, is currently in a favourable position to service its loan commitments and to continue to pursue a progressive dividend policy. The following summarises the capital resources and requirements of S&P for UK regulatory purposes. The Boards of the S&P companies have availed themselves of certain of the provisions of PS06/14 which has led to a reduction in certain liabilities. 31 December 2010 2009 GBPm GBPm Available capital resources ('CR') 69.7 74.4 -------- -------- Long-term insurance capital requirement ('LTICR') 24.3 22.9 Resilience capital requirement ('RCR') 1.7 4.1 -------- -------- Total capital resources requirement ('CRR') 26.0 27.0 -------- -------- Ratio of available CR to CRR 268% 276% -------- -------- Excess of CR over target requirement GBP43.7m GBP47.4m -------- -------- The information as at 31 December 2009 relates to the pre-acquisition period and is provided for illustrative purposes: it is presented after making adjustment for dividends totalling GBP91m, which were paid to S&P's previous shareholder prior to the acquisition date. The Boards of the S&P companies have not established formal targets for CR cover for total CRR. It is not intended to make dividend distributions from S&P to Chesnara prior to transfer of the long-term insurance funds of S&P to CA: this process is planned to be completed towards the end of 2011. Movestic, in contrast to the UK businesses, and being open to new business, is, in the short to medium term, a net consumer of capital. The ratio of capital resources to capital resource requirements is a key indicator of the capital health of the business as it expands and provides the context in which further capital contributions are made by the parent company to finance that expansion in a predictable and orderly manner. The following summarises the capital resources and requirements of Movestic for Swedish regulatory purposes: 31 December 2010 2009 GBPm GBPm Available capital resources (CR) represented by: - Share capital 1.2 1.1 - Additional equity contributions 35.2 33.6 - Accumulated deficit (13.1) (10.2) -------- -------- 23.3 24.5 -------- -------- Regulatory capital resource requirement (CRR) 12.4 8.1 -------- -------- Target requirement 18.6 12.1 -------- -------- Ratio of CR to CRR 188% 302% -------- -------- Excess of CR over target requirements GBP4.7m GBP12.4m -------- -------- The Movestic Board sets a minimum target of 150% of the regulatory capital requirement. Swedish solvency regulation requires that a certain proportion of assets, to be fully admissible, is to be held in the form of cash. The operation of this requirement may, from time to time, act as the operative constraint in determining the level of additional funding requirements, thereby causing the solvency ratio to rise above what it would otherwise have been, had the form of assets matching capital resources not been a constraint. Movestic's solvency ratio declines as the increasing scale of its business requires a higher level of regulatory capital: as the ratio approaches 150%, further planned capital contributions will be made by the Group. Insurance Groups Directive In accordance with the EU Insurance Groups Directive, the Group calculates the excess of the aggregate of regulatory capital employed over the aggregate minimum solvency requirement imposed by local regulators for all of the constituent members of the Group, all of which are based in Europe. The following sets out these calculations after the recognition of final dividends for the respective financial year, but approved by the Board and paid to Group shareholders after the respective dates: 31 December 2010 2009 GBPm GBPm Available group capital resources 121.2 99.7 Group regulatory capital (60.6) (31.6) requirement -------- -------- Excess 60.6 68.1 -------- -------- Cover 200% 316% -------- -------- The fall in the ratio, which remains considerably in excess of the regulatory requirement of at least 100%, reflects the anticipated dilutive effect of the S &P acquisition. Individual Capital Assessments The FSA Prudential Sourcebooks require UK insurance companies to make their own assessment of their capital needs to a required standard (a 99.5% probability of being able to meet liabilities to policyholders after one year). In the light of scrutiny of this assessment, the FSA may impose its own additional individual capital guidance. The Individual Capital Assessment (ICA) is based on a realistic liability assessment, rather than on the statutory mathematical reserves, and involves stress testing the resultant realistic balance sheet for the impact of adverse events, including such market effects as significant falls in equity values, interest rate increases and decreases, bond defaults and further widening of bond spreads. CA completed a further full annual assessment during 2010 as a result of which it was concluded that the effective current and medium-term capital requirement constraints on distributions to Chesnara will continue to be on the basis set out under `Regulatory capital resources and requirements' above. This assessment is subject to quarterly high-level updates until the next full annual assessment. S&P plans to complete a full annual ICA, based on the position as at 31 December 2010, during May 2011: it is not expected that this will lead to a requirement to hold regulatory capital higher than that set out under 'Regulatory Resources and Requirements' above. We are currently developing Movestic's ability to produce similar assessments, so that the determination of risk-based capital is more clearly aligned with UK best practice. In the meantime, Movestic, in accordance with local regulatory requirements, continues to make quarterly assessments of the risk-based capital requirements of its business: these indicate that capital resources currently provide a comfortable margin over capital resource requirements. International Reporting Developments Over the year, we have continued to monitor developments in the EU Solvency II framework which will impact the UK and Swedish businesses. We have established a Steering Group to oversee our implementation of the regulations, which are due to become effective on 1 January 2013. Besides ensuring that there are robust processes for the calculation of technical reserves and solvency capital, the implementation will embrace wide-ranging changes in risk management processes on a Group-wide basis. In the meantime, we have continued internal quantitative analysis and are currently formulating a detailed implementation plan. During 2010 the IASB issued an Exposure Draft relating to Insurance Contracts to which we responded. We will continue to monitor progress on this significant IFRS development. In June 2008, the European Insurance CFO Forum (`CFO Forum') issued the European Insurance CFO Forum Market Consistent Embedded Value (`MCEV') Principles. These principles, with which we had intended to comply with effect from 2009, represent a development of the existing European Embedded Value (`EEV') principles issued by the same Forum, which form the current basis of preparation of our Supplementary Information - European Embedded Value Basis as set out in Note 1 to the Supplementary Information. However, on 22 May 2009, the CFO Forum announced that the mandatory MCEV reporting date for all its member firms would be deferred until 2011, in light of developments arising from the recent financial crisis. We will consider compliance with these principles during 2011. Capital Structure, Treasury Policy and Liquidity The Group's UK operations are ordinarily financed through retained earnings and through the current emergence of surplus in the UK life businesses. Movestic is financed by a combination of financial reinsurance arrangements and capital contributions from Chesnara. With respect to acquisitions the Group seeks to finance these through a suitable mix of debt and equity, within the constraints imposed by the operation of regulatory rules over the level of debt finance which may be borne by Insurance Groups. The acquisition of S&P in December 2010 for GBP63.5m was accomplished by way of debt:equity financing broadly in a ratio of 2:1. This has introduced a modest level of gearing to the structure of Group financing. The Board continues to have a conservative approach to the investment of shareholders' funds in the UK life businesses, which underpins our strong solvency position. For the UK businesses, where the greater part of shareholders' funds subsist, this approach targets the investment of 100% of available funds in cash and fixed interest securities. In the light of recent volatility in financial markets, particular attention is given to the mix and spread of these investments to ensure that we are not unduly exposed to particular sectors and that our counterparty limits are strictly adhered to. Cash available for more than twelve months in the UK is normally transferred to fund managers for longer-term investment. Current economic conditions heighten the risk of corporate bond default and observations on this are made in the 'Going Concern' section below. The profile and mix of investment asset holdings between fixed interest stocks and cash on deposit in the UK is such that realisations to support dividend distributions can be made in an orderly and efficient way. Other factors which may place a demand on capital resources in the future include the costs of unavoidable large scale systems development such as those which may be involved with changing regulatory requirements. To the extent that ongoing administration of the UK life businesses is performed within the terms of its third party outsourcing agreements, the Group is sheltered, to a degree, from these development costs as they are likely to be on a shared basis. Cash Flows The Group's longer-term cash flow cycle continues to be characterised by the strong inflow to shareholders' funds of transfers from the long-term insurance fund of CA, which is supported by the emergence of surplus within that fund. These flows are used (i) to repay our debt obligations as set out in Note 6 following; (ii) to support dividend distributions to shareholders; and (iii) to support the medium-term requirements of Movestic to meet regulatory solvency capital requirements as it expands. Going Concern The Group's cash flow position described above, together with the return on financial assets in the parent company, supports the ability to trade in the short-term. Accordingly, the underlying solvency position of the UK life businesses and their ongoing ability to generate surpluses which support cash transfers to shareholders' funds is critical to the ongoing ability of the Group to continue trading and to meet its obligations as they fall due. The information set out in `Solvency and Regulatory Capital' above indicates a strong solvency position as at 31 December 2010 as measured at both the individual regulated life company levels in both the UK and Sweden and at the Group level. In addition, in respect of CA, a Financial Condition Report and a detailed annual Individual Capital Assessment have been prepared, as also set out above. These include assessments of the ability of the business to withstand key events, including increased rates of policy lapse, expense overruns and unfavourable investment market conditions. The assessments indicate that CA is able to withstand the impact of these adverse scenarios, including the effect of continuing significant investment market falls, while the business's outsourcing arrangements protect it from significant expense overruns. As also indicated above, the current assessment of the risk-based capital requirements of Movestic indicates a comfortable excess of capital resources over those requirements. Notwithstanding that the Group is well capitalised, the current financial and economic environment continues to present specific threats to its short-term cash flow position and it is appropriate to assess other relevant factors. In the first instance, the Group does not rely on the renewal or extension of bank facilities to continue trading - indeed, as indicated, its normal operations are cash generative. The Group does, however, rely on cash flow from the maturity or sale of fixed interest securities which match its obligations to its Guaranteed Bond policyholders: in the current economic environment there remains a continuing higher risk of bond default, particularly in respect of financial institutions. In order to manage this risk we ensure that our bond portfolio is actively monitored and well diversified. However, this risk has continued to abate through 2010 as our underlying bond obligations to policyholders continued to mature. Other significant counterparty default risk relates to our principal reassurer Guardian Assurance plc (`Guardian'). We monitor Guardian's financial position and are satisfied that any associated credit default risk is low. Our expectation is that, notwithstanding the risks set out above, the Group will continue to generate surplus in its UK long-term businesses sufficient to meet its debt obligations as they fall due, to continue to pursue a reliable and progressive dividend policy and to meet the medium-term financing requirements of Movestic, which is expected to become cash-generative within two to three years. Consolidated Statement of Comprehensive Income for the year ended 31 December 2010 Year ended 31 December 2010 2009 Note GBP000 GBP000 Insurance premium revenue 114,950 100,105 Insurance premium ceded to reinsurers (35,695) (24,997) -------- -------- Net insurance premium revenue 79,255 75,108 Fee and commission income 63,410 51,120 Net investment return 303,850 326,680 -------- -------- Total revenue (net of reinsurance payable) 446,515 452,908 Other operating income 9,216 4,689 -------- -------- Total income 455,731 457,597 -------- -------- Insurance contract claims and benefits incurred Claims and benefits paid to insurance contract holders (139,424) (129,557) Net increase in insurance contract provisions (106,618) (127,840) Reinsurers' share of claims and benefits 45,635 47,897 -------- -------- Net insurance contract claims and benefits (200,407) (209,500) -------- -------- Change in investment contract liabilities (180,021) (199,748) Reinsurers' share of investment contract 3,904 4,710 liabilities -------- -------- Net change in investment contract liabilities (176,117) (195,038) -------- -------- Fees, commission and other acquisition costs (14,688) (5,167) Administrative expenses (29,375) (18,245) Other operating expenses (16,157) (9,336) -------- -------- Total expenses (436,744) (437,286) -------- -------- Total income less expenses 18,987 20,311 Share of profit from associates 597 39 Profit recognised on business combinations 3 15,864 25,056 -------- -------- Operating profit 35,448 45,406 Financing costs (1,280) (665) -------- -------- Profit before income taxes 34,168 44,741 Income tax (expense)/credit 5 (4,467) 1,192 -------- -------- Profit for the year 29,701 45,933 -------- -------- Attributable to: Shareholders 4 29,819 45,940 Non-controlling interest (118) (7) -------- -------- 29,701 45,933 Foreign exchange translation differences arising on the revaluation of foreign operations 4,285 3,381 -------- -------- Total comprehensive income for the year 33,986 49,314 ======== ======== Attributable to: Shareholders 34,104 49,321 Non-controlling interest (118) (7) -------- -------- 33,986 49,314 ======== ======== Basic earnings per share (based on profit for the year attributable to shareholders) 10 29.05p 45.26p ======== ======== Diluted earnings per share (based on profit for the year attributable to shareholders) 10 29.05p 45.26p ======== ======== Consolidated Balance Sheet at 31 December 2010 31 December 2010 2009 Note GBP000 GBP000 Assets Intangible assets Deferred acquisition costs 14,659 9,327 Acquired value of in-force business 93,046 86,463 Acquired value of customer relationships 3,032 2,682 Software assets 6,829 4,060 Property and equipment 671 491 Investment in associates 1,783 1,051 Investment properties 120,820 3,355 Reinsurers' share of insurance contract provisions 280,743 236,866 Amounts deposited with reinsurers 30,264 27,056 Financial assets Equity securities at fair value through income 492,321 454,970 Holdings in collective investment schemes at fair value through income 3,177,265 1,612,861 Debt securities at fair value through income 319,516 247,836 Policyholders' funds held by the Group 52,337 41,107 Insurance and other receivables 33,225 19,822 Prepayments 3,908 3,784 Derivative financial instruments 9,707 7,964 -------- -------- Total financial assets 4,088,279 2,388,344 -------- -------- Reinsurers' share of accrued policyholder claims 3,678 4,728 Income taxes 5,486 395 Cash and cash equivalents 194,134 155,241 Assets held for sale 380 - -------- -------- Total assets 4,843,804 2,920,059 -------- -------- Liabilities Liabilities held for sale 380 - Bank overdrafts 2,154 2,312 Insurance contract provisions 2,404,079 1,077,033 Unallocated divisible surplus 83 - Financial liabilities Investment contracts at fair value through income 2,002,712 1,529,221 Liabilities relating to policyholders' funds held by the Group 52,337 41,107 Borrowings 6 62,694 28,996 Derivative financial instruments 137 54 -------- -------- Total financial liabilities 2,117,880 1,599,378 -------- -------- Provisions 1,822 1,452 Deferred tax liabilities 20,526 10,366 Reinsurance payables 22,310 15,039 Payables related to direct insurance and investment contracts 35,808 30,433 Deferred income 11,647 13,132 Income taxes 6,923 1,313 Other payables 16,923 9,833 -------- -------- Total liabilities 4,640,535 2,760,291 -------- -------- Net assets 4 203,269 159,768 ======== ======== Shareholders' equity Share capital 7 42,024 41,501 Share premium 42,523 20,458 Treasury shares 8 (217) (3,379) Other reserves 7,716 3,431 Retained earnings 9 111,223 97,744 -------- -------- Total shareholders' equity 203,269 159,755 Non-controlling interest - 13 -------- -------- Total equity 203,269 159,768 ======== ======== Consolidated Statement of Cash Flows for the year ended 31 December 2010 Year ended 31 December 2010 2009 GBP000 GBP000 Profit for the year 29,819 45,940 Adjustments for: Depreciation of tangible fixed assets 294 65 Amortisation of deferred acquisition costs 5,737 2,080 Amortisation of acquired value of in-force business 8,148 6,953 Amortisation of acquired value of customer relationships 1,182 188 Amortisation of internally-developed software 1,176 414 Tax expense/(recovery) 4,467 (1,192) Interest receivable (16,913) (17,959) Dividends receivable (31,090) (24,048) Interest expense 1,280 665 Change in fair value of investment properties (113) 77 Fair value gains on financial assets (252,456) (284,739) Loss on sale of property and equipment 2 21 Profit arising on business combinations (15,864) (25,056) Share of profit of associate net of impairment (597) 122 Interest received 16,370 20,893 Dividends received 30,792 23,304 Increase in intangible assets related to insurance and investment contracts (10,343) (3,157) Changes in operating assets and liabilities Increase in financial assets (78,785) (58,028) Increase in reinsurers share of insurance contract provisions (31,471) (27,211) Increase in amounts deposited with reinsurers (3,208) (4,875) Decrease/(increase) in insurance and other receivables 1,305 (4,671) Decrease/(increase) in prepayments 80 (1,293) Increase in assets held for sale (380) - Increase in liabilities held for sale 380 - Increase in insurance contract provisions 121,382 120,648 Increase in investment contract liabilities 270,801 219,609 Increase/(decrease) in provisions 370 (2,229) Increase in reinsurance payables 5,677 3,629 (Decrease)/increase in payables related to direct insurance and investment contracts (6,050) 3,604 Decrease in other payables (422) (970) -------- -------- Cash utilised by operations 51,570 (7,216) Income tax paid (4,537) (2,371) -------- -------- Net cash generated from/(utilised by) operating activities 47,033 (9,587) ======== ======== Cash flows from investing activities Business combinations net of cash acquired (46,483) (5,944) Investment in associates (38) (334) Development of software (2,541) (918) Purchases of property and equipment (296) (180) -------- -------- Net cash utilised by investing activities (49,358) (7,376) ======== ======== Cash flows from financing activities Proceeds from the issue of share capital, net of expenses 22,588 - Sale of treasury shares 3,162 - Proceeds from borrowings 40,000 - Repayment of borrowings (7,236) (5,759) Dividends paid (16,340) (15,934) Interest paid (2,365) (821) -------- -------- Net cash generated from/(utilised by) financing activities 39,809 (22,514) ======== ======== Net increase/(decrease) in cash and cash equivalents 37,484 (39,477) Cash and cash equivalents at beginning of the year 152,929 191,287 Effect of exchange rate changes on cash and cash equivalents 1,567 1,119 -------- -------- Cash and cash equivalents at end of the year 191,980 152,929 ======== ======== Consolidated Statement of Changes in Equity for the year ended 31 December 2010 Year ended 31 December 2010 Share Share Other Treasury Retained capital premium reserves shares earnings Total GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 Equity shareholders' funds at 1 January 2010 41,501 20,458 3,431 (3,379) 97,744 159,755 Profit for the period representing total recognised income and expenses - - - - 29,819 29,819 Dividends paid - - - - (16,340) (16,340) Issue of new shares 523 22,065 - - - 22,588 Sale of treasury shares - - - 3,162 - 3,162 Foreign exchange - - 4,285 - - 4,285 translation reserve -------- -------- -------- -------- -------- -------- Equity shareholders' funds at 31 December 42,024 42,523 7,716 (217) 111,223 203,269 2010 ======== ======== ======== ======== ======== ======== Year ended 31 December 2009 Share Share Other Treasury Retained capital premium reserves shares earnings Total GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 Equity shareholders' funds at 1 January 2009 41,501 20,458 50 (3,379) 67,738 126,368 Purchase of treasury shares - - - - - - Profit for the year attributable to shareholders - - - - 45,940 45,940 Dividends paid - - - - (15,934) (15,934) Foreign exchange - - 3,381 - - 3,381 translation reserve -------- -------- -------- -------- -------- -------- Equity shareholders' funds at 31 December 41,501 20,458 3,431 (3,379) 97,744 159,755 2009 ======== ======== ======== ======== ======== ======== NOTES 1 Significant accounting policies In the information which follows distinction is made, where necessary, in respect of the applicability of certain policies, or as to their clarification: (i) as between the UK businesses and the Swedish business, which comprises the Movestic segment, and (ii) as between the CA and S&P segments of the UK businesses. (a) Statement of compliance The preliminary announcement is based on the Group's financial statements for the year ended 31 December 2010, which are prepared in accordance with International Financial Reporting Standards (`IFRSs') as adopted by the European Union (`Adopted IFRSs') as adopted by the EU. The Group has applied, for the first time, Improvements to IFRSs 2009, and those elements of Improvements to IFRSs 2010 effective for accounting periods beginning on or after January 1 2010. Their application has not led to any changes in Group accounting policies. At the date of authorisation of these financial statements, the following Standards, which are applicable to the Group and which have not been applied in these financial statements, were in issue, but were not yet effective, and in some cases had not yet been adopted by the EU: - IFRS9 Financial Instruments - IAS24 (revised) Related Party Disclosures The Directors anticipate that the application of these Standards in future periods will have no material impact on the financial statements of the Group. (b) Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and of entities controlled by the Company (its subsidiaries), made up to 31 December each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. The Parent Company financial statements present information about the Company as a separate entity and not about its group. Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Group's equity therein. Non-controlling interests consist of the amount of those interests at the date of the original business combination and the non-controlling interest's share of changes in equity since the date of the combination. Profit or loss and each component of other comprehensive income are attributed to the Company and to the non-controlling interests. Total comprehensive income is attributed to the Company shareholders and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition or up to the effective date of disposal. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation. (c) Basis of preparation The Consolidated financial statements have been prepared on a going concern basis. The Directors believe that they have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. In making this assessment, the Directors have taken into consideration the points as set out in the Financial Review in the section headed `Going Concern'. The financial statements are presented in pounds sterling, rounded to the nearest thousand and are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments, financial instruments at fair value through income, assets and liabilities held for sale, unallocated divisible surplus, investment property and investment contract liabilities at fair value through income. Assets and liabilities are presented on a current and non-current basis in the notes to the financial statements. If assets are expected to be recovered and liabilities expected to be settled within a year, they are classified as current. If they are expected to be recovered or settled in more than one year, they are classified as non-current. The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimate is revised if the revision affects only that year, or in the year of the revision and future years if the revision affects both current and future years The accounting policies set out below have been applied consistently to all years presented in these consolidated financial statements. (d) Business combinations The Group uses the purchase method of accounting to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Expenses directly attributable to the acquisition are expensed as incurred. The acquiree's identifiable assets, liabilities, and contingent liabilities, which meet the conditions for recognition under IFRS 3 are measured initially at their fair values at the acquisition date. Gains arising on a bargain purchase, where the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree exceeds the cost of acquisition, is recognised in profit or loss at the acquisition date. The non-controlling interest in the acquiree is initially measured at the non-controlling interest's proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. (e) Investments in associates An associate is an entity over which the Group is in a position to exercise significant influence, but not control or joint control, through participation in the financial and operating policy decisions of the investee. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. Investments in associates are carried in the balance sheet at cost as adjusted by post-acquisition changes in the Group's share of the net assets of the associate, less any impairment in the value of individual investments. Where a Group company transacts with an associate of the Group, profits and losses are eliminated to the extent of the Group's interest in the associate. Losses may provide evidence of an impairment of assets transferred, in which case appropriate provision is made for impairment. (f) Foreign currencies The individual financial statements of each Group company are presented in the currency of the primary economic environment in which it operates, being its functional currency. For the purpose of these consolidated financial statements, the results and financial position of each Group company are expressed in pounds sterling, which is the functional currency of the Parent Company and the presentation currency of the consolidated financial statements. In preparing the financial statements of the individual companies, transactions in currencies other than the entity's functional currency, being foreign currencies, are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities which are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value, which are denominated in foreign currencies are translated at the rates prevailing when the fair value was determined. Non-monetary items, which are measured in terms of historical cost in a foreign currency, are not retranslated. Exchange differences are recognised in profit or loss in the period in which they arise, except when they relate to items for which gains and losses are recognised in equity. For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group's foreign operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during the period, in which case the exchange rates at the dates of transactions are used. Exchange differences arising are classified as equity and are recognised in the Group's foreign currency translation reserve. Such translation differences are recognised as income or as expense in the period in which the operation is disposed of. Transactions relating to business combinations denominated in foreign currencies are translated into sterling at the exchange rates prevailing on the transaction date. (g) Product classification The Group's products are classified at inception as either insurance or investment contracts for accounting purposes. Insurance contracts are contracts which transfer significant insurance risk and remain as insurance contracts until all rights and obligations are extinguished or expire. They may also transfer financial risk. Investment contracts are contracts which carry financial risk, with no significant insurance risk. Where contracts contain both insurance and investment components and the investment components can be measured reliably, the contracts are unbundled and the components are separately accounted for as insurance contracts and investment contracts respectively. In some insurance contracts and investment contracts the financial risk is borne by the policyholders. Such contracts are usually unit-linked contracts. With-profits contracts, which subsist only within the UK businesses, all contain a discretionary participation feature (''DPF'') which entitles the holder to receive, as a supplement to guaranteed benefits, additional benefits or bonuses, which may be a significant portion of the total contractual benefits. In respect of S&P the amount and timing of such contractual benefits are at the discretion of the Group and are contractually based on realised and/or unrealised investment returns on a specified pool of assets held by the Group. The terms and conditions of these contracts, together with UK regulations, set out the bases for the determination of the amounts on which the additional discretionary benefits are based and within which the Group may exercise its discretion as to the quantum and timing of their payment to contract holders. In respect of CA all such contracts are wholly reinsured with Guardian Assurance plc ('Guardian'), a subsidiary of Aegon NV, and the amount or timing of the additional payments are contractually at the discretion of the reinsurer and are contractually based on: (i) the performance of a specified pool of contracts or a specified type of contract; (ii) realised and/or unrealised investment returns on a specified pool of assets held by the reinsurer; or (iii) the profit or loss of the reinsurer. All contracts with discretionary participation features are classified as insurance contracts. (h) Insurance contracts There are fundamental differences between the nature of the insurance contracts subsisting in the UK and Swedish businesses, including inter alia contract longevity. As a consequence, the alignment of income and expense recognition with the underlying assumption of risk leads to the adoption of separate accounting policies appropriate to each business, as follows: UK Businesses (i) Premiums Premiums are accounted for when due, or in the case of unit-linked insurance contracts, when the liability is recognised, and exclude any taxes or duties based on premiums. Outward reinsurance premiums are accounted for when due. (ii) Claims and benefits Claims are accounted for in the accounting period in which they are due or notified. Surrenders are accounted for in the accounting period in which they are paid. Claims include policyholder bonuses allocated in anticipation of a bonus declaration. Reinsurance recoveries are accounted for in the same period as the related claim. (iii) Acquisition costs Acquisition costs comprise all direct and indirect costs arising from the conclusion of insurance contracts. They are initial fees amortised at a rate based on the pattern of anticipated margins in respect of the related policies. An explicit deferred acquisition cost asset is established in the balance sheet to the extent that acquisition costs exceed initial fees deducted. At 31 December each year, such costs that are deferred to future years are reviewed to ensure they do not exceed available future margins. Renewal commission and other direct and indirect acquisition costs arising on enhancements to existing contracts are expensed as incurred. (iv) Measurement of insurance contract provisions Insurance contract provisions are measured using accounting policies having regard to the principles laid down in Council Directive 2002/83/EC. Insurance contract provisions are determined following an annual actuarial investigation of the long-term funds and are calculated initially on a statutory solvency basis in order to comply with the reporting requirements of the Prudential Sourcebook for Insurers. This valuation is then adjusted to remove certain contingency and other reserves. In accordance with this, the provisions are calculated on the basis of current information, using the specific valuation methods set out below. Unit-linked provisions are measured by reference to the value of the underlying net asset value of the Group's unitised investment funds, determined on a bid value basis, at the balance sheet date. Deferred tax on unrealised capital gains on the underlying investments in the unitised funds is also reflected in the measurement of unit-linked provisions and is not discounted. For immediate annuities in payment the provision is calculated as the discounted value of the expected future annuity payments under the policies, allowing for mortality, including projected improvements in future mortality, interest rates and expenses. For certain temporary annuities in payment no allowance for mortality has been made. In respect of S&P, for those classes of non-linked business with a discretionary participation feature, a gross premium method has been used to value the liability, whereby expected income and costs have been projected, allowing for mortality, interest rates and expenses. For the other classes of non-linked business the provision is calculated on a net premium basis, being the level of premium consistent with a premium stream, the discounted value of which, at the outset of the policy, would be sufficient to cover exactly the discounted value of the original guaranteed benefits at maturity, or at death if earlier, on the valuation basis. The provision is then calculated by subtracting the present value of future net premiums from the present value of the benefits guaranteed at maturity, or death if earlier, as a result of events up to the balance sheet date. Negative provisions do not arise under the net premium method, which makes no allowances for voluntary discontinuances by policyholders, and which only implicitly allows for future policy maintenance costs. In respect of CA for those classes of non-linked and unit-linked business where policyholders participate in profits the liability is wholly reassured to Guardian. The liability is calculated on a net premium basis, but is then increased to the realistic liability as a result of the liability adequacy test. Insurance contract provisions are tested for adequacy by discounting current estimates of all contractual cash flows and comparing this amount to the carrying value of the provision and any related assets: this is known as the liability adequacy test. Where a shortfall is identified, an additional provision is made and the Group recognises the deficiency in income for the year. Insurance contract provisions can never be definitive as to their timing or the amount of claims and are therefore subject to subsequent reassessment on a regular basis. Swedish Business - Life (i) Premiums Premiums are accounted for when received, and exclude any taxes or duties based on premiums. Outward reinsurance premiums are accounted for when due. (ii) Claims and benefits Claims are accounted for in the accounting period in which they are due or notified. Reinsurance recoveries are accounted for in the same period as the related claim. (iii) Acquisition costs Acquisition costs comprise expenditure incurred arising from the completion of insurance contracts. They are initial fees amortised at a rate based on the pattern of anticipated margins in respect of the related policies. An explicit deferred acquisition cost asset is established in the balance sheet to the extent that acquisition costs exceed initial fees deducted. At the end of each year, such costs that are deferred to future years are reviewed to ensure they do not exceed available future margins. Renewal commission and other direct and indirect acquisition costs arising on enhancements to existing contracts are expensed as incurred. (iv) Measurement of insurance contract provisions Provision is made at the year-end for the estimated cost of claims incurred but not settled at the balance sheet date, including the cost of claims incurred but not yet reported. The estimated cost of claims includes expenses to be incurred in settling claims. Outstanding claim provisions are not discounted other than for income protection and waiver of premium benefits, where payments may be made for a considerable period of time. All reasonable steps are taken to ensure that there is appropriate information regarding claims exposures. However, given the uncertainty in establishing claims provisions, it is likely that the final outcome will prove to be different from the original liability established. Insurance contract provisions are tested for adequacy by discounting current estimates of all contractual cash flows and comparing this amount to the carrying value of the provision and any related assets: this is known as the liability adequacy test. Where a shortfall is identified, an additional provision is made and the deficiency in income for the year is recognised. Swedish Business - Non-life (i) Premiums Written premiums for non-life (general) insurance business comprise the premiums on contracts incepting in the financial year. Written premiums are stated gross of commission payable to intermediaries and exclusive of taxes and duties paid on premiums. Unearned premiums are those proportions of the premium which relate to periods of risk after the balance sheet date. Unearned premiums are calculated on a straight-line basis according to the duration of the policy underwritten. (ii) Acquisition costs Acquisition costs, which represent commission payable, incurred in writing written premiums, are deferred and amortised over the period in which the related premiums are earned. (iii) Claims Claims incurred Claims incurred comprise claims and related expenses paid in the year and changes in provisions for outstanding claims, including provisions for claims incurred but not yet reported and related expenses, together with any adjustments to claims from previous years. Outstanding claims provisions Provision is made at the year-end for the estimated cost of claims incurred but not settled at the balance sheet date, including the cost of claims incurred but not yet reported. The estimated cost of claims includes expenses to be incurred in settling claims. Outstanding claims provisions are not discounted. Provisions are calculated gross of any reinsurance recoveries. All reasonable steps are taken to ensure that there is appropriate information regarding claims exposures. However, given the uncertainty in establishing claims provisions, it is likely that the final outcome will prove to be different from the original liability established. (i) Investment contracts (i) Amounts collected Amounts collected on investment contracts, which primarily involve the transfer of financial risk such as long-term savings contracts, are accounted for using deposit accounting, under which the amounts collected, less any initial fees deducted, are credited directly to the balance sheet as an adjustment to the liability to the investor. (ii) Amounts deposited with reinsurers Amounts deposited with reinsurers under reinsurance arrangements, which primarily involve the transfer of financial risk, are entered directly to the balance sheet as amounts deposited with reinsurers. These assets are designated on initial recognition as at fair value through income. (iii) Benefits For investment contracts, benefits paid are not included in the income statement but are instead deducted from investment contract liabilities in the accounting period in which they are paid. (iv) Acquisition costs Acquisition costs relating to investment contracts comprise directly attributable incremental acquisition costs, which vary with, and are related to, securing new contracts, and are recognised as an asset to the extent that they represent the contractual right to benefit from the provision of investment management services. The asset is presented as a deferred acquisition cost asset and is amortised over the expected term of the contract, as the fees relating to the provision of the services are recognised. All other costs are recognised as expenses when incurred. (v) Liabilities All investment contract liabilities are designated on initial recognition as held at fair value through income. The Group has designated investment contract liabilities at fair value through income as this more closely reflects the basis on which the businesses are managed. The financial liability in respect of unit-linked contracts is measured by reference to the value of the underlying net asset value of the unitised investment funds, determined on a bid value, at the balance sheet date. For the UK businesses, deferred tax on unrealised capital gains and for the Swedish business a yield tax in respect of an estimate of the investment return on the underlying investments in the unitised funds are also reflected in the measurement of the respective unit-linked liabilities. In respect of the UK businesses guaranteed income and guaranteed growth bond liabilities and other investment contract liabilities are managed together with related investment assets on a fair value basis as part of the documented risk management strategy. The fair value of other investment contracts is measured by discounting current estimates of all contractual cash flows that are expected to arise under contracts. (j) Unallocated divisible surplus The unallocated divisible surplus represents the excess of policyholder assets over policyholder liabilities in respect of the S&P with-profits funds. As permitted under IFRS 4, the Group has opted to continue to record an unallocated surplus of such with-profits funds wholly as a liability. The annual excess or shortfall of income over expenditure of the with-profits funds, after declaration and attribution of the cost of bonuses to policyholders is transferred to or from the unallocated divisible surplus each year through a charge or credit to the income statement. The balance retained in the unallocated divisible surplus represents cumulative income arising on the with-profits business that has not been allocated to policyholders or shareholders. The balance of the unallocated divisible surplus is determined after full provision for deferred tax on unrealised appreciation on investments. In the event of the estimated liability attributable to policyholders exceeding available funds, the balance is transferred to shareholder funds. (k) Reinsurance The Group cedes reinsurance in the normal course of business for the purpose of avoiding the retention of undue concentration of risk on any one life, policyholder or loss event (for example multiple losses under a Group Life contract). Assets, liabilities and income and expense arising from ceded reinsurance contracts are presented separately from the related assets, liabilities, income and expenses from the related insurance contracts because the reinsurance arrangements do not relieve the Group from its direct obligations to its policyholders. Only rights under contracts that give rise to a significant transfer of insurance risk are accounted for as reinsurance assets, which comprise amounts due from insurance companies for paid and unpaid losses and ceded life policy benefits. Rights under contracts that do not transfer significant insurance risk are accounted for as financial instruments and are presented as amounts deposited with reinsurers. The net premiums payable to a reinsurer may be more or less than the reinsurance assets recognised by the Group in respect of the reinsurance cover purchased. Any gain or loss is recognised in the income statement in the period in which the reinsurance premiums are payable. Rights under reinsurance contracts comprising the reinsurers' share of insurance contract provisions and accrued policyholder claims are estimated in a manner that is consistent with the measurement of the provisions held in respect of the related insurance contracts and in accordance with the terms of the reinsurance contract. Such assets are deemed impaired if there is objective evidence, as a result of an event that occurred after its initial recognition, that the Group may not recover all amounts due and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer. Impairment losses reduce the carrying value of the related reinsurance assets to their recoverable amount and are recognised as an expense in the income statement. The Group enters into certain financing arrangements, which are established in the form of a reinsurance contract, but which are substantively in the form of a financial instrument. Such arrangements are classified and presented as borrowings within financial liabilities. (l) Fee and commission income Fees charged for investment management services provided in connection with investment contracts are recognised as revenue as the services are provided. Initial fees which exceed the level of recurring fees and relate to the future provision of services are deferred and amortised over the anticipated period in which services will be provided. Initial fees charged for investment management services provided in connection with insurance contracts are recognised as revenue when earned. For both insurance and investment contracts, initial fees, annual management charges and contract administration charges are recognised as revenue on an accruals basis. Surrender charges are recognised as a reduction to policyholder claims and benefits incurred when the surrender benefits are paid. Benefit-based fees comprising charges made to unit-linked insurance and investment funds for mortality and morbidity benefits are recognised as revenue on an accruals basis. For insurance and investment contracts, commissions received or receivable which do not require the Group to render further services are recognised as revenue by the Group on the effective commencement or renewal dates of the related contract. However, when it is probable that the Group will be required to render further services during the life of the contract, the commission, or part thereof, is deferred and recognised as revenue over the period in which services are rendered. (m) Investment income Investment income comprises income from financial assets and rental income from investment properties. Income from financial assets comprises dividend and interest income, net fair value gains and losses (both unrealised and realised) in respect of financial assets classified as fair value through income, and realised gains on financial assets classified as loans and receivables. Dividends are accrued on an ex-dividend basis. Interest received and receivable in respect of interest- bearing financial assets classified as at fair value through income is included in net fair value gains and losses. For loans and receivables and cash and cash equivalents interest income is calculated using the effective interest method. Rental income from investment properties under operating leases is recognised in the income statement on a straight-line basis over the term of each lease. Lease incentives are recognised in the income statement as an integral part of the total lease income. (n) Expenses (i) Operating lease payments Leases where a significant proportion of the risks and rewards of ownership is retained by the lessor are classified as operating leases. Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense. (ii) Financing costs Financing costs comprise interest payable on borrowings and on reinsurance claims deposits included within reinsurance payables, calculated using the effective interest rate method. (o) Income taxes Income tax on the profit or loss for the year comprises current and deferred tax and is recognised in the income statement. Tax that relates directly to transactions reflected within equity is also presented within equity. (i) Current tax Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. (ii) Deferred tax Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. (iii) Policyholders' fund yield tax Certain of the Group's policyholders within the Swedish business are subject to a Swedish yield tax which is calculated based on an estimate of the investment return on underlying investments within their unitised funds. The Group is under an obligation to deduct the yield tax from the policyholders' unitised funds and to remit these deductions to the tax authorities. The deduction from policyholders' unitised funds is presented as management fee income with an equal charge reflected in the current tax charge. (p) Acquired value of in-force business Acquired in-force insurance and investment contracts arising from business combinations are measured at fair value at the time of acquisition. The difference between the fair value of insurance contracts and the liability measured in accordance with the Group's accounting policies for the contracts is recorded as acquired present value of in-force business. Present value of in-force business is carried gross of tax and is amortised against income on a time profile which, it is intended, will broadly match the profile of the underlying emergence of surplus as anticipated at the time of acquisition. The present value of in-force insurance contracts is tested for recoverability/ impairment as part of the liability adequacy test. The present value of in-force investment contracts is stated at cost less accumulated amortisation and impairment losses. The initial cost is deemed to be the fair value of the contractual customer relationships acquired. The acquired present value of the in-force investment contracts is carried gross of tax and is amortised against income on a time profile which, it is intended, will broadly match the profile of the underlying emergence of profit from the contracts. The recoverable amount is estimated at each balance sheet date. If the recoverable amount is less than the carrying amount, an impairment loss is recognised in the income statement and the carrying amount is reduced to its recoverable amount. (q) Acquired value of customer relationships The acquired value of customer relationships arising from business combinations is measured at fair value at the time of acquisition. This comprises the discounted cash flows relating to new insurance and investment contracts which are expected to arise from existing customer relationships. These are carried gross of tax, are amortised in accordance with the expected emergence of profit from the new contracts and are tested periodically for recoverability. (r) Software assets An intangible asset in respect of internal development software costs is only recognised if all of the following conditions are met: (i) an asset is created that can be identified; (ii) it is probable that the asset created will generate future economic benefits; and (iii) the development costs of the asset can be measured reliably. Where no internally-generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred. Software assets, including internally developed software, are amortised on a straight-line basis over their estimated useful life, which typically varies between 3 and 5 years. (s) Property and equipment Items of property and equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation is charged to the income statement on a straight-line basis over the estimated useful economic lives of the property and equipment on the following basis: Computers and similar equipment 3 years Fixtures and other equipment 5 years Assets held under finance leases are depreciated over their useful economic lives on the same basis as owned assets, or where shorter, over the term of the relevant lease. (t) Investment property Investment properties are properties which are held either to earn rental income or for capital appreciation or for both. On initial recognition investment properties are measured at cost including attributable transaction costs, and are subsequently measured at fair value. Independent external valuers, having an appropriate recognised professional qualification and recent experience in the location and category of property being valued, value the portfolio every twelve months. The fair values reflect market values at the balance sheet date, being the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. Any gain or loss arising from a change in fair value is recognised in the income statement. Rental income from investment property is accounted for as described in accounting policy (m). (u) Financial assets Financial assets are classified into different categories depending on the type of asset and the purpose for which it is acquired. Currently two different categories of financial assets are used: `financial assets at fair value through income' and `loans and receivables'. Financial assets classified as at fair value through income comprise financial assets designated as such on initial recognition and derivative financial instruments. All financial assets held for investment purposes other than derivative financial instruments are designated as at fair value through income on initial recognition since they are managed, and their performance is evaluated, on a fair value basis in accordance with documented investment and risk management strategies. This designation is also applied to the Group's investment contracts, since the investment contract liabilities are managed together with the investment assets on a fair value basis as part of the documented risk management strategy. Purchases and sales of `regular way' financial assets are recognised on the trade date, which is when the Group commits to purchase, or sell, the assets. All financial assets are initially measured at fair value plus, in the case of financial assets not classified as at fair value through income, transaction costs that are directly attributable to their acquisition. Subsequent to initial recognition, financial assets classified as at fair value through income are measured at their fair value without any deduction for transaction costs that may be incurred on their disposal. The fair values of financial assets quoted in an active market are their bid prices at the balance sheet date. Financial assets classified as loans and receivables are stated at amortised cost less impairment losses. A provision for the impairment of loans and receivables is established when there is objective evidence that the Group will not be able to collect all the amounts due according to the original contract terms after the date of the initial recognition of the asset and when the impact on the estimated cash flows of the financial asset can be reliably measured. Financial assets classified as prepayments are held at cost and are amortised over the relevant time period. Financial assets at fair value through income are regularly reviewed for objective evidence of impairment. In determining whether objective evidence exists, the Group considers, among other factors, the financial stability of the counterparty, current market conditions and fair value volatility. Financial assets are derecognised when contractual rights to receive cash flows from the financial assets expire, or where the financial assets have been transferred together with substantially all the risks and rewards of ownership. (v) Derivative financial instruments Derivative financial instruments are recognised at fair value. The gain or loss on re-measurement to fair value is recognised immediately in profit or loss. Hedge accounting has not been applied. The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties. The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price. The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price. Embedded derivatives which are not closely related to their host contracts and which meet the definition of a derivative are separated and fair valued through income. (w) Policyholders' funds held by the group and liabilities relating to policyholders' funds held by the group Policyholders' funds held by the Group and liabilities relating to policyholders' funds held by the Group are recognised at fair value. Policyholders' funds held by the Group The policyholders' funds held by the Group represent the assets associated with an Investment product in the Swedish business, where the assets are held on behalf of the policyholder and where all the risks and rewards associated with the assets are the policyholders' not the Group's. The policyholders' funds held by the Group are held for investment purposes on behalf of the policyholders and are designated as at fair value through income. The fair values of the policyholders' funds held by the Group are the accumulation of the bid prices of the underlying assets at the balance sheet date. Transactions in these financial assets are recognised on the trade date, which is when the Group commits (on behalf of the policyholder) to purchase, or sell the assets. Liabilities relating to policyholders' funds held by the Group The liability relating to policyholders' funds held by the Group represents the liability that matches the asset policyholders' funds held by the Group. As stated previously, the risk and rewards associated with the investment product (and its underlying assets and matching liability) lie with the policyholders, not the Group. (x) Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks and other short-term highly liquid investments. Highly liquid is defined as having a short maturity of three months or less at their acquisition. (y) Assets held for sale and liabilities held for sale Assets and liabilities are classified as held for sale if their carrying amount is to be recovered principally through a sale transaction that is highly likely to complete within one year from the date of classification, rather than through continuing use. Such assets are measured at the lower of carrying amount and fair value and are classified separately from other assets in the balance sheet. Assets and liabilities are not netted. In the period where a non-current asset or disposal group is recognised for the first time, the balance sheet for the comparative prior period is not restated. (z) Impairment The carrying amounts of the Group's assets other than reinsurance assets (refer to (k) above) and assets which are carried at fair value are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the assets' recoverable amount is estimated in order to determine the extent of the impairment loss, if any. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount and impairment losses are recognised in the income statement. The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money. Impairment losses are reversed through the income statement if there is a change in the estimates used to determine the recoverable amount. Such losses are reversed only to the extent that the assets' carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation where applicable, if no impairment loss had been recognised. (aa) Provisions Provisions are recognised when the Group has a present, legal or constructive obligation as a result of past events such that it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Where the effect of the time value of money is material, the amount of the provision is the present value of the expenditures expected to be required to settle the obligation. The Group recognises provisions for onerous contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract. (bb) Borrowings Borrowings are recognised initially at fair value, less transaction costs, and are subsequently measured at amortised cost using the effective interest method, with interest expense recognised in the income statement on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts future cash payments through the expected life of the financial liability. (cc) Employee benefits (i) Pension obligations UK Businesses Group companies operate defined contribution pension schemes, which are funded through payments to insurance companies, to which Group companies pay fixed contributions. There are no legal or constructive obligations on Group companies to pay further contributions if the fund does not hold sufficient assets to pay employee benefits relating to service in current and prior periods. Accordingly, Group companies have no further payment obligations once the contributions have been paid. Contributions to defined contribution pension schemes are recognised in the income statement when due. Swedish Business The Group participates in a combined defined benefit and defined contribution scheme for the benefit of its employees. However, the scheme is a multi-employer scheme, with the associated assets and liabilities maintained on a pooled basis. There is limited information available to the Group to allow it to account for the scheme as a defined benefit scheme and, in accordance with IAS19 Employee Benefits, it is, therefore, accounted for as a defined contribution scheme. Contributions paid to the scheme are recognised in the income statement when due. (ii) Bonus plans The Group recognises a liability and an expense for bonuses based on a formula that takes into consideration the profit attributable to the Company's shareholders after certain adjustments. The expense is recognised in the income statement on an accruals basis. (dd) Share capital and shares held in treasury (i) Share capital Shares are classified as equity when there is no obligation to transfer cash or other assets. Incremental costs directly attributable to the issue of equity instruments are shown in equity as a deduction from the proceeds, net of tax. Incremental costs directly attributable to the issue of equity instruments, as consideration for the acquisition of a business, are included in the cost of acquisition. (ii) Shares held in treasury Where the Company purchases its own equity share capital, the consideration paid, including directly attributable costs, is deducted from total shareholders' equity and shown separately as `treasury shares' until they are cancelled. Where such shares are subsequently sold, any consideration received is credited to the share premium account. (ee) Dividends Dividend distributions to the Company's shareholders are recognised in the period in which the dividends are paid, and, for the final dividend, when approved by the Company's shareholders at the annual general meeting. (ff) Other payables and payables related to direct insurance and investment contracts Insurance and investment contract payables and other payables are recognised when due and are measured on initial recognition at the fair value of the consideration paid. Subsequent to initial recognition, payables are measured at amortised cost using the effective interest rate method. 2 Status of financial information The financial information contained in this preliminary announcement does not constitute the Company's consolidated statutory financial statements for the years ended 31 December 2009 or 2010 but is derived from those financial statements. The financial statements for the year ended 31 December 2010 will be delivered following the Company's Annual General Meeting. The auditors have reported on those financial statements; their reports were unqualified and did not contain statements under section 498(2) or (3) of the Companies Act 2006. 3 Business combinations Profit recognised on business combinations arises on acquisition of: Year ended 31 December 2010 2009 GBP000 GBP000 Save & Prosper Insurance Limited 15,488 - Aspis FÃ¶rsÃ¤kringar Liv AB 376 - Movestic LivfÃ¶rsÃ¤kring AB - 25,056 -------- -------- 15,864 25,056 ======== ======== Acquisition of Save & Prosper Insurance Limited On 20 December 2010, Chesnara plc acquired the entire issued share capital (100%) of Save & Prosper Insurance Limited ("S&P") from JPMorgan Asset Management Marketing Limited for a total consideration of GBP63,524,000, paid in cash. Save & Prosper Insurance Limited is a UK-based insurance and investment Group underwriting primarily life assurance risks and providing a portfolio of contracts for the saving and retirement needs of customers through asset management, and is effectively closed to new business. In life assurance companies there is a requirement for businesses to hold a level of regulatory capital, whilst the cash flows relating to the policy book generate a profit stream. The inability of a company acquiring a closed book life assurance business to freely distribute the net assets supporting the regulatory capital leads to a value being placed on the business, as a whole, lower than the fair value of the net assets acquired. This was taken into account, during negotiations, by Chesnara in determining a suitable consideration, which was less than the previously-reported value of the net assets of S & P. Subsequent to acceptance of the purchase offer price, but before completion, investment valuation movements have resulted in significant changes in the valuation of insurance liabilities and related assets which have increased the value of the net assets acquired of S & P at the completion date of 20 December 2010. The key sensitivities relating to the determination of the insurance liabilities, considered within the completion balance sheet and key factors considered in determining the value of the acquired in-force business are disclosed in the full financial statements for the year ended 31 December 2010. The acquisition of this shareholding has given rise to a profit on acquisition of GBP15,488,000 calculated as follows: The estimated book and fair values of the assets and Provisional liabilities at the date of fair value acquisition were: Book value adjustments Fair value Assets GBP000 GBP000 GBP000 Intangible assets: Value of in-force contracts - 9,093 9,093 Investment properties 117,925 - 117,925 Reinsurers' share of insurance contract provisions 7,692 - 7,692 Amounts deposited with reinsurers - - - Total financial assets 1,261,883 - 1,261,883 Reinsurers' share of accrued policyholder claims 256 - 256 Income taxes 4,943 - 4,943 Cash and cash equivalents 15,217 - 15,217 -------- -------- -------- Total assets 1,407,916 9,093 1,417,009 -------- -------- -------- Liabilities Bank overdraft 29 - 29 Insurance contract provisions 1,197,067 - 1,197,067 Investment contracts 108,862 - 108,862 Unallocated divisible surplus 83 - 83 Deferred tax liabilities 9,777 2,455 12,232 Reinsurance payables 23 - 23 Payables related to direct insurance and investment contracts 10,919 - 10,919 Income taxes 3,217 - 3,217 Other payables 5,565 - 5,565 -------- -------- -------- Total liabilities 1,335,542 2,455 1,337,997 -------- -------- -------- Net assets 72,374 6,638 79,012 -------- -------- -------- Net assets acquired(100%) 79,012 Total consideration (63,524) -------- Profit arising on acquisition of subsidiary 15,488 ======== The assets and liabilities as at the acquisition date in the table above are stated at their provisional fair values and may be amended for 12 months after the date of acquisition in accordance with paragraph 62 of IFRS 3, Business Combinations. Within the net assets acquired are receivable balances totalling GBP12.9m, which are held at fair value: an impairment review conducted as part of the fair value and accounting policy adjustment process has been completed. The costs in respect of the transaction which have been written off in the Consolidated Statement of Comprehensive Income are GBP3,169,000 and are included in Administration Expenses. The results of S&P have been included in the consolidated financial statements of the Group with effect from 20 December 2010, and have contributed revenue of GBP17.4m over this period, whilst contributing GBP0.2m profit to the overall consolidated profit before tax. Had S&P been consolidated from 1 January 2010 the consolidated statement of comprehensive income would have included revenue of GBP177.7m, and would have contributed GBP11.7m loss to the overall consolidated profit before tax. Acquisition of business relating to Aspis FÃ¶rsÃ¤kringar Liv AB On 19 February 2010, Chesnara plc's Swedish subsidiary, Movestic LivfÃ¶rsÃ¤kring Liv AB (`Movestic'), entered into an agreement with the Swedish Regulatory Authority, Finansinspektionen ('FI') to take over the operational management and certain of the assets and liabilities of Aspis FÃ¶rsÃ¤kringar Liv AB (`Aspis') for a total consideration of SEK 20.75m (GBP1.8m), paid in cash. Movestic has acquired the in force business, the personnel, expertise and systems of Aspis and will also manage, but not be responsible for, the payment of in-force claims that had occurred up to 12 November 2009. Movestic had previously, under the terms of an asset transfer agreement entered into on 10 December 2009, acquired the right to offer renewal policies to Aspis policyholders from 12 November 2009. Movestic acquired the net assets of the business at less than their fair value, because it was in a position, at short notice, to provide the regulatory capital required by the Swedish regulator to back the policyholder liabilities acquired, the previous owner having defaulted on this obligation. The acquisition of this business has given rise to a profit on acquisition of GBP376,278 calculated as follows: The estimated book and fair values of the assets and liabilities at Provisional the date of Book fair value Fair acquisition were: value adjustments value Assets GBP000 GBP000 GBP000 Intangible assets Value of in-force insurance contracts - 235 235 Software assets - 927 927 Value of customer relationships - 1,306 1,306 Deferred acquisition costs 235 (235) - Property and equipment 154 - 154 Cash and cash equivalents 3,651 - 3,651 -------- -------- -------- Total assets 4,040 2,233 6,273 -------- -------- -------- Liabilities Insurance contract provisions 3,911 - 3,911 Other payables 154 - 154 -------- -------- -------- Total liabilities 4,065 - 4,065 -------- -------- -------- Net assets (25) 2,233 2,208 -------- -------- -------- Net assets acquired 2,208 Total consideration (1,832) -------- Profit arising on acquisition of business 376 ======== The assets and liabilities as at the acquisition date in the table above are stated at their provisional fair values and may be amended for 12 months after the date of acquisition in accordance with paragraph 62 of IFRS 3, Business Combinations. The costs in respect of the transaction which have been written off in the Consolidated Statement of Comprehensive Income are GBP64,279 and are included in Administration expenses. The results of Aspis have been included in the consolidated financial statements of the Group with effect from 19 February 2010, and have contributed revenue of GBP7.5m over this period, whilst contributing GBP1.2m loss to the overall consolidated profit before tax. Had Aspis been consolidated from 1 January 2010 the consolidated statement of comprehensive income would have included revenue of GBP7.9m, and the results would have contributed GBP1.3m loss to the overall consolidated profit before tax. Acquisition of Movestic LivfÃ¶rsÃ¤kring AB On 23 July 2009, Chesnara plc acquired the entire issued share capital (100%) of Movestic LivfÃ¶rsÃ¤kring AB ('Movestic') from Moderna Finance AB for a total consideration of SEK 250m (GBP19,956,000), paid in cash. Movestic is a Stockholm-based insurance and investment company which specialises in corporate and personal pension arrangements and life assurance policies. Primarily it aggregates client funds into a range of investment providers and provides policy wrappers. It sells principally through the independent financial adviser channel and has, approximately, a 5.7% per cent market share of the Swedish unit-linked pension market. It was established in 2000, with its unit-linked business being launched in 2002. The book value and fair values of the assets and liabilities at the date of acquisition were disclosed in the financial statements for the year ended 31 December 2009, together with the profit arising on acquisition. Chesnara considers that the primary factor that gave rise to the significant profit arising on acquisition was the desire of Movestic's parent group to divest itself rapidly of Movestic, combined with Chesnara's ability to complete the transaction within a short period of time for a cash consideration. Prior to its acquisition by Chesnara, Movestic was a 100% subsidiary of Moderna Finance AB (MFAB), which in turn was owned by Glitnir Bank in Iceland. This bank was adversely affected by the Icelandic banking crisis and was nationalised by the Government of Iceland in October 2008. MFAB had recently sold its non-life insurance operation, which was the significantly larger part of its business. We understood that it was keen to divest itself quickly of the remaining life insurance and pensions business (Movestic). As far as we are aware, although we are not able to be 100% certain, there were no other potential purchasers. From the negotiations, we understood that MFAB's primary concern was speed of execution rather than obtaining a fuller value for the disposal. The acquisition of this business gave rise to a profit on acquisition of Â£25,056,000 4 Operating segments The Group considers that it has no product or distribution-based business segments. It reports segmental information on the same basis as reported internally to the Chief Operating Decision Maker, which is the Board of Directors of Chesnara plc. The segments of the Group as at 31 December 2010 comprise: CA This segment comprises part of the Group's UK insurance and investment operation, being Countrywide Assured Life Holdings Limited ('CA'), which holds part of the Group's UK insurance and investment assets and liabilities, and is responsible for managing unit-linked and non-linked business. Up until 20 December 2010 it was designated as the 'UK Business' segment. S&P This segment, which was acquired on 20 December 2010, comprises the balance of the Group's UK insurance and investment operation, Save & Prosper Insurance Limited (S&P), which holds the balance of the Group's UK insurance and investment assets, and is responsible for managing both unit-linked and non-linked business, including a significant with-profits portfolio, which carries significant additional market risk. Movestic This segment comprises the Swedish insurance and investment operation, Movestic LivfÃ¶rsÃ¤kring AB (`Movestic'), formerly known as Moderna FÃ¶rsÃ¤kringar Liv AB ('Moderna'), which holds the Group's Swedish insurance and investment assets and liabilities, and is responsible for managing both unit-linked and non-linked business. Up until 20 December 2010 it was designated as the 'Swedish Business' segment. Other Group Activities The functions performed by the holding company, Chesnara plc, are defined under the operating segment analysis as Other Group Activities. Also included therein are consolidation and elimination adjustments. Apart from the changes set out above, there were no changes to the basis of segmentation during the year ended 31 December 2010. The accounting policies of the segments are the same as those for the Group as a whole. Any transactions between the business segments are on normal commercial terms in normal market conditions. The Group evaluates performance of operating segments on the basis of the profit before tax attributable to shareholders and on the total assets and liabilities of the reporting segments and the Group. There were no changes to the measurement basis for segment profit during the year ended 31 December 2010. (i) Segmental income statement for the year ended 31 December 2010 Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Insurance premium revenue 80,157 372 34,421 - 114,950 Insurance premium (14,563) - (21,132) - (35,695) ceded to reinsurers -------- -------- -------- -------- -------- Net insurance premium revenue 65,594 372 13,289 - 79,255 Fee and commission income 38,532 77 24,801 - 63,410 Net investment 178,664 16,949 108,023 214 303,850 return -------- -------- -------- -------- -------- Total revenue (net of reinsurance payable) 282,790 17,398 146,113 214 446,515 Other operating 3,481 201 5,534 - 9,216 income -------- -------- -------- -------- -------- Segmental income 286,271 17,599 151,647 214 455,731 -------- -------- -------- -------- -------- Insurance contract claims and benefits incurred Claims and benefits paid to insurance contract holders (124,449) (3,347) (11,628) - (139,424) Net (increase)/ decrease in insurance contract provisions (89,773) (13,820) (3,025) - (106,618) Reinsurers' share of 37,084 - 8,551 - 45,635 claims and benefits -------- -------- -------- -------- -------- Net insurance contract claims and (177,138) (17,167) (6,102) - (200,407) benefits incurred -------- -------- -------- -------- -------- Change in investment contract liabilities (71,672) - (98,437) - (170,109) Change in liabilities relating to policyholders' funds held by the Group - - (9,912) - (9,912) Reinsurers' share of investment contract 3,904 - - - 3,904 liabilities -------- -------- -------- -------- -------- Net change in (67,768) - (108,349) - (176,117) investment contract liabilities -------- -------- -------- -------- -------- Fees, commission and other acquisition costs (1,252) - (13,436) - (14,688) Administrative expenses (9,524) (208) (15,407) (4,236) (29,375) Other operating (4,897) - (11,470) 210 (16,157) expenses -------- -------- -------- -------- -------- (260,579) (17,375) (154,764) (4,026) (436,744) Segmental expenses -------- -------- -------- -------- -------- Segmental income less expenses 25,692 224 (3,117) (3,812) 18,987 Share of profit from associates - - 597 - 597 Profit recognised on - - 376 15,488 15,864 acquisition of subsidiary -------- -------- -------- -------- -------- Segmental operating profit/(loss) 25,692 224 (2,144) 11,676 35,448 Financing costs - - (1,210) (70) (1,280) -------- -------- -------- -------- -------- Profit/(loss) before tax 25,692 224 (3,354) 11,606 34,168 Income tax (expense) /credit (4,740) (63) 176 160 (4,467) Non-controlling - - 118 - 118 interest -------- -------- -------- -------- -------- Profit/(loss) after tax attributable to 20,952 161 (3,060) 11,766 29,819 shareholders ======== ======== ======== ======== ======== (ii) Segmental income statement for the year ended 31 December 2009 Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Insurance premium revenue 88,469 - 11,636 - 100,105 Insurance premium ceded to reinsurers (15,831) - (9,166) - (24,997) -------- -------- -------- -------- -------- Net insurance premium revenue 72,638 - 2,470 - 75,108 Fee and commission income 42,543 - 8,577 - 51,120 -------- -------- -------- -------- -------- Net investment return 233,926 - 92,239 515 326,680 -------- -------- -------- -------- -------- Total revenue (net of reinsurance payable) 349,107 - 103,286 515 452,908 Other operating income 4,689 - - - 4,689 -------- -------- -------- -------- -------- Segmental income 353,796 - 103,286 515 457,597 -------- -------- -------- -------- -------- Insurance contract claims and benefits incurred Claims and benefits paid to insurance contract holders (126,737) - (2,820) - (129,557) Net (increase)/ decrease in insurance contract provisions (128,064) - 224 - (127,840) Reinsurers' share of claims and benefits 45,630 - 2,267 - 47,897 Net insurance contract claims and (209,171) - (329) - (209,500) benefits incurred -------- -------- -------- -------- -------- Change in investment contract liabilities (107,524) - (92,224) - (199,748) Reinsurers' share of investment contract liabilities 4,710 - - - 4,710 Net change in investment contract (102,814) - (92,224) - (195,038) liabilities -------- -------- -------- -------- -------- Fees, commission and other acquisition costs (1,116) - (4,051) - (5,167) Administrative expenses (9,806) - (5,276) (3,163) (18,245) Other operating (6,105) - (3,563) 332 (9,336) expenses -------- -------- -------- -------- -------- Segmental expenses (329,012) - (105,443) (2,831) (437,286) -------- -------- -------- -------- -------- Segmental income less expenses 24,784 - (2,157) (2,316) 20,311 Share of profit from associates - - 39 - 39 Profit recognised on - - - 25,056 25,056 acquisition of subsidiary -------- -------- -------- -------- -------- Segmental operating profit/(loss) 24,784 - (2,118) 22,740 45,406 Financing costs - - (508) (157) (665) -------- -------- -------- -------- -------- Profit/(loss) before tax 24,784 - (2,626) 22,583 44,741 Income tax credit/ (expense) 948 - (148) 392 1,192 Non-controlling - - 7 - 7 interest -------- -------- -------- -------- -------- Profit/(loss) after tax attributable to 25,732 - (2,767) 22,975 45,940 shareholders ======== ======== ======== ======== ======== (iii) Segmental balance sheet as at 31 December 2010 Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Intangible assets 27,870 9,055 80,641 - 117,566 Property and equipment 67 - 604 - 671 Investment in associates - - 1,783 - 1,783 Reinsurers' share of insurance contract provisions 228,276 7,692 44,775 - 280,743 Amounts deposited with reinsurers 30,264 - - - 30,264 Investment properties 2,895 117,925 - - 120,820 Financial assets 1,491,088 1,276,303 1,320,645 243 4,088,279 Reinsurers' share of accrued policyholder claims 3,422 256 - - 3,678 Income tax - 4,943 - 543 5,486 Cash and cash equivalents 133,716 14,972 24,248 21,198 194,134 Assets held for sale - - 380 - 380 -------- -------- -------- -------- -------- Total assets 1,917,598 1,431,146 1,473,076 21,984 4,843,804 -------- -------- -------- -------- -------- Liabilities held for sale - - 380 - 380 Bank overdrafts 2,125 29 - - 2,154 Insurance contract provisions 1,129,558 1,210,810 63,711 - 2,404,079 Unallocated divisible surplus - 83 - - 83 Investment contracts at fair value through income 646,609 108,862 1,247,241 - 2,002,712 Liabilities relating to policyholders' funds held by the Group - - 52,337 - 52,337 Borrowings - - 23,407 39,287 62,694 Derivative financial instruments 137 - - - 137 Provisions 1,822 - - - 1,822 Deferred tax liabilities 7,525 12,222 779 - 20,526 Reinsurance payables 1,921 23 20,366 - 22,310 Payables related to direct insurance and investment contracts 19,338 10,919 5,551 - 35,808 Deferred income 11,647 - - - 11,647 Income taxes 3,188 3,280 455 - 6,923 Other payables 3,098 5,773 6,050 2,002 16,923 -------- -------- -------- -------- -------- Total liabilities 1,826,968 1,352,001 1,420,277 41,289 4,640,536 -------- -------- -------- -------- -------- Net assets 90,630 79,145 52,799 (19,305) 203,269 Non-controlling interest - - - - - -------- -------- -------- -------- -------- Net assets attributable to shareholders 90,630 79,145 52,799 (19,305) 203,269 ======== ======== ======== ======== ======== Segmental balance sheet as at 31 December 2009 Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Intangible assets 32,471 - 70,061 - 102,532 Property and equipment - - 491 - 491 Investment in associates - - 1,051 - 1,051 Reinsurers' share of insurance contract provisions 209,604 - 27,262 - 236,866 Amounts deposited with reinsurers 27,056 - - - 27,056 Investment properties 3,355 - - - 3,355 Financial assets 1,413,798 - 974,475 71 2,388,344 Reinsurers' share of accrued policyholder claims 4,728 - - - 4,728 Income tax - - - 395 395 Cash and cash equivalents 120,830 - 14,776 19,635 155,241 -------- -------- -------- -------- -------- Total assets 1,811,842 - 1,088,116 20,101 2,920,059 -------- -------- -------- -------- -------- Bank overdrafts 2,312 - - - 2,312 Insurance contract provisions 1,044,680 - 32,353 - 1,077,033 Investment contracts at fair value through income 610,930 - 918,291 - 1,529,221 Liabilities relating to policyholders' funds held by the Group - - 41,107 - 41,107 Borrowings - - 24,799 4,197 28,996 Derivative financial instruments 54 - - - 54 Provisions 1,452 - - - 1,452 Deferred tax liabilities 9,613 - 751 2 10,366 Reinsurance payables 2,064 - 12,975 - 15,039 Payables related to direct insurance and investment contracts 24,751 - 5,682 - 30,433 Deferred income 13,132 - - - 13,132 Income taxes 854 - 459 - 1,313 Other payables 3,825 - 3,990 2,018 9,833 -------- -------- -------- -------- -------- Total liabilities 1,713,667 - 1,040,407 6,217 2,760,291 -------- -------- -------- -------- -------- Net assets 98,175 - 47,709 13,884 159,768 Non-controlling - - (13) - (13) interest -------- -------- -------- -------- -------- Net assets attributable to shareholders 98,175 - 47,696 13,884 159,755 ======== ======== ======== ======== ======== 5 Income tax expense Year ended 31 December Total income tax expense/(credit) comprises: 2010 2009 GBP000 GBP000 CA, S&P and Other Group Activities 4,643 (1,340) Movestic (176) 148 -------- -------- 4,467 (1,192) Total ======== ======== Year ended 31 December CA, S&P and Other Group Activities 2010 2009 GBP000 GBP000 Current tax expense Current year 5,685 3,548 Overseas tax 617 976 Adjustment to prior years 441 (4,681) -------- -------- Net expense/(credit) 6,743 (157) Deferred tax credit Origination and reversal of temporary differences (2,100) (1,183) -------- -------- Total income tax expense/(credit) 4,643 (1,340) ======== ======== Reconciliation of effective Year ended 31 December tax rate on profit before tax 2010 2009 GBP000 GBP000 Profit before tax 37,522 47,367 -------- -------- Income tax using the domestic corporation tax rate of 28% (2009: 28%) 10,506 13,263 Non-taxable profit on acquisition of subsidiary (4,337) (7,016) Permanent differences 777 304 Effect of UK taxing bases on insurance profits Offset of franked investment income (3,373) (3,859) Variation in rate of tax on amortisation of acquired in-force value 72 73 Other 556 576 Under/(over) provided in prior years 442 (4,681) -------- -------- Total income tax expense/(credit) 4,643 (1,340) ======== ======== The amount overprovided for the year ended 31 December 2009 relates principally to the writeback of a provision for current tax in Countrywide Assured plc in respect of 2007. This provision had been established because of uncertainty surrounding the interpretation of UK tax legislation relating to that year. In the event, the submission to HMRC of the tax computation for that year has resolved the uncertainty and the provision has, accordingly, been released. Year ended 31 December Movestic 2010 2009 GBP000 GBP000 Current tax expense Current year 1 12 Adjustment to prior years (15) - -------- -------- Deferred tax expense (14) 12 Origination and reversal of temporary differences (162) 136 -------- -------- Total income tax (credit)/expense (176) 148 ======== ======== Reconciliation of effective tax rate on profit Year ended 31 December before tax 2010 2009 GBP000 GBP000 Loss before tax (3,354) (2,626) -------- -------- Income tax using the domestic corporation tax rate of 26.3% (882) (691) Non-taxable income in relation to unit-linked nbusiness 202 349 Policyholder tax - 13 Non-taxable fair value adjustment on acquisition 469 440 Impact of different rate for subsidiaries 22 5 Permanent differences (22) (13) Unrecognised tax recoverable 49 47 Non-deductible expenses - 8 Overprovided in prior years (14) (10) -------- -------- Total income tax (credit)/expense (176) 148 ======== ======== 6 Borrowings Group 31 December 2010 2009 GBP000 GBP000 Bank loan 39,287 4,197 Amount due in relation to financial reinsurance 23,406 24,686 Other 1 113 -------- -------- Total 62,694 28,996 ======== ======== Current 13,107 12,474 Non-current 49,587 16,522 -------- -------- Total 62,694 28,996 ======== ======== The bank loan subsisting at 31 December 2009, which was drawn down on 2 June 2005 under a facility made available on 4 May 2005, was unsecured and was repayable in five equal annual instalments on the anniversary of the draw down date. Accordingly the loan was fully repaid on 2 June 2010. The outstanding principal on the loan bore interest at a rate based on the London Inter-Bank Offer Rate, payable in arrears over a period which varies between one and six months at the option of the borrower. The bank loan subsisting at 31 December 2010, which was drawn down on 20 December 2010 under a facility made available on 17 November 2010, is unsecured and is repayable in five increasing annual instalments on the anniversary of the draw down date. The outstanding principal on the loan bears interest at a rate of 2.25 percentage points above the London Inter-Bank Offer Rate and is repayable over a period which varies between one and six months at the option of the borrower. The fair value of the bank loan at 31 December 2010 was GBP40,000,000 (31 December 2009: GBP4,200,000). The fair value of amounts due in relation to financial reinsurance was GBP24,590,409 (31 December 2009: GBP26,415,353). The fair value of other borrowings is not materially different from their carrying value. 7 Share capital and share premium 31 December 2010 31 December 2009 Share Share Number of capital Number of capital shares GBP000 shares GBP000 Share capital 115,047,662 42,024 104,588,785 41,501 ======== ======== ======== ======== Share Share Premium Premium GBP000 GBP000 42,523 20,458 ======== ======== The number of shares in issue at the balance sheet date included 199,011 shares held in treasury (31 December 2009: 3,096,194). Share capital for the Group includes the impact of "reverse acquisition accounting" associated with Chesnara plc's acquisition of Countrywide Assured Life Holdings Limited ('CALH') from Countrywide plc ('Countrywide') on 24 May 2004. As a result of this, included within share capital of the Group is GBP41,501,000, which represents the amount of issued share capital of Countrywide Assured Life Holdings Limited (the legal subsidiary) immediately before the acquisition. As a result of this accounting treatment the Group share capital differs from the Chesnara plc company position, which is set out below. The following sets out changes in Group share capital and share premium during the year ended 31 December 2009: Share Issued share capital premium Number GBP000 GBP000 Balance at 1 January 2010 104,588,785 41,501 20,458 Issue and allocation on 26 November 2010 arising from non pre-emptive placing 10,458,877 523 20,394 Expenses incurred in connection with non pre-emptive placing - - (962) Arising on sale of treasury shares - - 2,633 -------- -------- -------- Balance at 31 December 2010 115,047,662 42,024 42,523 ======== ======== ======== On 26 November 2010 Chesnara plc launched and completed a bookbuilt, non pre-emptive placing of 10,458,877 new ordinary shares of 5p each with institutional investors and thereby raised gross proceeds of GBP20,917,754 (GBP19,955 622 net of expenses of GBP962,132). During November 2010 the Chesnara plc sold 2,897,183 ordinary shares held in treasury, thereby raising gross proceeds of GBP5,794,366: the profit arising of GBP2,632,670 arising on the sale has been credited to the share premium account There were no changes in Group share capital or share premium during the year ended 31 December 2009. 8 Treasury shares 31 December 2010 2009 GBP000 GBP000 Balance at 1 January 3,379 3,379 Sales during the year (3,162) - -------- -------- Balance at 31 December 217 3,379 ======== ======== During November 2010, the Company sold 2,897,183 ordinary shares held in treasury for a total consideration of GBP5,794,366. The cost of those shares was GBP3,161,696 and the consequential profit arising on sale of GBP2,632,670 has been credited to the share premium account. 9 Retained earnings 31 December 2010 2009 GBP000 GBP000 Retained earnings attributable to equity holders of the parent company comprise Balance at 1 January 97,744 67,738 Profit for the year 29,819 45,940 Dividends Final approved and paid for 2008 - (10,200) Interim approved and paid for 2009 - (5,734) Final approved and paid for 2009 (10,453) - Interim approved and paid for 2010 (5,887) - -------- -------- Balance at 31 December 111,223 97,744 ======== ======== The interim dividend in respect of 2009, approved and paid in 2009, was paid at the rate of 5.65p per share. The final dividend in respect of 2009, approved and paid in 2010, was paid at the rate of 10.30p per share so that the total dividend paid to the equity shareholders of the Parent Company in respect of the year ended 31 December 2009 was made at the rate of 15.95p per share. The interim dividend in respect of 2010, approved and paid in 2010, was paid at the rate of 5.8p per share to equity shareholders of the Parent Company registered at the close of business on 10 September 2010, the dividend record date. A final dividend of 10.6p per share in respect of the year ended 31 December 2010 payable on 20 May 2011 to equity shareholders of the Parent Company registered at the close of business on 8 April 2011, the dividend record date, was approved by the Directors after the balance sheet date. The resulting total final dividend of GBP12.2m has not been provided for in these financial statements and there are no income tax consequences. The following summarises dividends per share in respect of the year ended 31 December 2009 and 31 December 2010: 2010 2009 p p Interim - approved and paid 5.80 5.65 Final - proposed 10.60 10.30 -------- -------- Total 16.40 15.95 ======== ======== 10 Earnings per share Earnings per share are based on the following: Year ended 31 December 2010 2009 Profit for the year attributable to shareholders (GBP000) 29,819 45,940 -------- -------- Weighted average number of ordinary shares 102,642,750 101,492,591 -------- -------- Basic earnings per share 29.05p 45.26p -------- -------- Diluted earnings per share 29.05p 45.26p ======== ======== The weighted average number of ordinary shares in respect of the year ended 31 December 2010 is based on 104,588,785 shares in issue at the beginning of the period less 3,096,194 own shares held in treasury and on 115,047,662 shares in issue at the end of the period, less 199,011 own shares held in treasury, taking account of the timing of the issue of new shares and of the sale of treasury shares. The weighted average number of ordinary shares in respect of the year ended 31 December 2009 is based on 104,588,785 shares in issue at the beginning of the period and on 104,588,785 shares in issue at the end of the period less 3,096,194 own shares held in treasury, taking account of the timing of the purchases of own shares. There were no share options outstanding during the year ended 31 December 2009 or during the year ended 31 December 2010. Accordingly, there is no dilution of the average number of ordinary shares in issue in respect of these periods. Earnings per share for the year ended 31 December 2010 includes the impact of GBP15,864,000 of profit recognised on the acquisition of S&P and of the Aspis business. Excluding this item, both the basic and diluted earnings per share for the year ended 31 December 2010 would have been 13.60p Earnings per share for the year ended 31 December 2009 includes the impact of GBP25,056,000 of profit recognised on the acquisition of Movestic. Excluding this item both the basic and diluted earnings per share for the year ended 31 December 2009 would have been 20.58p per share. 11 Additional Information Additional information relating to the Company can be found on its website www.chesnara.co.uk. 12 Forward looking statements This document may contain forward-looking statements with respect to certain of the plans and current expectations relating to future financial condition, business performance and results of Chesnara plc. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the control of Chesnara plc including, amongst other things, UK domestic and global economic and business conditions, market-related risks such as fluctuations in interest rates, inflation, deflation, the impact of competition, changes in customer preferences, delays in implementing proposals, the timing, impact and other uncertainties of future acquisitions or other combinations within relevant industries, the policies and actions of regulatory authorities, the impact of tax or other legislation and other regulations in the jurisdiction in which Chesnara plc and its subsidiaries operate. As a result, Chesnara plc's actual future condition, business performance and results may differ materially from the plans, goals and expectations expressed or implied in these forward-looking statements. Supplementary Information - European Embedded Value Basis Summarised EEV consolidated income statement Year ended 31 December 2010 2009 Note GBP000 GBP000 Operating profit of covered business 6 6,364 19,120 Other operational result 6 (6,114) 868 -------- -------- Operating profit 250 19,988 Variation from longer-term investment return 6 26,941 13,750 Effect of economic assumption changes 6 (4,453) (9,730) -------- -------- Profit before tax and before exceptional item 22,738 24,008 Exceptional items Profit recognised on business combinations 6,9 41,043 54,187 Effect of modelling improvements 6 13,239 - -------- -------- Profit before tax 77,020 78,195 Tax 6 (4,014) 12,070 -------- -------- Profit for the year 73,006 90,265 -------- -------- Attributable to: Shareholders 73,124 90,272 Non-controlling interest (118) (7) -------- -------- 73,006 90,265 ======== ======== Earnings per share Based on profit for the period attributable to shareholders 71.24p 88.94p -------- -------- Diluted earnings per share Based on profit for the period attributable to shareholders 71.24p 88.94p -------- -------- Supplementary Information - European Embedded Value Basis Summarised EEV consolidated balance sheet 31 December 2010 2009 Assets Note GBP000 GBP000 Value of in force business 5,8 265,415 198,312 Deferred acquisition costs arising on unmodelled business 616 197 Acquired value of customer relationships 983 346 Software assets 6,829 4,060 Property and equipment 671 491 Investment in associate 1,783 1,051 Reinsurers' share of insurance contract provisions 247,432 209,537 Amounts deposited with reinsurers 29,002 26,240 Investment properties 120,820 3,355 Deferred tax assets - 1,972 Financial assets Equity securities at fair value through income 492,321 454,970 Holdings in collective investment schemes at fair value through income 3,177,265 1,612,861 Debt securities at fair value through income 319,516 247,836 Insurance and other receivables 33,234 19,822 Prepayments 3,908 3,784 Policyholders' funds held by the Group 52,337 41,107 Derivative financial instruments 9,707 7,964 -------- -------- Total financial assets 4,088,288 2,388,344 -------- -------- Reinsurers' share of accrued policy claims 3,678 4,728 Income taxes 5,486 395 Cash and cash equivalents 194,134 155,241 Assets held for sale 380 - -------- -------- Total assets 4,965,517 2,994,269 -------- -------- Liabilities Liabilities held for sale 380 - Bank overdraft 2,154 2,312 Insurance contract provisions 2,370,948 1,049,906 Unallocated divisible surplus 14,930 - Financial liabilities Investment contracts at fair value through income 2,010,954 1,543,915 Borrowings 70,148 36,307 Derivative financial instruments 137 54 Liabilities relating to policyholders' 52,337 41,107 funds held by the Group -------- -------- Total financial liabilities 2,133,576 1,621,383 -------- -------- Provisions 1,822 1,452 Deferred tax liabilities 5,578 - Reinsurance payables 21,830 15,039 Payables related to direct insurance and investment contracts 35,808 30,433 Income taxes 6,923 1,313 Other payables 16,932 9,833 -------- -------- Total liabilities 4,610,881 2,731,671 -------- -------- Net assets 354,636 262,598 ======== ======== Equity Share capital 42,024 41,501 Share premium 42,523 20,458 Treasury shares (217) (3,379) Foreign exchange reserve 15,056 5,539 Other reserves 50 50 Retained earnings 255,200 198,416 -------- -------- Total shareholders' equity 354,636 262,585 Non-controlling interest - 13 -------- -------- Total equity 5,8 354,636 262,598 ======== ======== NOTES TO THE SUPPLEMENTARY INFORMATION 1 Basis of preparation This section sets out the detailed methodology followed for producing these Group financial statements which are supplementary to the Group's primary financial statements which have been prepared in accordance with International Financial Reporting Standards ('IFRS'). These financial statements have been prepared in accordance with the European Embedded Value ('EEV') principles issued in May 2004 by the European CFO Forum and supplemented by Additional Guidance on EEV Disclosures issued by the same body in October 2005. The principles provide a framework intended to improve comparability and transparency in embedded value reporting across Europe. In order to improve understanding of the Group's financial position and performance, certain of the information presented in these financial statements is presented on a segmental basis: the business segments are the same as those described in Note 4 to the primary financial statements prepared on the IFRS basis. The S&P Business was acquired on 20 December 2010: accordingly, the results relating thereto, as reflected in segmental analysis are for a period of 11 days. Prior year information in respect of the financial position as at 31 December 2009 and for the year then ended is designated as GBPnil in respect of the S&P Business, while other prior year data are designated as not applicable ('n/a'). 2 Covered business The Group uses EEV methodology to value the bulk of its long-term business (the 'covered business'), which is written primarily in the UK and Sweden, as follows: (i) for the UK businesses (comprising the CA and S&P segments), the covered business comprises the business's long-term business being those individual life insurance, pensions and annuity contracts falling under the definition of long-term insurance business for UK regulatory purposes. The operating expenses of the holding company, Chesnara plc, are treated as an integral part of the UK covered business. (ii) for the Swedish business (comprising the Movestic segment), the covered business comprises the business's long-term pensions and savings unit-linked business. Group life and sickness business, including waiver of premium and non-linked individual life assurance policies are not included in the covered business: the result relating to this business is established in accordance with IFRS principles and is included within 'other operational result' within the consolidated summarised income statement. Under EEV principles no distinction is made between insurance and investment contracts, as there is under IFRS, which accords these classes of contracts different accounting treatments. 3 Methodology (a) Embedded Value Overview Shareholders' equity comprises the embedded value of the covered business, together with the net equity of other Group companies, including that of the holding company which is stated after writing down fully the carrying value of the covered business. The embedded value of the covered business is the aggregate of the shareholder net worth ('SNW') and the present value of future shareholder cash flows from in-force covered business (value of in-force business) less any deduction for (i) the cost of guarantees within S&P, and (ii) the cost of required capital. It is stated after allowance has been made for aggregate risks in the business. SNW comprises those amounts in the long-term business, which are either regarded as required capital or which represent surplus assets within that business. New business CA and S&P Much of the covered business is in run-off and is, accordingly, substantially closed to new business. The UK businesses do still sell a small amount of new business but, overall, the contribution from new business to the results established using EEV methodology is not material. Accordingly, not all of those items related to new business values, which are recommended by the EEV guidelines, are reported in this supplementary financial information. Movestic New business, in relation to the pensions and savings covered business is taken as all business where contracts are signed and new premiums paid during the reporting period, for both new policies and premium increases on existing business, but excluding standard renewals. New business premium volumes. New business premium volume for the period which is consistent with the analysis of profit in Note 6 is as follows: New business premium income relating to pensions and savings covered business, GBP24.9m * * Basis: annualised premium plus 1/10 single premium translated into sterling at the 2010 average rate of SEK 11.1249 = GBP1. The new business contribution has been assessed as at the end of the period, using opening assumptions. Value of in-force business The cash flows attributable to shareholders arising from in-force business are projected using best estimate assumptions for each component of cash flow. The present value of the projected cash flows is established by using a discount rate which reflects the time value of money and the risks associated with the cash flows which are not otherwise allowed for. There is a deduction for the cost of holding the required capital, as set out below. Participating business For participating business within the S&P business the Group maintains the assets and liabilities in a separate with-profits fund. In accordance with the Principles and Practices of Financial Management, in the first instance all benefits, which in some cases include guaranteed minimum investment returns, are paid from policyholder assets within the fund. The participating business effectively operates as a smoothed unit linked contract subject to minimum benefit guarantees. The with-profits fund contains assets which are attributable to shareholders as well as those attributable to policyholders. Assets attributable to shareholders can only be released from the fund subject to meeting prudent liabilities in respect of minimum benefits and the frictional cost of this restriction has been allowed for in determining the value of the in-force business. Fundamentally, the value of the with-profits in-force business is driven by the fund management charges levied on the policyholder assets subject to the effect of minimum benefit guarantees. Taxation The present value of the projected cash flows arising from in-force business takes into account all tax which is expected to be paid under current legislation, including tax which would arise if surplus assets within the covered business were eventually to be distributed. For the UK businesses, allowance has been made for planned reductions in corporation tax, as announced by the Chancellor in his budget speech on 22 June 2010. No allowance has been made for the changes announced by the Chancellor in his budget speech on 23 March 2011. The value of the in-force business has been calculated on an after-tax basis and is grossed up to the pre-tax level for presentation in the income statement. The amount used for the grossing up is the amount of shareholder tax, excluding those payments made on behalf of policyholders, being policyholder tax in the UK businesses and yield tax in Movestic. Cost of capital A market-consistent valuation approach requires consideration of 'frictional' costs of holding shareholder capital: in particular, the cost of tax on investment returns and the impact of investment management fees can reduce the face value of shareholder funds. For CA, the expenses relating to corporate governance functions eliminate any taxable investment return in shareholder funds, while investment management fees are not material. The cost of holding the required capital to support the covered business (see 3(b) below) is reflected as a deduction from the value of in-force business. Financial options and guarantees CA The principal financial options and guarantees in CA are (i) guaranteed annuity rates offered on some unit-linked pension contracts and (ii) a guarantee offered under Timed Investment Funds that the unit price available at the selected maturity date (or at death, if earlier) will be the highest price attained over the policy's life. The cost of these options and guarantees has been assessed, in principle, on a market-consistent basis, but, in practice, this has been carried out on approximate bases, which are appropriate to the level of materiality of the results. S&P The principal financial options and guarantees in S&P are (i) minimum benefits payable on maturity or retirement for participating business; (ii) the option to extend the term under the Personal Retirement Account contract on terms potentially beneficial to the policyholder; (iii) the option to increase premiums under the Personal Retirement Account contract on terms potentially beneficial to the policyholder; and (iv) certain insurability options offered. The cost of guaranteeing a minimum investment return on participating contracts, being the only material guarantee, has been assessed on a market consistent basis. For the remaining options and guarantees the cost has been assessed on an approximate basis, appropriate to the level of materiality of the results. Movestic In respect of Movestic, some contracts provide policyholders with an investment guarantee, whereby a minimum rate of return is guaranteed for the first 5 years of the policy, at a rate of 3% per annum. As at 31 December 2010, the total amount guaranteed was approximately GBP0.1m. Thus, due to low volumes and the limited exposure, the value of the guarantee is ignored as not material to the results. Allowance for risk Allowance for risk within the covered business is made by: (i) setting required capital levels by reference to the assessment of capital needs made by the directors of the regulated entities within the respective businesses ( the 'Directors'); (ii) setting the risk discount rate, which is applied to the projected cash flows arising on the in-force business, at a level which includes an appropriate risk margin (see 3(c) below); and (iii) explicit allowance for the cost of financial options and guarantees and, where appropriate, for reinsurer default. Internal group company EEV Guidance requires that actual and expected profit or loss incurred by an internal group company on services provided to the covered business should be included in allowances for expenses. The covered business in Movestic is partially managed by an internal group fund management company. Not all relevant future income and expenses of that company have been included in the calculation of embedded value. However, the effect is not considered to be material. Consolidation adjustments Consolidation adjustments have been made to: (i) eliminate the investment in subsidiaries; (ii) allocate group debt finance against the segment to which it refers; and (iii)allocate corporate expenses as explained in note 4(d) below. (b) Level of Required Capital The level of required capital of the covered business reflects the amount of capital that the Directors consider necessary and appropriate to manage the respective businesses. In forming their policy the Directors have regard to the minimum statutory requirements and an internal assessment of the market, insurance and operational risks inherent in the underlying products and business operations. The capital requirement resulting from this assessment represents: (i) for CA, 150% of the long-term insurance capital requirement ('LTICR') together with 100% of the resilience capital requirement ('RCR'), as determined by the regulations of the Financial Services Authority in the UK; (ii) for Movestic, 150% of the regulatory solvency requirement as determined by Finansinspektionen in Sweden. The boards of the S&P companies have not established a formal internal assessment of the capital requirement for S&P. However, pending this assessment, a provisional requirement has been set at 175% of the long-term insurance capital requirement ('LTICR') together with 100% of the resilience capital requirement ('RCR') as determined by the regulations of the Financial Services Authority in the UK. The required level of regulatory capital is provided as follows: (i) for the UK businesses, by the retained surplus within the long-term business fund and by share capital and retained earnings within the shareholder funds of the regulated entities; and (ii) for Movestic, by share capital and additional equity contributions from the parent company, net of the accumulated deficit in the regulated entity, these components together comprising shareholder's equity. Movestic is reliant, in the medium term, on further equity contributions from the parent company, Chesnara plc. (c) Discount Rates The discount rates are a combination of the reference rate and a risk margin. The reference rate reflects the time value of money and the risk margin reflects any residual risks inherent in the covered business and makes allowance for the risk that future experience will differ from that assumed. In order to reduce the subjectivity when setting the discount rates, the Group has decided to adopt a 'bottom up' market-consistent approach to allow explicitly for market risk. Using the market-consistent approach, each cash flow is valued at a discount rate consistent with that used in the capital markets: in accordance with this, equity-based cash flows are discounted at an equity discount rate and bond-based cash flows at a bond discount rate. In practice a short-cut method known as the 'certainty equivalent' approach has been adopted. This method assumes that all cash flows earn the reference rate of return and are discounted at the reference rate. In general, and consistent with the market's approach to valuing financial instruments for hedging purposes, the reference rate is based on swap yields. These have been taken as mid swap yields available in the market at 31 December 2010. Allowance also needs to be made for non-market risks. For some of these risks, such as mortality and expense risk, it is assumed that the shareholder can diversify away any uncertainty where the impact of variations in experience on future cash flows is symmetrical. For those risks that are assumed to be diversifiable, no adjustment has been made. For any remaining risks that are considered to be non-diversifiable risks, there is no risk premium observable in the market and, therefore, a constant margin has been added to the risk margin. The margin added reflects the assumed risks within the businesses and is 50 basis points for CA and S&P and 70 basis points for Movestic. This margin is applied to the basic value of in-force business prior to the deductions for financial options and guarantees and the cost of required capital. (d) Analysis of Profit The contribution to operating profit, which is identified at a level which reflects an assumed longer-term level of investment return, arises from three sources: (i) new business; (ii) return from in-force business; and (iii) return from shareholder net worth. Additional contributions to profit arise from: (i) variances between the actual investment return in the period and the assumed long-term investment return; and (ii) the effect of economic assumption changes. The contribution from new business represents the value recognised at the end of each period in respect of new business written in that period, after allowing for the cost of acquiring the business, the cost of establishing the required technical provisions and after making allowance for the cost of capital, calculated on opening assumptions. The return from in-force business is calculated using closing assumptions and comprises: (i) the expected return, being the unwind of the discount rates over the period applied to establish the value of in-force business at the beginning of the period; variances between the actual experience over the period and the assumptions (ii) made to establish the value of business in force at the beginning of the period; and (iii) the net effect of changes in future assumptions, made prospectively at the end of the period, from those used in establishing the value of business in force at the beginning of the period, other than changes in economic assumptions. The contribution from shareholder net worth comprises the actual investment return on residual assets in excess of the required capital. (e) Assumption Setting There is a requirement under EEV methodology to use best estimate demographic assumptions and to review these at least annually with the economic assumptions being reviewed at each reporting date. The current practice is detailed below. Each year the demographic assumptions are reviewed as part of year-end processes and hence were reviewed in December 2010. The detailed projection assumptions, including mortality, morbidity, persistency and expenses reflect recent operating experience. Allowance is made for future improvement in annuitant mortality based on experience and externally published data. Favourable changes in operating experience, particularly in relation to expenses and persistency, are not anticipated until the improvement in experience has been observed. Holding company expenses (for the Chesnara Group such expenses relate largely to listed company functions) are allocated to the CA covered business, except for a relatively small amount of expense, which is assumed to relate to business development functions, to reflect effort expended within the holding company relating to the transaction of life assurance business through the subsidiary companies. Hence the expense assumptions used for the cash flow projections include the full cost of servicing this business. The economic assumptions are reviewed and updated at each reporting date based on underlying investment conditions at the reporting date. The assumed discount rates and inflation rates are consistent with the investment return assumptions. In addition, the demographic assumptions used at 31 December 2010 are considered to be best estimate and, consequently, no further adjustments are required. In respect of the CA business, the assumptions required in the calculation of the value of the annuity rate guarantee on pension business have been set equal to best-estimate assumptions. (f) Pension Schemes In Movestic, where the Group participates in a combined defined benefit and defined contribution scheme, future contributions to the scheme are reflected in the value of in-force business. (g) Financial Reassurance In respect of Movestic the Group uses financial reinsurance to manage the impact of its new business strain. Whilst this liability is valued at fair value within the IFRS statements, allowing for an option which provides the Group with the right to settle the liability early on beneficial terms, when valuing the shareholder net worth within the EEV it is considered more appropriate to assess this liability at a higher cost, reflecting the likelihood of the option not being utilised. 4 Assumptions (a) Investment Returns Investment returns are assumed to be equal to the reference rate, as covered in note 3(c) above. For linked business, the aggregate return has been determined by the reference rate less an appropriate allowance for tax. CA S&P Movestic 31 December 31 December 31 December 2010 2009 2010 2009 2010 2009 Investment Return* 3.1%** 3.8%** 5 year 2.69% n/a 3.18% 2.87% 10 year 3.70% n/a 3.61% 3.62% 15 year 4.09% n/a 3.80% 3.89% 20 year 4.15% n/a 3.94% 4.01% 25 year 4.12% n/a 3.94% 4.01% 30 year 4.04% n/a 3.94% 4.01% Inflation - RPI 2.95% 2.9% 2.95% n/a 2.3% 2.0% * For S&P and Movestic, a full swap curve is used: the rates quoted are presented as indicative spot rates. ** For CA business, a single rate is applied for all durations. (b) Actuarial Assumptions The demographic assumptions used to determine the value of the in-force business have been set at levels commensurate with the underlying operating experience identified in the periodic actuarial investigations. (c) Taxation Projected tax has been determined assuming current tax legislation and rates continue unaltered, except where future tax rates or practices have been announced. The tax rates for CA and S&P allow for changes in Corporation Tax as announced by the Chancellor in his budget speech of 22 June 2010, so reflect a reduction from the current rate of 28% to 24% in steps of 1%. If allowance had only been made for the enacted change to 27%, the embedded value would have been GBP2.5m lower as at 31 December 2010. The tax rates do not allow for further changes announced by the Chancellor in his budget speech on 23 March 2011 for a reduction in the UK Corporation Tax rate to 26% from April 2011 and to reduce thereafter by annual decrements of 1% to 23%. (d) Expenses The expense levels are based on internal expense analysis investigations and are appropriately allocated to the new business and policy maintenance functions. For CA and S&P, these have been determined by reference to: (i) the outsourcing agreements in place with our third-party business process administrators; (ii) anticipated revisions to the terms of such agreements as they fall due for renewal; and (iii) corporate governance costs relating to the covered business. For Movestic, these have been determined by reference to: (i) an expense analysis in which all expenses were allocated to covered and uncovered business, with expenses for the covered business being allocated to acquisition and maintenance activities; and (ii) expense drivers, being, in relation to acquisition costs, the number of policies sold during the period and, in relation to maintenance expenses, the average number of policies in force during the period. The expense assumptions for CA also include the expected future holding company expenses which will be recharged to the worldwide covered business. No allowance has been made for future productivity improvements in the expense assumptions. (e) Discount Rate An explicit constant margin is added to the reference rate shown in (a) above to cover any remaining risks that are considered to be non-market, non-diversifiable risks, as there is no risk premium observable in the market. This margin, which is 50 basis points for CA and S&P (CA as at 31 December 2009 : 50 basis points) and 70 basis points for Movestic (as at 31 December 2009 70 basis points), gives due recognition to the relative sensitivity of the value of in-force business to the discount rate for the different businesses, and to the fact that: a) For CA: (i) the covered business is substantially closed to new business; (ii) there is no significant exposure in the with profit business, which is wholly reinsured; (iii) expense risk is limited as a result of the outsourcing of substantially all policy administration and related functions to third-party business process administrators; and (iv) for much of the life business the Group has the ability to vary risk charges made to policyholders. b) For S&P: (i) the covered business is substantially closed to new business; and (ii) expense risk is limited as a result of the outsourcing of substantially all policy administration and related functions to third-party business process administrators. c) For Movestic: (i) the covered business remains open; (ii) the in-force business is relatively small; (iii) reinsurance is used to significantly reduce insurance risks; and (iv) a number of the risks provide diversification benefits within the Chesnara Group, in relation to reinsurance counterparties, market exposures and policyholder populations. 5 Analysis of shareholders' equity 31 December 2010 Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Regulated entities Capital 30,172 26,056 12,390 - 68,618 required Free 40,176 35,904 10,931 - 87,011 surplus -------- -------- -------- --------- ------- Shareholders' net worth of regulated entities 70,348 61,960 23,321 - 155,629 Adjustments to shareholder net worth Deferred - - (51,243) - (51,243) acquisition costs Financial - - (6,145) - (6,145) reinsurance liability Other - - 8,649 - 8,649 asset / liability adjustments --------- --------- -------- -------- ------- Adjusted 70,348 61,960 (25,418) - 106,890 shareholder net worth In-force 79,360 41,307 144,748 - 265,415 value of covered business -------- -------- -------- -------- ------- Embedded 149,708 103,267 119,330 - 372,305 value of regulated entities Less: amount - (39,287) - - (39,287) financed by borrowings -------- -------- -------- -------- ------- Embedded value of regulated 149,708 63,980 119,330 - 333,018 entities attributable to shareholders Net equity of - - 1,307 20,311 21,618 other Group companies -------- -------- -------- -------- ------- Total 149,708 63,980 120,637 20,311 354,636 shareholders' equity ======== ======== ======== ======== ======= 31 December 2009 Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Regulated entities Capital 32,042 - 12,123 - 44,165 required Free 40,253 - 12,337 - 52,590 surplus -------- -------- -------- -------- ------- Shareholders' net worth of regulated entities 72,295 - 24,460 - 96,755 Adjustments to shareholder net worth Deferred - - (44,721) - (44,721) acquisition costs Financial - - (5,313) - (5,313) reinsurance liability Other - - 4,299 - 2,203 asset / liability adjustments -------- -------- -------- -------- ------- Adjusted 72,295 - (21,275) - 48,924 shareholder net worth In-force 85,559 - 112,753 - 198,312 value of covered business -------- -------- -------- -------- ------- Embedded 157,854 - 91,478 - 243,039 value of regulated entities Less: amount (4,197) - - - (4,197) financed by borrowings -------- -------- -------- -------- ------- Embedded 153,657 - 91,478 - 245,135 value of regulated entities attributable to shareholders Net equity of - - (1,048) 18,498 19,546 other Group companies -------- -------- -------- -------- ------- Total 153,657 - 90,430 18,498 262,585 shareholders' equity ======== ======== ======== ======== ======= The movement in the in-force value of covered business comprises: Year ended 31 December CA S&P Movestic Total 2010 GBP000 GBP000 GBP000 GBP000 Value at beginning of 35,559 - 112,753 198,312 period Amount arising on - 42,391 - 42,391 acquisition Amount credited/ charged (6,199) (1,084) 31,995 24,712 to operating profit -------- -------- -------- -------- Value at end of period 79,360 41,307 144,748 265,415 ======== ======== ======== ======== Year ended 31 December CA S&P Movestic Total 2009 GBP000 GBP000 GBP000 GBP000 Value at beginning of 84,940 - - 84,940 period Amount arising on - - 95,953 95,953 acquisition -------- Amount credited/ charged 619 - 16,800 17,419 to operating profit -------- -------- -------- -------- Value at end of period 85,559 - 112,753 198,312 ======== ======== ======== ======== CA On 2 June 2005, the Group drew down GBP21m on a bank loan facility, in order to part fund the acquisition of CWA Life Holdings plc ('CWA'). This effectively represented a purchase of part of the underlying value in force of CWA by way of debt finance and it follows that the embedded value of the UK regulated entity is not attributable to equity shareholders of the Group to the extent of the outstanding balance on the loan account at each balance sheet date. The loan was repayable in five equal annual instalments on the anniversary of the draw down date, the funds for the repayment effectively being provided by way of the realisation of the underlying value of in-force business of the covered business. In accordance with this, GBP4.2m of the loan was repaid on 2 June 2009 and a further GBP4.2m was repaid on 2 June 2010, leaving principal outstanding at that date of GBPnil. S&P On 20 December 2010, the Group drew down GBP40m on a bank loan facility, in order to part fund the acquisition of Save & Prosper Insurance Limited and its subsidiary, Save & Prosper Pensions Limited (together 'S&P'). This effectively represented a purchase of part of the underlying value in force of S&P by way of debt finance and it follows that the embedded value of the UK regulated entity is not attributable to equity shareholders of the Group to the extent of the outstanding balance on the loan account at each balance sheet date. The loan is repayable in five annual instalments on the anniversary of the draw down date, the funds for the repayment effectively being provided, in part, by way of the realisation of the underlying value of in-force business of the covered business. There was a principal outstanding at the balance sheet date of GBP40m. Movestic The adjusted shareholder net worth of Movestic is that of the regulated entity, which includes also the net worth attributable to the non-covered business within the regulated entity. Accordingly, for Movestic, the embedded value of regulated entities comprises the embedded value of covered business and the value of the non-covered business of the regulated entity, the latter component being valued on an IFRS basis. 6 Summarised statement of changes in equity and analysis of profit (a) Changes in equity may be summarised as: Statement of changes in equity Year ended 31 December 2010 2009 GBP000 GBP000 Shareholders' equity at beginning of period 262,585 182,708 13,239 - Effect of modelling improvements -------- -------- Shareholders' equity at beginning of period restated 275,824 182,708 Profit for the period attributable to shareholders 59,885 90,272 Issue of new shares Share capital 523 - Share premium 22,065 - Sale of treasury shares 3,162 - Foreign exchange reserve movement 9,517 5,539 (16,340) (15,934) Dividends paid -------- -------- 354,636 262,585 Shareholders' equity at end of period -------- -------- During 2010, Movestic introduced a new system for modelling value-in-force, which provided the capability for (i) more accurately modelling the impact on commission paid of policies becoming paid-up and (ii) for determining future fee income on a case-by-case investment mix basis, whereas previously it had been necessary to adopt high-level estimates. The effect of the modelling improvements is classified as an exceptional credit in the consolidated income statement and is presented after operating profit. (b) The profit for the period is analysed as: Year ended 31 Other December 2010 Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Covered business New business 685 - 2,057 - 2,742 contribution Return from in-force business Expected return 5,203 6 6,207 - 11,416 Experience 11,315 101 (7,942) - 3,474 variances Operating (1,985) - (10,142) - (12,127) assumption changes Return on shareholder 736 123 - - 859 net worth -------- -------- -------- -------- -------- Operating profit/ (loss) of covered business 15,954 230 (9,820) - 6,364 Variation from longer-term investment return 14,880 - 12,061 - 26,941 Effect of economic (7,248) (1,513) 4,308 - (4,453) assumption changes -------- -------- -------- -------- -------- Profit on covered 23,586 (1,283) 6,549 - 28,852 business before tax Tax thereon (4,695) 359 - - (4,336) -------- -------- -------- -------- -------- Profit on covered 18,891 (924) 6,549 - 24,516 business after tax Results of non-covered business and of other group companies Loss before tax, and - - (3,674) (2,440) (6,114) exceptional items Exceptional profit recognised on - business combination - - 376 - 376 of Aspis - business combination of S&P - - - 40,667 40,667 Tax - - 177 145 322 -------- -------- -------- -------- -------- Profit after tax 18,891 (924) 3,428 38,372 59,767 Non-controlling - - 118 - 118 interest -------- -------- -------- -------- -------- Profit for the period attributable to shareholders 18,891 (924) 3,546 38,372 59,885 ======== ======== ======== ======== ======== The exceptional profit recognised on business combinations relates to the acquisition by Movestic of the business of Aspis Forsakringar Liv AB ('Aspis') and the acquisition by Chesnara plc of Save & Prosper Insurance Limited and its subsidiary company Save & Prosper Pensions Limited (together 'S&P'). The determination of the profit relating to Aspis is set out in Note 3 to the IFRS financial statements and the determination of the profit relating to S&P is set out in Note 9 following. Year ended 31 Other December 2009 Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Covered business New business 1,482 - 783 - 2,265 contribution Return from in-force business Expected 7,357 - 1,682 - 9,039 return Experience 4,499 - 2,060 - 6,559 variances Operating 8,862 - (7,405) - 1,457 assumption changes Return on (200) - - - (200) shareholder net worth -------- -------- -------- -------- -------- Operating profit 22,000 - (2,880) - 19,120 Variation from longer-term investment 6,206 - 7,544 - 13,750 return Effect of (12,286) - 2,556 - (9,730) economic assumption changes -------- -------- -------- -------- -------- Profit on 15,920 - 7,220 - 23,140 covered business before tax Tax thereon 11,893 - - - 11,893 -------- -------- ------- -------- -------- Profit on 27,813 - 7,220 - 35,033 covered business after tax ======== ======== ======== ======== ======== Results of non-covered business and of other group companies Profit - - 1,623 (755) 868 before tax, and exceptional item Exceptional profit arising on combination - - - 54,187 54,187 of Movestic business Tax - - (161) 338 177 -------- -------- -------- -------- -------- Profit after 27,813 - 8,682 53,770 90,265 tax Non-controlling - - 7 - 7 interest -------- -------- -------- -------- -------- Profit for the period attributable to 27,813 - 8,689 53,770 90,272 shareholders ======== ======== ======== ======== ======== The results of the non-covered business and of other group companies before tax and before exceptional item are presented as 'other operational result' in the consolidated income statement. For CA, the result of the covered business includes the expenses of the holding company, with an equal and opposite adjustment to the result of the non-covered business and of other group companies. Included within the effect of economic assumption changes in respect of CA for the year ended 31 December 2009 is an amount of GBP5,620,000 being a reduction of pre-tax profit relating to a change in the basis of taxation of overseas dividends. This change leads to a reduction in the estimate of future deductions for taxation from policyholder linked funds and is matched by a broadly offsetting reduction in the estimate of future tax payable. This is a significant component of the tax credit of GBP11,893,000 in respect of tax for CA for the year ended 31 December 2009 as shown above. 7 Sensitivities to alternative assumptions The following tables show the sensitivity of the embedded value as reported at 31 December 2010, and of the new business contribution of Movestic, to variations in the assumptions adopted in the calculation of the embedded value. Sensitivity analysis is not provided in respect of the new business contribution of CA and S&P for the year ended 31 December 2010 as the reported level of new business contribution is not considered to be material (see Note 3 (a) above). It largely relates to guaranteed bond business, where a close asset /liability matching approach leaves values broadly insensitive to changes in experience. New Business Embedded Value Contribution CA S&P Movestic Movestic GBPm GBPm GBPm GBPm Published value as at 31 149.7 103.3 120.6 2.1 December 2010 -------- -------- -------- -------- Changes in embedded value/new business contribution arising from: Economic sensitivities 100 basis point increase in (5.7) 16.4 (0.5) (0.1) yield curve 100 basis point reduction in 4.0 (21.5) 0.4 - yield curve 10% decrease in equity and (2.8) (10.7) (9.7) - property values Operating sensitivities 10% decrease in maintenance 2.2 3.7 6.3 0.6 expenses 10% decrease in lapse rates 2.8 (1.3) 8.6 0.9 5% decrease in mortality/ morbidity rates Assurances 1.3 1.2 0.4 - Annuities (1.5) - - - Reduction in the required capital to statutory minimum 0.6 1.3 - - The key assumption changes represented by each of these sensitivities are as follows: Economic sensitivities (i) 100 basis point increase in the yield curve: The reference rate is increased by 1% and the rate of future inflation has also been increased by 1% so that real yields remain constant; (ii) 100 basis point reduction in the yield curve: The reference rate is reduced by 1% and the rate of future inflation has also been reduced by 1% so that real yields remain constant; and (iii) 10% decrease in the equity and property values. This gives rise to a situation where, for example, a Managed Fund unit liability with a 60% equity holding would reduce by 6% in value. Operating sensitivities (i) 10% decrease in maintenance expenses, giving rise to, for example, a base assumption of GBP20 per policy pa reducing to GBP18 per policy pa; (ii) 10% decrease in persistency rates giving rise to, for example, a base assumption of 10% of policy base lapsing pa reducing to 9% pa; (iii) 5% decrease in mortality/morbidity rates giving rise to, for example, a base assumption of 95% of the parameters in a selected mortality/morbidity table reducing to 90.25% of the parameters in the same table, assuming no changes are made to policyholder charges or any other management actions; and (iv) the sensitivity to the reduction in the required capital to the statutory minimum shows the effect of reducing the required capital from that defined in Note 3(b) above to the minimum requirement prescribed by regulation. In each sensitivity calculation all other assumptions remain unchanged except where they are directly affected by the revised economic conditions: for example, as stated, changes in interest rates will directly affect the reference rate. 8 Reconciliation of shareholders' equity on the IFRS basis to shareholders' equity on the EEV basis Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 31 December 2010 Shareholders' 90,301 39,858 52,799 20,311 203,269 equity on the IFRS basis Adjustments Deferred acquisition costs Investment (6,265) - (7,298) - (13,563) contracts Deferred 10,885 - - - 10,885 income Adjustment to provisions on investment contracts, net of amounts deposited with reinsurers (10,739) 1,997 - - (8,742) Adjustments to provisions on insurance (180) - - - (180) contracts, net of reinsurers' share Adjustments to provisions on unallocated - (14,847) - - (14,847) divisible surplus Acquired (15,563) (6,610) (62,866) - (85,039) in-force value Acquired value - - (2,049) - (2,049) of customer relationships Adjustment to - - (7,454) - (7,454) borrowings Deferred tax 1,909 2,275 2,757 - 6,941 -------- -------- -------- -------- -------- Shareholder 70,348 22,673 (24,111) 20,311 89,221 net worth Value of 79,360 41,307 144,748 - 265,415 in-force business -------- -------- -------- -------- -------- Shareholders' 149,708 63,980 120,637 20,311 354,636 equity on the EEV basis Shareholder net worth comprises: Shareholder 70,348 61,960 (25,418) - 106,890 net worth in regulated entities Shareholders' net equity in other Group companies - - 1,307 20,311 21,618 Debt finance - (39,287) - - (39,287) -------- -------- -------- -------- -------- Total 70,348 22,673 (24,111) 20,311 89,221 ======== ======== ======== ======== ======== Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 31 December 2009 Shareholders' 93,561 - 47,696 18,498 159,755 equity on the IFRS basis Adjustments Deferred acquisition costs Investment (7,173) - (1,447) - (8,620) contracts Deferred 12,319 - - - 12,319 income Adjustment to provisions on investment contracts, net of amounts deposited with reinsurers (15,038) - - - (15,038) Adjustments to provisions on insurance contracts, net of reinsurers' share (238) - - - (238) Acquired (18,282) - (61,675) - (79,957) in-force value Acquired - - (2,336) - (2,336) value of customer relationships Adjustment to - - (5,073) - (5,073) borrowings Deferred tax 2,949 - 512 - 3,461 -------- -------- -------- -------- -------- Shareholder 68,098 - (22,323) 18,498 64,273 net worth Value of 85,559 - 112,753 - 198,312 in-force business -------- -------- -------- -------- -------- Shareholders' 153,657 - 90,430 18,498 262,585 equity on the EEV basis ======== ======== ======== ======== ======== Shareholder net worth comprises: Shareholder 72,295 - (21,275) - 51,020 net worth in regulated entities Shareholders' net equity in other Group companies - - (1,048) 18,498 17,450 Debt finance (4,197) - - - (4,197) -------- -------- -------- -------- -------- Total 68,098 - (22,323) 18,498 64,273 ======== ======= ======== ======== ======== 9 Exceptional item Profit arising on business combinations is presented as an exceptional item in the consolidated income statement and comprises: Arising on business combination with: Year ended 31 December 2010 2009 GBP000 GBP000 S&P 40,667 - Aspis 376 - Movestic - 54,187 -------- -------- 41,043 54,187 ======== ======== Details of the combination with the Aspis business are set out in Note 3 to the IFRS financial statements. The profit arising on the combination with S&P arises on the purchase, on 20 December 2010, of 100% of the issued share capital of Save & Prosper Insurance Limited and its subsidiary, Save & Prosper Pensions Limited, comprising the S&P businesses, and is measured as the difference between the purchase consideration of GBP63,524,000 and the embedded value of the S&P businesses at the purchase date, being GBP104,191,000, which was established in accordance with the methodology set out in Notes 2 to 4 of these supplementary financial statements. 10 Earnings per share Year ended 31 December 2010 2009 p p Basic earnings per share Based on profit for the period attributable to 71.24 88.94 shareholders -------- -------- Based on profit for the period attributable to shareholders before exceptional item 31.26 35.55 -------- -------- Diluted earnings per share Based on profit for the period attributable to 71.24 88.94 shareholders -------- -------- 31.26 35.55 Based on profit for the period attributable to shareholders before exceptional item -------- -------- 11 Foreign exchange translation reserve A foreign exchange translation reserve arises on the translation of the financial statements of Movestic, the functional currency of which is the Swedish Krona, into pounds sterling, which is the presentational currency of the Group financial statements. Items in the consolidated income statement are translated at the average exchange rate of SEK11.1249= GBP1 ruling in the reported period (Year ended 31 December 2009: SEK11.5594=GBP1), while all items in the balance sheet are stated at the closing rates ruling at the reported balance sheet date, being SEK10.5250 = GBP1 at 31 December 2010 (SEK11.5305= GBP1 at 31 December 2009). The differences arising on translation using this methodology are recognised directly in shareholders' equity within the foreign exchange translation reserve. The reported embedded value is sensitive to movements in the SEK:GBP exchange rate. Had the exchange rate as at 31 December 2010 been 10% higher at SEK11.5775 = GBP1, then the reported embedded value of GBP354.6m as at 31 December 2010 would have been reported as GBP343.7m. 12 Post balance sheet event In his budget speech on 23 March 2011, the Chancellor announced changes which will affect the taxation of UK-based Life Insurance companies as follows: the rate of UK Corporation Tax will reduce to 26% from April 2011 and, thereafter, by annual decrements of 1% to 23%. No allowance has been made for the impact of these changes as disclosed in Note 4(c) above; and the basis of taxation of insurance companies will be changed following the introduction of solvency II regulations. While the announcement contained the principles to be adopted, key elements of the detailed provisions remain to be finalised. These changes may have a material impact on the embedded value.

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