Half-yearly Report

Chesnara plc - Interim Results for the six months ended 30 June 2011 2.6% increase continues dividend growth at Chesnara 31 August 2011 Chesnara today reported interim results for the half-year ended 30 June 2011. The Group remains committed to offering shareholders an attractive long-term income stream arising from the profits of its life assurance businesses. * Profit (on IFRS basis) before tax for the six months ended 30 June 2011 of GBP3.8m, (2010: GBP12.0m) * Earnings per share (on IFRS basis) of 2.79p, (2010: 7.71p) * On EEV basis pre-tax loss for the half-year of GBP(4.9)m (2010: profit GBP6.3m) including modelling adjustments * Successful operational integration of Save and Prosper acquisition * Continuing positive UK persistency experience and robust cash generation * Equity market volatility and falling yield curve impacts results * Shareholder equity on EEV basis (pre-proposed interim dividend payment) of GBP340.1m - GBP2.96 per share (30 June 2010: GBP255.1m - GBP2.51 per share) * Group solvency ratio remains, post dividend, above target at 198% (30 June 2010: 330%) * In the UK, Countrywide Assured's solvency ratio remains well above target at 254% (30 June 2010: 263%) whilst Save and Prosper's ratio at 269% (30 June 2010: 243%) was also very strong. Movestic's solvency ratio of 189% (30 June 2010: 220%) also remains above target * 5.95p interim dividend per share proposed (2009: 5.8p), an increase of 2.6% * Board remains confident about future dividend flows * Search for value adding acquisition opportunities continues * Comparatives for 30 June 2010 exclude Save and Prosper which was acquired on 20 December 2010 Commenting on the results, Graham Kettleborough, Chief Executive said: "Challenging equity and bond markets have given rise to mixed results. However the resilience of our underlying business has again enabled us to deliver a reliable and progressive dividend stream by proposing a 2.6% increase in the interim dividend to 5.95p per share." The Board approved this statement on 30 August 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 GBP47.8m. 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 GBP20m. The company is open to new business and seeks to grow its position in the Swedish unit-linked market. Its proposition 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 GBP63.5m in cash. This was funded by raising a new lending facility of GBP40m and the sale of new and treasury shares which raised GBP26.7m. The companies are closed to new business and operate an outsourced business model which is complementary to Chesnara's existing UK operations. Chesnara plc Condensed Consolidated Financial Statements for the Six Months Ended 30 June 2011 FINANCIAL CALENDAR 31 August 2011..........................Interim results for the six months ended 30 June 2011 announced 7 September 2011........................Ex dividend date 9 September 2011........................Dividend record date 14 October 2011........................Dividend payment date 18 November 2011........................Interim Management Statement for the quarter ending 30 September 2011 March 2012...........................Results for the year ending December 2011 announced 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, Swedish 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 jurisdictions 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. Note on terminology As explained in Note 4 to the unaudited IFRS Condensed Consolidated Financial Statements, 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 business', 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 Unaudited 6 months ended Year ended 30 June 31 December 2011 2010 2010 IFRS basis Operating profit/(loss) â€ƒCA 8.0 16.8 25.7 â€ƒS&P (1.2) - 0.2 â€ƒMovestic 0.6 (4.3) (2.5) Other group activities (1.0) (0.8) (3.8) Profit arising on business combinations - 1.0 15.9 -------- -------- -------- 6.4 12.7 35.5 Financing costs (2.6) (0.7) (1.3) Profit before tax GBP3.8m GBP12.0m GBP34.2m ======== ======== ======== Basic earnings per share 2.79p 7.71p 29.05p Dividend per share (including proposed dividend) 5.95p 5.80p 16.40p Shareholders' net equity GBP196.3m GBP156.8m GBP203.3m ======== ======== ======== European Embedded Value basis (EEV) Operating profit/(loss) Covered business â€ƒCA 2.8 10.0 16.0 â€ƒS&P 0.6 - 0.2 â€ƒMovestic (2.6) (16.5) (9.8) Other group activities (0.6) (0.8) (6.1) ------- -------- -------- 0.2 (7.3) 0.3 Investment variances and economic assumption changes â€ƒCA 0.2 (4.9) 7.6 â€ƒS&P 3.4 - (1.5) â€ƒMovestic (3.4) 7.2 16.4 -------- -------- -------- Profit/(loss) before tax and before exceptional items 0.4 (5.0) 22.8 Exceptional items â€ƒProfit arising on business combinations - 0.9 41.0 â€ƒEffect of modelling adjustments (5.3) 10.4 13.2 -------- -------- -------- (Loss)/profit before tax (4.9) 6.3 77.0 Tax (1.9) (2.4) (4.0) -------- -------- -------- (Loss)/profit for the period GBP(6.8)m GBP3.9m GBP73.0m ======== ======== ======== Shareholders' equity on EEV basis Embedded value â€ƒCA 126.4 132.1 149.7 S&P 106.8 - 103.2 â€ƒMovestic 112.4 93.7 119.4 -------- -------- -------- Embedded value of covered business 345.6 225.8 372.3 Acquired embedded value financed by debt (39.3) - (39.3) Shareholders' equity in other group companies 33.8 29.3 21.6 -------- -------- -------- GBP340.1m GBP255.1m GBP354.6m ======== ======== ======== EEV per share 296.2p 251.3p 308.8p 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 period end, as a component of shareholders' equity. Accordingly, the EEV result recognises, within profit, the movement in this component. S&P was acquired on 20 December 2010. Accordingly, the results of S&P set out above in respect of the year ended 31 December 2010 are for the 11-day post-acquisition period and the unaudited results for the six months ended 30 June 2010 exclude S&P. CHAIRMAN'S STATEMENT I am pleased to present the eighth interim financial statements of Chesnara plc, which are the first interim statements that incorporate the results of S&P, which was acquired in late December 2010. The first half of the year has been characterised by continuing economic uncertainty and this, together with the associated impact on global investment markets, has had an overall adverse effect on our reported results. It is, however, pleasing that CA's cash generation, on which the Group currently relies to support its dividend policy, has shown a measure of resilience in the face of these pressures. Review of the Business The dominating investment market influence in the UK over the period has been the downward drift in short-term interest rates combined with an easing up in longer-term rates, while investment returns in Movestic, our Swedish-based business, have been negatively affected by poor equity and fixed-interest investment performance. These factors have had varying and contrasting impacts on the businesses' IFRS and EEV earnings measures, such that the effects are by no means uniform. While CA's IFRS result has generally benefited from the fall in short-term fixed-interest yields, due to the impact on the capital value of assets backing its insurance liabilities, the corresponding S&P result has experienced a loss of GBP4.2m arising from strain in its with profits portfolio. This has resulted from a slightly lower actuarial valuation interest rate, driven by general market movements, and the fact that the result is sensitive to relatively minor movements in the rate: this is also true of any upside impact of prospective rate increases. Within these funds, there has also been an increase in the proportion of cash-based investments compared with the position at 31 December 2010. In contrast, S&P's EEV result, which reflects a longer-term view, has benefited from a GBP2.6m reduction in the estimated cost of guarantees within its with profits portfolio, driven by the prospect of improved longer-term interest rates. Within Movestic, dull investment market performance has led to an adverse EEV impact of GBP6.2m in the period, as the projected level of policyholder funds under management, on which its fee income is based, has fallen. In the short-term, however, as reflected in Movestic's IFRS result, this impact is muted. On an IFRS basis, at the consolidated Group level, we have posted a pre-tax profit of GBP3.8m for the half year ended 30 June 2011, compared with GBP12.0m for the corresponding period in 2010. The result was adversely affected by the GBP4.2m with profits strain arising in S&P, while the 2010 half-year result was enhanced by the release of GBP3.2m relating to a claims reserve within CA. CA's pre-tax result for the half year is robust at GBP8.0m, in spite of the impact of a GBP2m increase in expense provisions. A further highlight of the overall IFRS result is that Movestic's pre-tax loss at GBP1.2m is on a clearly improving trend, with its core risk insurance and savings operations now trading at, or just above, break even. On the EEV basis of reporting, excluding modelling adjustments, we have posted a post-tax loss of GBP1.5m for the half year, compared with a loss of GBP6.4m for the corresponding period in 2010. The dominating feature has been the adverse investment return variance of GBP6.2m arising within Movestic. Also within Movestic the value added by new business and the unwind of the discount rate, together some GBP5m at the pre-tax level, has been offset by an adverse impact of Â£5m arising from policy discontinuance. Within the UK businesses the EEV result has been supported by the GBP2.6m reduction in the estimated cost of guarantees within the S&P with profits funds, while continuing favourable lapse and mortality experience in CA, together GBP2m at the pre-tax level, has offset the impact of the GBP2m increase in expense provisions. Other significant movements in Group embedded value are a GBP5.3m adverse effect in respect of modelling adjustments, offset by a foreign exchange translation gain of GBP4.5m following the appreciation by 4% of the Swedish Krona against sterling over the first half of the year. Cumulative modelling adjustments, principally arising from the introduction of a new model in Movestic in 2010, are, for the 18-month period ended 30 June 2011, GBP7.9m favourable, GBP13.2m having been reflected during the year ended 31 December 2010. The adjustments made in the first half of 2011 are net of the correction of errors of GBP7.7m, unrelated to the adjustments made in 2010, detected in the operation of the new model. These factors, together with the core trading loss of GBP1.5m, have given rise to a reduction in Group EEV of GBP2.3m. Shareholder Value and Returns to Shareholders Total shareholder equity on the EEV basis, pre appropriation of the proposed interim dividend, is GBP340.1m (296.2p per share) compared with GBP354.6m (308.8p per share) as at 31 December 2010. The difference in total shareholder equity is the GBP2.3m net reduction referred to above together with the payment of the final 2010 dividend of GBP12.2m (10.6p per share). The capacity of the Group to pursue its dividend policy currently continues to rely on the emergence of surplus within CA and, as indicated, this has proved to be resilient in the face of challenging economic and investment market conditions. CA's solvency position stands at a healthy 254% (213% as at 31 December 2010), while S&P's solvency position has improved slightly from 268% to 269% and Movestic's solvency ratio stands at 189% compared with a target of at least 150%. The Group solvency position post the proposed interim dividend accordingly remains healthy at 198% (31 December 2010: 200%). Based on the strength of our reserves and of our capital solvency ratios, the Board has decided to declare an interim dividend of 5.95p per share (2010 interim dividend: 5.80p per share), which represents a 2.6% increase and equates to a total dividend payable to shareholders of GBP6.8m. In arriving at this decision the Board has taken careful consideration of the current volatility in global investment markets. Outlook Like many businesses, we have been affected by the ongoing turmoil in the equity and debt markets and we provide some guidance to the effect of market volatility in the EV Supplementary Information section of these statements. Reassuringly, cash generation remains robust and, following the successful integration of S&P, our plans to merge it with CA are progressing well. This merger will result in further capital and operating synergies which will support our short to medium-term dividend capability. The strategic rationale for the acquisition of S&P remains sound and we fully expect the generation of surplus from this business to further underpin future dividend capability. We are making good progress on the implementation of Solvency II and are on target for the current implementation date of 1 January 2013. As ever, we remain subject to challenges from regulatory or legislative change, the economic environment, low interest rates and volatility in the equity markets. However, we remain strong financially and believe we are well-placed to deliver good ongoing returns to shareholders. We also believe that the current climate and the challenges of Solvency II will give rise to possible acquisition opportunities and we remain keen to progress these. Peter Mason Chairman 30 August 2011 DIRECTORS INFORMATION Peter Mason was appointed as Chairman of Chesnara plc and Chairman of the Nomination Committee on 1 January 2009. He was re-appointed as a member of the Remuneration and Audit & Risk Committees with effect from 22 December 2009 and was appointed as Chairman of Movestic LivfÃ¶rsÃ¤kring AB with effect from 23 July 2009. He was also appointed as Chairman of the Boards of the S&P companies with effect from 20 December 2010. He is currently a Non-executive Director of Homeowners Friendly Society and is the Investment Director and Actuary of Neville James Group, an investment management company. He was admitted as a Fellow of the Institute of Actuaries in 1979. Graham Kettleborough is the Chief Executive of Chesnara plc. He joined Countrywide Assured plc in July 2000 with responsibility for marketing and business development and was appointed as Managing Director and to the Board in July 2002. He was appointed as a Non-executive Director of Movestic LivfÃ¶rsÃ¤kring AB and as Chairman of Movestic KapitalfÃ¶rvaltning AB with effect from 23 July 2009. He was also appointed as Managing Director of the S&P companies with effect from 20 December 2010. Prior to joining Countrywide Assured plc, he was Head of Servicing and a Director of the Pension Trustee Company at Scottish Provident. He has lifetime experience in the financial services industry, primarily in customer service, marketing, product and business development, gained with Scottish Provident, Prolific Life, City of Westminster Assurance and Target Life. Ken Romney is the Finance Director of Chesnara plc. He joined Countrywide Assured plc in 1989 and became a member of the Board in 1997. He was also appointed as Finance Director of the S&P companies with effect from 20 December 2010. He has worked in the life assurance industry for the last 27 years. He was Chief Accountant at Laurentian Life (formerly Imperial Trident) up to 1987 and was Financial Controller at Sentinel Life between 1987 and 1989. He worked for Price Waterhouse in their audit division until 1983 in both the UK and South Africa. He is a Fellow of the Institute of Chartered Accountants in England and Wales. Frank Hughes is the Business Services Director of Chesnara plc. He joined Countrywide Assured plc in November 1992 as an IT Project Manager and was appointed to the Board as IT Director in May 2002. He has 26 years' experience in the life assurance industry gained with Royal Life, Norwich Union and CMG. Mike Gordon is an Independent Non-executive Director of Chesnara plc and is Chairman of the Remuneration Committee. He was appointed as Senior Independent Non-executive Director of Chesnara plc on 1 January 2009. He also serves on the Audit & Risk Committee and the Nomination Committee and was appointed as a Non-executive Director of Movestic LivfÃ¶rsÃ¤kring AB with effect from 23 July 2009. He spent 12 years as Group Sales Director of Skandia Life Assurance Holdings. Terry Marris is an Independent Non-executive Director of Chesnara plc and serves on the Audit & Risk Committee, the Remuneration Committee and the Nomination Committee. He was also appointed as a Non-executive Director of the S&P companies with effect from 21 January 2011. He joined Countrywide Assured Group plc in 1992 and was Managing Director of Countrywide Assured plc until July 2002. Previous roles included senior management positions at Lloyds Bank and General Accident. Peter Wright is an Independent Non-Executive Director who was appointed to the Chesnara plc Board on 1 January 2009. At the same date he was appointed as Chairman of the Audit & Risk Committee and as a member of the Remuneration Committee. He was appointed as a member of the Nomination Committee with effect from 9 July 2009.He was also appointed as a Non-executive Director of the S&P companies with effect from 20 December 2010 and as Chairman of the Risk Committees and With Profits Committees of those companies. He retired as a Principal of Towers Perrin on 1 January 2008 and is a former Vice President of the Institute of Actuaries, having been admitted as a Fellow in 1979. INTERIM MANAGEMENT REPORT Background and Strategy Our History and Development Chesnara was listed on the London Stock Exchange in 2004, when we acquired CA on its demerger from Countrywide plc ('Countrywide'). CA was established in 1988 as the life assurance division of Countrywide and, predominantly, sold mortgage-related life assurance products through Countrywide's financial services division. As a substantially closed life business it continues to administer its in-force portfolio which mainly comprises endowment and protection policies, this reflecting CA's history of providing mortgage-related policies to clients of an estate-agency based financial services group. In 2005 we acquired City of Westminster Assurance Company Limited ('CWA') from Irish Life and Permanent plc for a total purchase consideration of GBP47.8m. CWA is also substantially closed to new business. In common with the CA business, the policies comprising the CWA business include a mix of endowment, protection and pension policies. However, unlike CA, there is a relatively high proportion of pension policies and this helped to improve the overall mix of Chesnara's UK business by spreading the risk subsisting within the different policy types. On 30 June 2006, the long-term business of CWA was transferred to CA under the provisions of Part VII of the Financial Services and Markets Act 2000 (the 'Part VII Transfer'). Besides reducing the reporting and regulatory burden, financial and operational synergies resulted. Opportunities for further similar acquisitions then became limited as valuations increased to levels which would not provide attractive returns for shareholders. This was followed by uncertainty arising from disruption to financial markets and a recessionary environment which prevented any significant acquisition activity. However, in July 2009 we acquired an open Swedish life assurance and pensions company - then named Moderna FÃ¶rsÃ¤kringar Liv AB ('Moderna') - for a cash consideration of GBP20m. This represented a very attractive discount to its embedded value. Moderna (now rebranded Movestic) is an open unit-linked life and pensions business based in Sweden. It started writing business in 2002 and had achieved a market share of 14% of the company-paid pensions market by 2008. This market penetration fell as issues surrounding its then ownership, by an Icelandic financial services organisation, and its proposed sale became a concern to its key distributors - Swedish Independent Financial Advisers - and their clients. Shortly after the acquisition, the Swedish regulator, Finansinspektionen ('FI'), approved the commencement of operation of a subsidiary company Moderna Fonder & Analys AB (now Movestic KapitalfÃ¶rvaltning AB) which was established to separate out the fund selection and management activities from the life company and to develop these activities in the wider market. On acquisition, Movestic owned 49% of the share capital in two associated companies, AkademikerRÃ¥dgivning I Sverige AB ('AR') and Modernac SA ('Modernac'). The former is an Independent Financial Adviser which was jointly owned by AkademikerjÃ¤nst I.A.S. AB ('the Akademics') and a strategic review led to Movestic acquiring a further 42% of the shares resulting in 91% ownership. We are currently in the process of liquidating this business due to unsatisfactory returns. Modernac is a reinsurer based in Luxembourg and was established to reinsure business resulting from a group life cover arrangement with the Akademics which was extended for five years at the time the increased shareholding in AR was acquired. In February 2010, Movestic acquired the in-force business, personnel, expertise and systems of Aspis FÃ¶rsÃ¤krings Liv AB ('Aspis'), a small Swedish life and health risk insurer, which complements Movestic's focus on pensions and savings contracts. The acquisitions of Movestic and Aspis add a growth element to Chesnara's proposition to shareholders. Whilst requiring additional capital in the early years, the prospect for the creation of value for shareholders in the medium to longer term is significant. On 17 December 2010 we acquired the in-force claims portfolio of Aspis which we had administered since we acquired the in-force business. On 26 November 2010 we announced the proposed acquisition of Save & Prosper Insurance Limited and its subsidiary Save & Prosper Pensions Limited from JPMorgan Asset Management Marketing Limited for a consideration of GBP63.5m. The acquisition was financed through a new bank facility of GBP40m together with the proceeds of a placing of 10,458,877 new ordinary shares and the sale of 2,897,183 shares held in treasury, which together raised gross proceeds of GBP26.7m. Following the issue of a Circular on 30 November 2010 shareholders approved the acquisition at a General Meeting on 16 December 2010 with completion taking place on 20 December 2010. S&P is a UK-based provider of unit-linked, non-linked and with profits pension and life assurance products which is closed to new business. Like CWA, the company has a high proportion of pension policies and this enhances the longevity of Chesnara's UK proposition. An opportunity is presented by the acquisition of S&P to achieve financial and operational synergies from the merger of its life assurance and pensions books with those of Countrywide Assured. Merging them into one legal entity, by means of a transfer under Part VII of the Financial Services and Markets Act 2000 ('FSMA'), also provides the opportunity for more efficient use, and potential release, of capital from the combined businesses. As at 30 June 2011 CA managed a portfolio of some 157,000 life assurance and pensions policies, while S&P managed some 167,000 policies. In the UK, therefore, the total number of policies under management is some 324,000. CA sells a small amount of protection business to existing customers while both CA and S&P also benefit from additional inward flows on their existing life and pension contracts by way of inflation-linked increases and rebates received from the government in respect of contracted-out pension policies. The UK businesses are substantially closed to new business and their primary focus is the efficient run-off of their existing life and pensions portfolios. This gives rise to the emergence of surplus which supports our primary aim of delivering an attractive long-term dividend yield to our shareholders. By the very nature of the life business assets, the surplus arising will deplete over time as the policies mature, expire or are the subject of a claim. Chesnara Group and the UK business activities are based in Preston, Lancashire with a small office in the City of London. Movestic is based in Stockholm in Sweden and has an administration office in NorrkÃ¶ping in southern Sweden. Chesnara has 22 FTE employees in its corporate governance team in the UK. In Sweden, the headcount, across the two sites, is in the order of 130. The Swedish business is open to new business and its primary aim is to regain market share in the company-paid and individual pensions market, whilst developing further profitable business in other areas, in particular in the risk and health market. Writing new business requires funding to support the initial costs incurred: this is provided by way of financial reinsurance or cash contributions from Chesnara. As the in-force business portfolio grows in scale the income generated by it eventually allows the business to self fund and become a net generator of cash. Acquisition Strategy Chesnara continues to seek to participate in the consolidation of life assurance and pensions businesses in the UK and Western Europe. We primarily target acquisitions with a value of between GBP50m and GBP200m, although other opportunities are considered. All opportunities are assessed against a number of key criteria including size, risk (including actual or potential product and financial liabilities), discount to embedded value, capital requirements and the pattern and quality of predicted profit emergence. Our strategic approach, however, remains that such potential acquisitions should contribute to the primary aim of delivering a steady and attractive dividend yield, although opportunities which present a significant value uplift or growth opportunity will also be evaluated. Developments During 2011 There have been three areas of operational focus in the UK during the first half of 2011. Firstly, following the successful acquisition of Save & Prosper in late 2010 we have integrated the small team we acquired, opened a small office in London where they are based and strengthened the team at our main office in Preston with two senior management appointments to assist with the incremental governance requirements and improve cover for the existing team. The integration of the S&P operation and oversight has been completed successfully and we have a sound structure and operating model to support the acquired business. The second area of focus has been progressing the transfer of the acquired Save & Prosper business into our existing company - Countrywide Assured plc - utilising the provisions of Part VII of the Financial Services and Market Act 2000. Whilst the process is proving challenging we are currently on target with our plans to complete this by the end of the year. However, as the transfer requires the sanction of the Courts this cannot be guaranteed. The aim of the transfer is to generate operational and financial synergies through operating one company and regulated entity rather than the three - CA and the S&P Insurance and Pension companies - currently in place. The third area has been the implementation of the Solvency II regime which, at the time of writing, is expected to be effective from 1 January 2013. Although some extensions to the implementation date have been indicated we continue to focus on this date. Current planning indicates that we are well placed to meet the deadline and that there is not expected to be any increased capital requirements in the Group's UK businesses. In Sweden, one of the main areas of focus has been a significant systems migration which will provide a more robust and scalable platform for the future. The vast majority of this was successfully implemented in July with a small follow up migration planned for October. In addition to scalability and robustness it also offers a platform on which the time to market for new products and funds is substantially reduced. In conjunction with this migration further transfers of work to our lower operating cost centre in NorrkÃ¶ping have been undertaken. Most of our servicing is now undertaken in this office with corporate functions being focused in Stockholm. Whilst there has been some focus on Solvency II in Movestic the pace of development is now planned to increase following the necessary concentration on the systems migration. At the Group level we continue to search for value-adding acquisitions in the UK and Western Europe. From discussions with potential financiers and equity underwriters we believe that, if the right opportunity presents itself, we would have strong institutional support to finance a potential transaction. Key Performance Indicators Set out below are those indicators, categorised by principal operating segment, which we consider to be key in assessing the Group's performance. They are either in the nature of lead operational indicators or are measurements which reflect outcomes. We explain the significance of each indicator and also set out the way in which it has been formulated to the extent necessary to appreciate its characteristics. CA Policy attrition Generally, the longer that life and pensions policies remain in force the more profit accrues to CA. Over time the value of the in-force policies is realised into surplus within CA and this is, in turn, distributable to Chesnara, subject to regulatory constraints. It is important therefore that CA maximises policy retention through providing an advice service to customers. Different policy product types will naturally be subject to lapse, claim or surrender to varying extents and it is a detailed review and analysis of the experience of each of these types which gives rise to the projected policy in-force assumptions underpinning the projected value of policies in force within the embedded value. A statement of the annual rate of attrition of policies is provided as a broad indicator of the trend in longevity of the in-force base: Unaudited 6 months ended Year ended Number of in-force policies (000's) 30 June 31 December 2011 2010 2010 Beginning of period 162 176 176 End of period 157 169 162 Rate of attrition (annualised) 6.2% 8.0% 8.0% Bearing in mind the current economic backdrop in the UK, this notable improvement in the policy attrition rate is counter-intuitive. As the expectation remains that household budgets will come under increasing pressure and unemployment, or moves to part-time working, will increase, we will retain our current assumptions in this area until more enduring experience is available. Unit-linked funds under management The continuing level of unit-linked funds under management is an indicator of the ongoing level of profitability of CA as fund-related charges are an important component of CA's profit. Presented below, at each period end, is the level of policyholder unit-linked funds on which charges are based. Unaudited 30 June 31 December 2011 2010 2010 GBPm GBPm GBPm Policyholder unit-linked funds 1,506.6 1,370.4 1,536.4 -------- -------- -------- The movement in the value of unit-linked funds under management is a function of i) performance of the funds across UK equities, international equities, property and fixed interest securities, ii) received and invested premiums and iii) policies closed due to surrender, transfer or claim. Unit-linked fund performance Relative outperformance in the unit-linked funds helps promote policy retention and, when positive, increases the embedded value of the Group as future management charges will be of a higher magnitude. The CA Pension Managed Fund, which represents a significant proportion of CA policyholder unit-linked funds under management, provided a return of 15.86% over the year ended 30 June 2011 (year ended 30 June 2010: 19.74%) while the CWA Balanced Managed Pension Fund, which represents a significant proportion of CWA policyholder funds under management, provided a return of 16.04% over the same period (year ended 30 June 2010: 17.53%). These returns compare favourably with the ABI UK - Mixed Investment 40% to 85% - Pensions Fund average of 14.72% for the same period (30 June 2010: 17.77%). Mortgage endowments We continue to carry potentially significant exposure to mortgage endowment misselling complaints, which may become subject to redress payments to policyholders. Three of the key statistics which define and limit the extent of this exposure are set out below: Unaudited 6 months ended Year ended 30 June 31 December 2011 2010 2010 Number of complaints received 390 348 677 % of complaints assessed upheld 35% 26% 24% % of complaints assessed time barred 46% 57% 54% The percentage of in-force policies which are time-barred is now 86.1%. Time-barred policies are those mortgage endowment policies for which a misselling complaint is potentially not admissible through the application of rules and guidance issued by the FSA and the ABI. We do not expect the percentage of time-barred cases to increase significantly in future years. A slight increase in the number of complaints received reflects a higher number of policyholders mailed whilst the increase in uphold rate and reduced time barred rate reflect the reduced number of complaints from policyholders who accept they are time-barred and therefore realise submitting a complaint would be fruitless. S&P Information below in respect of the half-year ended 30 June 2010 and the year ended 31 December 2010 includes performance prior to the acquisition of S&P on 20 December 2010 and is presented for illustrative purposes. Policy attrition Generally, the longer that life and pensions policies remain in force the more profit accrues to S&P. Over time the value of the in-force policies is realised into surplus within S&P and this is, in turn, distributable to Chesnara, subject to regulatory constraints. Policy attrition is, therefore, an important factor underpinning S&P's ongoing level of profitability. Different policy product types will naturally be subject to lapse, claim, surrender, retirement or transfer to varying extents and it is a detailed review and analysis of the experience of each of these types which gives rise to the projected policy in-force assumptions underpinning the projected value of policies in force within the embedded value. A globalised statement of the annual rate of attrition of policies is provided as a broad indicator of the trend in longevity of the in-force base: Unaudited 6 months ended Year ended Number of in-force policies (000's) 30 June 31 December 2011 2010 2010 Beginning of period 172 184 184 End of period 167 177 172 Rate of attrition (annualised) 5.8% 7.6% 6.5% As with CA, the improvement in policy attrition is counter-intuitive. We would expect lower policy attrition in the S&P business as it has been closed longer and is more biased to pensions business. As with CA we will maintain our current assumptions until more enduring experience is available. Unit-linked funds under management The continuing level of funds under management is an indicator of the ongoing level of profitability of S&P as fund-related charges are an important component of S&P's profit. Presented below, at each period end, is the level of policyholder unit-linked funds on which charges are based. Unaudited 30 June 31 December 2011 2010 2010 GBPm GBPm GBPm Policyholder unit-linked funds 899.3 844.2 933.6 -------- -------- -------- The movement in the value of unit-linked funds under management is a function of i) performance of the funds across UK equities, international equities, property and fixed interest securities, ii) received and invested premiums and iii) policies closed due to surrender, transfer or claim. Unit-linked fund performance Relative outperformance in the unit-linked funds helps promote policy retention and, when positive, increases the embedded value of the Group as future management charges will be of a higher magnitude. The S&P Managed Pension Fund, which represents a significant proportion of S&P policyholder unit-linked funds under management, provided a return of 17.21% over the year ended 30 June 2011 (year ended 30 June 2010: 17.80%). These returns compare favourably with the ABI UK - Mixed Investment 40% to 85% - Pensions Fund average of 14.72% for the same period (30 June 2010: 17.77%). Valuation interest rate Due to the existence of guarantees within the with profits business the interest rate used for determining the actuarial liabilities, as part of the period-end actuarial valuation process, has a material impact on the level of surplus arising within the with profits funds. As the valuation rate reduces the surplus arising is expected to reduce. Presented below, at each period end, are the valuation interest rates for the material with-profits fund, that related to the pensions business. Unaudited 30 June 31 December 2011 2010 2010 With profits valuation interest rate - pensions 3.00% 3.00% 3.10% business -------- -------- -------- The rate is based on a weighted average, risk adjusted, yield for the matching assets held at the valuation date. Whilst yields on the longer-dated bonds have increased slightly over the six months to 30 June 2011, yields on shorter-dated bonds have fallen to a greater extent. In addition, an increase in cash within the fund, to further reduce investment risk, has reduced the yield being earned. These impacts have been mitigated to some extent by reconsidering the levels of margins within the final rate selected. Movestic Premium income The writing of profitable new business and the continuing flow of premium income are key to the success of Movestic, which focuses primarily on the pensions and savings market, but which also writes risk and health business where the opportunity exists. Unaudited 6 months ended Year ended 30 June 31 December 2011 2010 2010 New business premium income* GBPm GBPm GBPm Pensions and savings 26.7 29.3 52.9 Risk Insurance 1.1 6.9 8.1 -------- -------- -------- Total 27.8 36.2 61.0 -------- -------- -------- *Basis: annualised premium plus 1/10 single premium denominated in SEK and translated into sterling at a constant rate of SEK10.3 = GBP1 Unaudited 6 months ended Year ended 30 June 31 December 2011 2010 2010 Total premium income* GBPm GBPm GBPm Pensions and savings 122.7 136.1 263.1 Risk Insurance 19.9 19.4 38.4 -------- -------- -------- Total 142.6 155.5 301.5 -------- -------- -------- *Basis: total premiums paid denominated in SEK and translated into sterling at a constant rate of SEK10.3 = GBP1 The fall in new business risk insurance premiums, although apparently significant, reflect the bulk transfer in of business following the acquisition of the operations of Aspis Liv in the first half of 2010. The success in retaining this business is evidenced by the increase in total premium risk insurance premiums. Unfortunately the same cannot be said for pensions and savings where new business is slightly behind target and total premium income has reduced. This can largely be attributed to issues with lapses, transfers and surrenders and the actions we are taking in that respect are outlined in the following section. Policy attrition The longer that insurance and investment contracts remain in force, the more profit accrues to the business. Different policy product types will be subject to surrender, transfer or lapse to varying extents. Unaudited 6 months ended Year ended Annualised rate of attrition 30 June 31 December 2011 2010 2010 Surrenders (endowments) 14.5% 10.7% 13.4% Transfers (pensions) 5.4% 4.3% 4.6% Lapses (pensions and endowments) 16.8% 15.4% 19.8% Despite our initial actions, the rate of surrender and transfer has not improved although the lapse rate has. Further actions are being taken to address this in the face of strong marketing from Swedish banks. These include the imposition of a transfer fee from September 2011 (previously there was none), detailed analysis and follow up of IFAs with relatively high transfer rates, asking potential transfer clients to complete a form confirming their request (with 'reasons to stay' messages accompanying the form), and telephoning all clients who request a surrender. Further consideration is being given to loyalty measures for paid up clients. These initiatives are being developed by a unit specifically formed to analyse the reasons for business loss and to develop measures to mitigate it. Market share Movestic's primary target market is that of unit-linked pension business and, within that, company-paid contributions business. Share of unit-linked pensions market by quarter Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Total business 3.9% 5.1% 3.1% 5.8% 4.7% 5.6% Company-paid contributions business 12.3% 12.3% 10.1% 11.3% 12.5% 11.3% Whilst market share of company-paid business has fallen back to Q4 2010 levels we have made progress in the broader total business measure. This is to be welcomed as it reflectsthe relative performance for all business lines compared to the rest of the market. Unit-linked funds under management Unaudited 30 June 31 December 2011 2010 2010 GBPm GBPm GBPm Policyholder unit-linked funds 1,364.2 1,180.3 1,354.3 -------- -------- -------- * Translated into sterling at a constant rate of SEK10.1 = GNP1. The value of assets under management is a key reference point for establishing the ongoing profit-earning capacity of the business, as fees are received based on these values. Asset growth enables management to negotiate improved rebates from fund managers which drives improved profitability. Fund performance Relative fund performance, which is key to maintaining funds under management, obtaining new business and to supporting business retention, is as follows: Unaudited 6 months ended Year ended Number of funds 30 June 31 December 2011 2010 2010 Outperformed against relevant index 14 9 18 Underperformed against relevant index 18 19 12 No relevant index 7 3 3 Slightly more funds underperformed than over performed in the first half of the year as, generally, we are overweight in 'value' stocks and Swedish equities. Whilst this strategy produced good results in the first four months of the year the latter two months reversed the gains made. We have continued to review our fund range and have replaced some underperforming funds with similar funds from new managers which have better performance records and improved rebate levels. We have also introduced a number of new funds which will support the distribution and retention sides of the business which, we expect, will lead to increased new fund flows. IFRS Result The IFRS result for the six months ended 30 June 2011 comprises: Unaudited six months ended 30 June 2011 Pre-tax Tax Post-tax GBP000 GBP000 GBP000 CA result 8,012 (1,131) 6,881 S&P result (1,247) 809 (438) Movestic result (1,219) (281) (1,500) Other group activities (1,736) - (1,736) -------- -------- -------- Total result 3,810 (603) 3,207 ======== ======== Non-controlling interest - -------- Total result attributable to shareholders 3,207 ======== Unaudited six months ended 30 June 2010 Pre-tax Tax Post-tax GBP000 GBP000 GBP000 Profit arising on business combination - Aspis 989 - 989 CA result 16,795 (4,238) 12,557 S&P result - - - Movestic result (5,049) 44 (5,005) Other group activities (757) - (757) -------- -------- -------- Total result 11,978 (4,194) 7,784 ======== ======== Non-controlling interest 40 -------- Total result attributable to shareholders 7,824 ======== Year ended 31 December 2010 Pre-tax Tax Post-tax GBP000 GBP000 GBP000 Profit arising on business combinations - Aspis 376 - 376 - S&P 15,488 - 15,488 CA result 25,692 (4,740) 20,952 S&P result 224 (63) 161 Movestic result (3,730) 176 (3,554) Other group activities (3,882) 160 (3,722) -------- -------- -------- Total result 34,168 (4,467) 29,701 ======== ======== Non-controlling interest 118 -------- Total result attributable to shareholders 29,819 ======== The CA pre-tax result, which is net of an amortisation charge of GBP1.8m 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 run-off portfolio. A downward drift in short-term fixed-interest yields over the first half of the year, giving rise to an increase in the capital value of assets backing its insurance liabilities, has offset the adverse impact of a GBP2.0m strengthening of expense reserves, so that, overall, CA's result is in line with expectations. In contrast to this, the S&P result has experienced a pre-tax with profits strain of some GBP4.2m, principally in its pensions portfolio: this has resulted from the impact of declining short-term fixed-interest yields on reserving for the cost of guarantees within the with profits funds, together with relatively higher cash-based holdings within the investment funds in anticipation of rising interest rates. This outcome reflects the sensitivity of the S&P result to relatively small movements in yields and these adverse effects will reverse in a rising interest rate environment. A better guide to the underlying longer-term performance of S&P is given by the corresponding EEV result set out in the next section. As to the Movestic result, the tables above show a clearly improving trend on the IFRS basis, such that the core insurance risk and savings operations are now trading at break-even or slightly above, aided by the effect of the acquisition of the Aspis business in early 2010. EEV Result Supplementary information prepared in accordance with European Embedded Value ('EEV') principles issued in May 2004 by the European Insurance CFO Forum ('CFO Forum') supplemented by Additional Guidance on EEV Disclosures issued by the same body in October 2005, and set out in the financial statements on pages 43 to 59 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. In June 2008, the CFO Forum issued the European Insurance CFO Forum Market Consistent Embedded Value ('MCEV') Principles (Copywright Â© Stichting CFO Forum Foundation 2008). These principles, with which we had intended to comply with effect from 2009, represent a development of the existing European Embedded Value principles, which form the current basis of preparation of our 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. Further, in April 2011 the Forum withdrew the intention that the MCEV principles should be the only recognised format of embedded value reporting from 31 December 2011. We will continue to consider the appropriateness of retaining our current basis of presentation but have no current plans to adopt MCEV principles. The movement in Group European Embedded Value may be summarised as: Unaudited Year ended 6 months ended 30 June 31 December 2011 2010 2010 GBP000 GBP000 GBP000 EEV at beginning of period 354,636 262,585 262,585 Effect of modelling adjustments (5,267) 10,363 13,239 -------- -------- -------- EEV at beginning of period restated 349,369 272,948 275,824 Profit arising on acquisition of Aspis - 989 376 S&P - - 40,667 Result for the period net of tax CA 1,578 2,675 18,891 S&P 3,836 - (924) Movestic (6,323) (9,318) 3,052 Other group activities (629) (762) (2,295) Movement on non-controlling interest - - 118 Foreign exchange reserve movement 4,487 (947) 9,517 Dividends paid (12,174) (10,454) (16,340) Share capital issued - - 22,588 Disposal of Treasury shares - - 3,162 -------- -------- -------- EEV at end of period 340,144 255,131 354,636 ======== ======== ======== The dominant influences underlying the EEV outturn are: (i) modelling adjustments, net GBP5.3m adverse, so that the cumulative effects arising from this source over the 18-month period to 30 June 2011 are some GBP7.9m favourable. These effects arise principally within Movestic and generally reflect the ability to project cash flows at a greater level of granularity: the adjustments in respect of the six months ended 30 June 2011 are net of errors of some GBP7.7m adverse detected in the operation of Movestic's new model (further information is provided in Note 6 of the EEV Supplementary Information); (ii) an accretion of some GBP2.6m in the S&P result, in respect of a reduction in the prospective cost of guarantees within the with profits funds: while short-term fixed-interest yields are experiencing a short-term decline, a shift in the yield curve points to an improved outlook for longer-term investment returns; accordingly the overall S&P EEV result at GBP3.8m net of tax has proved resilient; (iii) less favourable investment conditions for Movestic, so that GBP6.2m of its EEV loss of GBP6.3m has arisen from investment market performance in its policyholder savings funds being significantly less than anticipated. While Movestic's result has benefited to the extent of GBP2.8m from the unwind of the discount rate and of GBP2.1m value added by new business in the period, these gains have been almost offset by an adverse impact of GBP5.0m arising from policy discontinuance. The full impact of Movestic-related losses has, however, been offset by a gain of GBP4.5m arising from the translation of Swedish Krona-denominated assets into sterling. A 4% appreciation of the Swedish Krona against sterling leads to an appreciation of some GBP5m in embedded value; and (iv) a relatively strong pre-tax CA performance, belied by its post-tax result, has sheltered the adverse impact of the GBP2.0m strengthening of expense reserves, referred to in 'IFRS Result' above. This additional reserve was entirely offset by favourable mortality experience variances of GBP0.4m, together with favourable policy lapse experience variances of Â£1.6m. Non-recurring adverse tax impacts have, however led to a somewhat muted result at the post-tax level. Shareholders' Equity and Embedded Value of Covered Business - EEV Basis The consolidated balance sheet prepared in accordance with EEV principles may be summarised as: Unaudited 30 June 2011 Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Value of in-force business 74,109 43,981 147,405 - 265,495 Other net assets 52,274 23,426 (33,557) 32,506 74,649 -------- -------- -------- -------- -------- 126,383 67,407 113,848 32,506 340,144 ======== ======== ======== ======== ======== Represented by: Embedded value (`EV') of regulated entities 126,383 106,794 112,457 - 345,634 Less: amount financed by borrowings - (39,387) - - (39,387) -------- -------- -------- -------- -------- EV of regulated entities attributable to shareholders 126,383 67,407 112,457 - 306,247 Net equity of other Group companies - - 1,391 32,506 33,897 -------- -------- -------- -------- -------- Shareholders' equity 126,383 67,407 113,848 32,506 340,144 ======== ======== ======== ======== ======== Unaudited 30 June 2010 Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Value of in-force business 73,581 - 114,493 - 188,074 Other net assets 58,523 - (22,970) 31,504 67,057 -------- -------- -------- -------- -------- 132,104 - 91,523 31,504 255,131 ======== ======== ======== ======== ======== Represented by: Embedded value (`EV') of regulated entities 132,104 - 93,717 - 225,821 Less: amount financed by borrowings - - - - - -------- -------- -------- -------- -------- EV of regulated entities attributable to shareholders 132,104 - 93,717 - 225,821 Net equity of other Group companies - - (2,194) 31,504 29,310 -------- -------- -------- -------- -------- Shareholders' equity 132,104 - 91,523 31,504 255,131 ======== ======== ======== ======== ======== 31 December 2010 Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Value of in-force business 79,360 41,307 144,748 - 265,415 Other net assets 70,348 22,673 (24,111) 20,311 89,221 -------- -------- -------- -------- -------- 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 financed by borrowings - (39,287) - - (39,287) -------- -------- -------- -------- -------- EV of regulated entities attributable to shareholders 149,708 63,980 121,069 - 334,757 Net equity of other Group companies - - (432) 20,311 19,879 -------- -------- -------- -------- -------- Shareholders' equity 149,708 63,980 120,637 20,311 354,636 ======== ======== ======== ======== ======== The tables below set out the components of the value of in-force business by major product line at each period end: Unaudited 30 June 2011 Number of policies CA S&P Movestic Total GBP000 GBP000 GBP000 GBP000 Endowment 47 7 15 69 Protection 51 6 - 57 Annuities 6 1 - 7 Pensions 46 139 76 261 Other 7 14 - 21 -------- -------- -------- -------- Total 157 167 91 415 ======== ======== ======== ======== Unaudited 30 June 2010 Number of policies CA S&P Movestic Total GBP000 GBP000 GBP000 GBP000 Endowment 52 - 15 67 Protection 55 - - 55 Annuities 5 - - 5 Pensions 50 - 74 124 Other 7 - - 7 -------- -------- -------- -------- Total 169 - 89 258 ======== ======== ======== ======== 31 December 2010 Number of policies CA S&P Movestic Total GBP000 GBP000 GBP000 GBP000 Endowment 50 8 15 73 Protection 52 6 - 58 Annuities 5 1 - 6 Pensions 48 143 75 266 Other 7 14 - 21 -------- -------- -------- -------- Total 162 172 90 424 ======== ======== ======== ======== Unaudited 30 June 2011 CA S&P Movestic Total Value in-force GBPm GBPm GBPm GBPm Endowment 31.8 7.9 12.8 52.5 Protection 46.9 2.0 - 48.9 Annuities (0.2) 1.4 - 1.2 Pensions 30.4 69.1 134.9 234.4 Other 2.1 0.4 - 2.5 -------- -------- -------- -------- Total at product level 111.0 80.8 147.7 339.5 Valuation adjustments â€ƒHolding company expenses (8.3) - - (8.3) â€ƒOther (24.1) (19.4) - (43.5) Cost of capital/frictional costs (1.0) (3.5) (0.2) (4.7) -------- -------- -------- -------- Value in-force pre-tax 77.6 57.9 147.5 283.0 Taxation (3.5) (14.0) - (17.5) -------- -------- -------- -------- Value in-force post-tax 74.1 43.9 147.5 265.5 ======== ======== ======== ======== Unaudited 30 June 2010 CA S&P Movestic Total Value in-force GBPm GBPm GBPm GBPm Endowment 36.6 - 12.7 49.3 Protection 46.3 - - 46.3 Annuities (0.2) - - (0.2) Pensions 33.3 - 102.0 135.3 Other - - - - -------- -------- -------- -------- Total at product level 116.0 - 114.7 230.7 Valuation adjustments â€ƒHolding company expenses (10.1) - - (10.1) â€ƒOther (27.7) - - (27.7) Cost of capital/frictional costs (0.9) - (0.2) (1.1) -------- -------- -------- -------- Value in-force pre-tax 77.3 - 114.5 191.8 Taxation (3.7) - - (3.7) -------- -------- -------- -------- Value in-force post-tax 73.6 - 114.5 188.1 ======== ======== ======== ======== 31 December 2010 CA S&P Movestic Total Value in-force GBPm GBPm GBPm GBPm Endowment 34.1 8.3 14.0 56.4 Protection 49.1 2.6 - 51.7 Annuities 0.5 1.5 - 2.0 Pensions 31.1 68.1 131.0 230.2 Other 1.7 0.7 - 2.4 -------- -------- -------- -------- Total at product level 116.5 81.2 145.0 342.7 Valuation adjustments â€ƒHolding company expenses (8.6) - - (8.6) â€ƒOther (23.4) (22.0) - (45.4) Cost of capital/frictional costs (1.0) (3.7) (0.3) (5.0) -------- -------- -------- -------- Value in-force pre-tax 83.5 55.5 144.7 283.7 Taxation (4.1) (14.2) - (18.3) -------- -------- -------- -------- Value in-force post-tax 79.4 41.3 144.7 265.4 ======== ======== ======== ======== 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. Principal Risks and Uncertainties Risk and uncertainties are assessed by reference to the extent to which they threaten, or potentially threaten, the ability of the Group to meet its core strategic objectives. These currently centre on the intention of the Group to maintain a reliable and progressive dividend policy. The specific principal risks and uncertainties subsisting within the Group are determined by the fact that: (i) the Group's core operations centre on the run-off of closed life and pensions businesses in the UK; (ii) notwithstanding this, the Group has a material segment, which comprises an open life and pensions business operating in a foreign jurisdiction; and (iii) these businesses are subject to local regulation, which significantly influences the amount of capital which they are required to retain and which may otherwise constrain the conduct of business. The following identifies the principal risks and uncertainties, together with a description of their actual or potential impact and of the way in which the Group seeks to control them. Insurance and financial risks relating to (i) insurance and investment contracts provided by the Group to policyholders and to investors and to (ii) Group-level investment activities are set out in Notes 5 and 6 respectively of the Company's published consolidated IFRS financial statements for the year ended 31 December 2010, where the information is provided on a segmented basis. The analysis below includes a re-presentation of the more significant risks identified therein on a generic basis. Risk Impact Control Adverse The Group provides benefits to The Group uses underwriting mortality/ policyholders in the event of techniques, reinsurance morbidity/ death or illness and to programmes and limits on levels longevity annuitants for their lifetime. of accepted risk on individuals, experience Premiums are partly fixed by in order to control the overall reference to mortality/morbidity level of risk. The Group has tables. To the extent that actual also retained the right on mortality or morbidity rates vary certain contracts to vary from the assumptions underlying premium rates in the light of product pricing, so more or less actual experience. profit will accrue to the Group. Notwithstanding this, the Group is exposed to the possible effects of pandemics, such as AIDS and SARS. The impact of overall mortality risk is mitigated to the extent that the Group has a portfolio of annuity contracts where the benefits cease on death. Adverse Persistency risk is the risk that The Group's exposure to persistency insurance policyholders or persistency risk is naturally experience investors in investment limited to the extent that, in contracts either discontinue closed life and pensions books, paying new premiums or investing which currently continue to new sums, or otherwise exercise comprise the larger part of the their rights to discontinue the Group's business, persistency contracts. Persistency rates rates tend to improve over time significantly lower than those due to policyholder/investor assumed will lead to reduced inertia. In Movestic a business Group profitability in the medium unit has been established to to long term. specifically focus on policy discontinuance and to develop measures to improve retention rates. Significant A significant part of the Group's Notwithstanding that individual and income and, therefore, overall fund mandates may give rise to prolonged profitability derives from fees diversification of risk and equity and received in respect of the that, within those funds, property management of policyholder and hedging techniques are used market falls investor funds. Fee levels are where appropriate, there is generally related to the value of clearly a significant residual funds under management and, as risk to adverse global equity the managed investment funds market conditions. The Group has overall comprise a significant taken the explicit decision not equity and property content, the to mitigate the residual risk, Group is particularly exposed to by way of hedging, because of the impact of significant and the significant cost relative to prolonged equity market falls. the risk: it does, however, Additionally, falls in equity and periodically review the costs of property values will increase the hedging. potential cost of investment guarantees in the S&P with profits funds. Adverse The Group maintains portfolios of The Group maintains rigorous movements in fixed interest securities (i) in matching programmes to ensure yields on order to match its insurance that exposure to mismatch loss fixed contract liabilities, in terms of is minimised: there may be some interest yield and cash flow reversal of the extent of loss securities characteristics, and (ii) as an through the natural effluxion of integral part of the investment time as dated securities funds it manages on behalf of approach their redemption date. policyholders and investors. It The Group does not seek to hedge is exposed to mismatch losses against adverse movements in arising from a failure to match fixed interest securities, as its insurance contract the cost is prohibitive when liabilities or from the fact that compared with the residual risk. sharp and discrete fixed interest The proportion of fixed interest yield movements may not be securities in policyholder and associated fully and immediately investor managed funds is with corresponding changes in significantly less than the actuarial valuation interest proportion of equities. rates. Additionally, a fall in fixed interest yields will increase the potential cost of guarantees within the S&P with profits funds. Expense For the closed UK life and For the UK businesses, the Group overruns pensions businesses, the Group is pursues a strategy of exposed to the impact of fixed outsourcing functions, to the and semi-fixed expenses, in fullest extent possible, to conjunction with a diminishing specialist outsourced services policy base, on profitability. providers. It seeks to do this For the Swedish open life and on pricing terms which recognise pensions business, the Group is the diminishing policy base and exposed to the impact of expense which, in respect of contract levels varying adversely from renewal, seeks to maintain those assumed in product pricing. competitive tension between service providers. For the Swedish business, periodic reviews are conducted to ensure that overall expense levels are appropriate, based on activity analysis and on medium-term projections. In addition, for both the UK and Swedish businesses, the Group maintains a strict regime of budgetary control. Adverse The Swedish business, whose The Group actively monitors sterling: functional and reporting currency exchange rate movements and the Swedish is the Swedish Krona, is a cost of hedging the currency Krona material part of the Group. risk on cash flows when exchange Exposure to adverse sterling/ appropriate. The Group does not rate Swedish Krona exchange rate currently seek to hedge the risk movements movements arises from actual of adverse currency movements on planned cash flows between the its reported results. Swedish subsidiary and its UK parent company and from the impact on reported IFRS and EEV results which are expressed in sterling. Counterparty The Group carries significant Risk to counterparty failure is failure inherent risk of counterparty mitigated generally by the failure in respect of; operation of guidelines which limit the level of exposure to - its fixed interest security any one counterparty and which portfolio; impose limits on exposure to credit ratings. In respect of - cash deposits; and exposure to one major reinsurer, Guardian Assurance plc - amounts due from reinsurers. ('Guardian'), the Group has a floating charge over the reinsurer's related investment assets, which ranks the Group equally with Guardian's policyholders. In addition, the Group reviews the regulatory returns filed by Guardian, in order to identify issues which may arise in connection with the financial viability of Guardian. Failure of The Group's UK life and pensions The Group specifies rigorous outsourced businesses are heavily dependent service level measures and service on outsourced service providers management information flows providers to to fulfil a significant number of under its contractual fulfil their core functions. In the arrangements. Following from contractual event of failure by either or this, the Group maintains obligations both service providers to fulfil continuing and close oversight their contractual obligations, in of the performance of both whole or in part, to the service providers. Under the requisite standards specified in terms of the contractual the contracts, the Group may arrangements the Group may suffer loss as its functions impose penalties and/or exercise degrade. step-in rights in the event of specified adverse circumstances. Key Man The nature of the Group is such The Group promotes the sharing dependency that, for both its Group-level of knowhow and expertise to the functions and for its UK life and fullest extent possible. It pensions operations, it relies on periodically reviews and a small, professional team. There assesses staffing levels, and, is, therefore, inevitably a where the circumstances of the concentration of experience and Group justify and permit, will knowhow within particular key enhance resource to ensure that individuals and the Group is, knowhow and expertise is more accordingly, exposed to the widely embedded. sudden loss of the services of these individuals. To minimise the risk of knowledge loss, the Group maintains succession plans and remuneration structures which comprise a retention element. Should a skills gap appear the Group seeks to utilise external resource until such time as a permanent solution can be identified. These processes are supplemented by the maintenance of procedures to assess the competence of, and training requirements for, all key individuals. Adverse The Group operates in The Group controls these risks regulatory jurisdictions which are currently and addresses the related and legal subject to significant change uncertainties by assessing changes arising from regulatory and legal potential outcomes and by taking requirements. These may either be appropriate action to minimise of a local nature, or of a wider the impact of adverse nature, following from EU-based circumstances. It monitors regulation and law. Significant industry comment and takes issues which have arisen and specialist professional advice, where there is currently where necessary. uncertainty as to their full impact on the Group include: It is in the nature of these issues, however, particularly in review of the UK tax regime in those areas where specific respect of life assurance regulatory rules and/or law have business; not yet been framed and implemented, that there remains the implementation of Solvency II significant uncertainty as to requirements; their impact on the Group's longer-term profitability and on the implications of a ruling made the capacity and capability of by the ECJ, applicable to its life and pensions insurance companies, in subsidiaries to distribute connection with gender; and regulatory determined surpluses. the impact of IFRS Insurance Accounting Phase 2 developments. The outcomes of these issues may variously impact the level of reported profitability in the Group and the capacity and capability of its life and pensions subsidiaries to distribute regulatory-determined surpluses; and Review of With profits Governance arrangements, following the issue of Consultation Paper 11/5 by the FSA. During the period, (i) the Swedish tax authorities withdrew their challenge to the tax treatment of fees rebated by investment fund managers and this area of uncertainty, which would have impacted Movestic, has now been satisfactorily resolved; and (ii) the UK Government has made statements regarding the ECJ ruling regarding the use of gender in pricing insurance which indicate that the effect on our UK businesses will be limited. In addition, insofar as the Group makes estimates and assumptions that affect the reported amounts of the following assets and liabilities, there is uncertainty as to the amounts at which they may eventually be settled or realised and as to the timing of settlement or realisation: (i) estimates of future benefits payments arising from long-term insurance contracts; (ii) fair value of investment contracts; (iii) liability for redress in respect of mortgage endowment misselling complaints; (iv) deferred acquisition costs and deferred income; (v) amortisation of acquired value of in-force business; (vi) insurance claim reserves; and (vii) insurance claim reserves - reinsurance recoverable. Detailed information on these items is provided in Note 3 of the Company's published consolidated financial statements for the year ended 31 December 2010. There have been no changes in the nature and incidence of the principal risks and uncertainties, referred to above, during the six months ended 30 June 2011, except as otherwise discussed above. Related Party Transactions There have been no related party transactions that have occurred during the first six months of the financial year that have materially affected the financial position or performance of the Group during that period and there have been no changes in the related party transactions described in the last annual report that could do so. 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 surplus 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. The Group continues to maintain a prudent approach to setting the valuation interest rates whereby it allows for default risk on matching corporate bonds, and thereby limits the liquidity premium taken credit for when assessing bond yields. A conservative allowance is made for the risk of default by means of a deduction from the redemption yield far higher than historical experience and then a cap on the resultant yield over the equivalent gilt is imposed. To ensure consistency of approach across the Group we have adopted an identical approach for CA and S&P which results in a less restrictive cap for CA than at prior reporting dates, but this has had no material impact because of the high credit quality of the bonds backing the CA business. Additionally, the CA Board continues to maintain their stance that permissive changes to regulationsintroduced 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: Unaudited 30 June 31 December 2011 2010 2010 GBPm GBPm GBPm Available capital resources (`CR') 52.1 58.2 44.1 -------- -------- -------- Long-term insurance capital requirement (`LTICR') 18.2 19.2 19.1 Resilience capital requirement (`RCR') 2.3 2.9 1.6 -------- -------- -------- Total capital resources requirement (`CRR') 20.5 22.1 20.7 -------- -------- -------- Target capital requirement cover 29.7 31.7 30.2 -------- -------- -------- Ratio of available CR to CRR 254% 263% 213% -------- -------- -------- Excess of CR over target requirements GBP22.4m GBP26.5m GBP13.9m ======== ======== ======== 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 GBP29.7m as at 30 June 2011 falls short of the Â£40m share capital component of CR, so it follows that GBP10.3m 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 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: Unaudited 30 June 31 December 2011 2010 2010 GBPm GBPm GBPm Available capital resources (`CR') 68.9 62.0 69.7 -------- -------- -------- Long-term insurance capital requirement (`LTICR') 23.9 23.6 24.3 Resilience capital requirement (`RCR') 1.7 1.9 1.7 -------- -------- -------- Total capital resources requirement (`CRR') 25.6 25.5 26.0 -------- -------- -------- Ratio of available CR to CRR 269% 243% 268% -------- -------- -------- Excess of CR over CRR GBP43.3m GBP36.5m GBP43.7m ======== ======== ======== The information as at 30 June 2010 relates to the period prior to the acquisition of S&P 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: Unaudited 30 June 31 December 2011 2010 2010 GBPm GBPm GBPm Available capital resources (CR) represented by: Share capital 1.3 1.1 1.2 Additional equity contributions 42.1 33.6 40.6 Accumulated deficit (19.6) (14.5) (18.5) -------- -------- -------- 23.8 20.2 23.3 -------- -------- -------- Regulatory capital resource requirement (CRR) 12.6 9.2 12.4 -------- -------- -------- Target requirement 18.9 13.8 18.6 -------- -------- -------- Ratio of CR to CRR 189% 220% 188% -------- -------- -------- Excess of CR over target requirements GBP4.9m GBP6.4m GBP4.7m ======== ======== ======== The Movestic Board, as a matter of policy, sets a minimum target of 150% of the regulatory capital requirement. Swedish solvency regulation requires that, to be fully admissible, a certain proportion of assets are 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: Unaudited 30 June 31 December 2011 2010 2010 GBPm GBPm GBPm Available group capital resources 119.2 106.9 121.2 Group regulatory capital requirement (60.3) (32.4) (60.6) -------- -------- -------- Excess 58.9 74.5 60.6 -------- -------- -------- Cover 198% 330% 200% ======== ======== ======== The regulatory requirement is that available Group capital resources should be at least 100% of the capital requirement. 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 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, based on the position as at 30 June 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 completed during June 2011 a full annual assessment, based on the position as at 31 December 2010, as a result of which it was concluded that the effective current capital requirement constraint on distributions to Chesnara is on the basis set out under 'Regulatory capital resources and requirements' above. This is likely to remain the position going forward for at least the short term. For the Group's Swedish business we have developed Movestic's ability to produce similar assessments, so that its capital assessment is aligned with UK practice. On this basis we conclude that the Group's capital requirements will continue to be driven by its regulatory capital resources. 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. EU Solvency II Framework We have continued to monitor developments in the EU Solvency II framework which will impact the UK and Swedish businesses. A Steering Group continues to oversee our implementation of the regulations, which are due to become effective on 1 January 2013: however, the exact date is currently being reconsidered by the EU and may be deferred to 2014. 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 have formulated a detailed implementation plan. Going Concern Statement After making appropriate enquiries, the Directors confirm that they are satisfied that the Company and the Group have adequate resources to continue in business for the foreseeable future. In making these enquiries, the Directors have taken account of the current economic environment, including global investment market volatility, reflected by falling equity markets and fluctuating yields on fixed-interest investments. The impact of these movements has been assessed by sensitivity analysis on Group cash flow and on regulatory solvency measures at the subsidiary and Group level. As a result, we continue to adopt the going concern basis in the preparation of the financial statements. Outlook These results highlight some of the effects that equity markets and interest rate movements can have on our performance. Whilst these effects have given rise to some volatility in the reported results, the underlying picture is one of a robust cash-generating business in CA, a strong and longer-term surplus generator in S&P and Movestic's core business entering into profit territory. We will remain focused on the efficient management of these businesses to ensure that we can deliver on our dividend aims. We will also continue to seek to acquire further businesses which will prolong our ability to deliver a dividend stream and/or offer significant value uplift to shareholders. Dividend We have signalled that we aim to provide a reliable and progressive dividend payment. With the underlying cash flow generated by the emergence of surplus from the UK business remaining healthy and our solvency position remaining strong, the Board is pleased to be able to declare an interim dividend of 5.95p per share which represents an increase of 2.6% over the 2010 interim payment. Graham Kettleborough Chief Executive Officer 30 August 2011 DIRECTORS' RESPONSIBILITY STATEMENT IN RESPECT OF THE HALF YEARLY FINANCIAL REPORT Responsibility statement We confirm that to the best of our knowledge: the condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting'; the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein). By order of the Board Peter Mason Graham Kettleborough Chairman Chief Executive Officer 30 August 2011 30 August 2011 INDEPENDENT AUDITOR'S REVIEW REPORT TO THE MEMBERS OF CHESNARA PLC IN RESPECT OF THE HALF YEARLY FINANCIAL REPORT We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2011 which comprises the condensed consolidated statement of comprehensive income, the condensed consolidated balance sheet, the condensed consolidated statement of cash flows, the condensed consolidated statement of changes in equity and related Notes 1 to 6. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. This report is made solely to the Company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the Company those matters we are required to state to them in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our review work, for this report, or for the conclusions we have formed. Directors' responsibilities The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority. As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting," as adopted by the European Union. Our responsibility Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. Scope of Review We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2011 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority. Deloitte LLP Chartered Accountants and Statutory Auditor Manchester United Kingdom 30 August 2011 CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE SIX MONTHS ENDED 30 JUNE 2011 Unaudited Year Six months ended ended 30 June 31 December 2011 2010 2010 Note GBP000 GBP000 GBP000 Insurance premium revenue 62,880 59,044 114,950 Insurance premium ceded to reinsurers (17,562) (18,999) (35,695) -------- -------- -------- Net insurance premium revenue 45,318 40,045 79,255 Fee and commission income 34,840 33,858 63,410 Net investment return 9,876 (150) 303,850 -------- -------- -------- Total revenue (net of reinsurance payable) 90,034 73,753 446,515 Other operating income 11,763 7,028 9,216 -------- -------- -------- Total income 101,797 80,781 455,731 -------- -------- -------- Insurance contract claims and benefits incurred â€ƒClaims and benefits paid to insurance contract holders (140,796) (64,345) (139,424) â€ƒNet decrease/(increase) in insurance contract provisions 56,452 14,006 (106,618) â€ƒReinsurers' share of claims and benefits 13,277 15,049 45,635 -------- -------- -------- Net insurance contract claims and (71,067) (35,290) (200,407) -------- -------- -------- Change in investment contract liabilities 13,584 (465) (180,021) Reinsurers' share of investment contract liabilities 326 (303) 3,904 -------- -------- -------- Net change in investment contract liabilities 13,910 (768) (176,117) -------- -------- -------- Fees, commission and other acquisition costs (8,855) (7,630) (14,688) Administrative expenses (17,722) (13,272) (29,375) Other operating expenses â€ƒCharge for amortisation of acquired value of in-force business (4,554) (5,636) (8,107) â€ƒCharge for amortisation of acquired value of customer relationships (383) (442) (952) â€ƒOther (6,983) (6,003) (7,098) -------- -------- -------- Total expenses (95,654) (69,041) (436,744) -------- -------- -------- Total income less expenses 6,143 11,740 18,987 Share of profit/(loss) of associates 293 (101) 597 Profit recognised on business combinations - 989 15,864 -------- -------- -------- Operating profit 6,436 12,628 35,448 Financing costs (2,626) (650) (1,280) -------- -------- -------- Profit before income taxes 4 3,810 11,978 34,168 Income tax expense (603) (4,194) (4,467) -------- -------- -------- Profit for the period 3,207 7,784 29,701 -------- -------- -------- Attributable to: â€ƒShareholders 2,4 3,207 7,824 29,819 â€ƒNon-controlling interest - (40) (118) -------- -------- -------- 3,207 7,784 29,701 Foreign exchange translation differences arising on the revaluation of foreign operations 1,972 (329) 4,285 -------- -------- -------- Total comprehensive income for the period 5,179 7,455 33,986 ======== ======== ======== Attributable to: â€ƒShareholders 5,179 7,495 34,104 â€ƒNon-controlling interest - (40) (118) -------- -------- -------- 5,179 7,455 33,986 ======== ======== ======== Basic earnings per share (based on profit for the period attributable to shareholders) 2 2.79p 7.71p 29.05p ======== ======== ======== Diluted earnings per share (based on profit for the period attributable to shareholders) 2 2.79p 7.71p 29.05p ======== ======== ======== CONDENSED CONSOLIDATED BALANCE SHEET AT 30 JUNE 2011 Unaudited Year Ended 30 June 31 December 2011 2010 2010 Note GBP000 GBP000 GBP000 Assets Intangible assets â€ƒDeferred acquisition costs 17,651 10,914 14,659 â€ƒAcquired value of in-force business 90,892 80,348 93,046 â€ƒAcquired value of customer relationships 2,761 3,498 3,032 â€ƒSoftware assets 7,405 5,456 6,829 Property and equipment 513 681 671 Investment in associates 2,150 943 1,783 Investment properties 125,684 3,355 120,820 Reinsurers' share of insurance contract provisions 277,482 239,078 280,743 Amounts deposited with reinsurers 30,058 26,571 30,264 Financial assets Equity securities at fair value through income 460,834 397,509 492,321 Holdings in collective investment schemes at fair value through income 3,153,838 1,537,247 3,177,265 Debt securities at fair value through income 319,406 380,057 319,516 Policyholders' funds held by the group 57,899 44,336 52,337 Insurance and other receivables 119,506 27,477 33,225 Prepayments 4,197 3,396 3,908 Derivative financial instruments 7,022 7,405 9,707 -------- -------- -------- Total financial assets 4,122,702 2,397,427 4,088,279 -------- -------- -------- Reinsurers' share of accrued policyholder claims 4,685 3,996 3,678 Income taxes 5,096 941 5,486 Cash and cash equivalents 168,820 174,183 194,134 Assets held for sale - - 380 -------- -------- -------- Total assets 4 4,855,899 2,947,391 4,843,804 -------- -------- -------- Liabilities Liabilities held for sale - - 380 Bank overdrafts 1,729 1,590 2,154 Insurance contract provisions 2,346,571 1,065,147 2,404,079 Unallocated divisible surplus - - 83 Financial liabilities â€ƒInvestment contracts at fair value through income 2,055,139 1,564,816 2,002,712 â€ƒLiabilities relating to policyholders' funds held by the group 57,899 44,336 52,337 â€ƒBorrowings 5 61,293 22,452 62,694 â€ƒDerivative financial instruments 1,103 1,542 137 -------- -------- -------- Total financial liabilities 2,175,434 1,633,146 2,117,880 -------- -------- -------- Provisions 1,480 1,696 1,822 Deferred tax liabilities 17,994 9,558 20,526 Reinsurance payables 16,455 22,105 22,310 Payables related to direct insurance and investment contracts 39,887 29,139 35,808 Deferred income 11,013 12,254 11,647 Income taxes 7,202 7,543 6,923 Other payables 41,860 8,417 16,923 -------- -------- -------- Total liabilities 4 4,659,625 2,790,595 4,640,535 -------- -------- -------- Net assets 196,274 156,796 203,269 ======== ======== ======== Shareholders' equity Share capital 42,024 41,501 42,024 Share premium 42,523 20,458 42,523 Treasury shares (217) (3,379) (217) Other reserves 9,688 3,102 7,716 Retained earnings 3 102,256 95,114 111,223 -------- -------- -------- Total shareholders' equity 196,274 156,796 203,269 Non-controlling interest - - - -------- -------- -------- Total equity 196,274 156,796 203,269 ======== ======== ======== CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED 30 JUNE 2011 Unaudited Six months ended Year ended 30 June 31 December 2011 2010 2010 GBP000 GBP000 GBP000 Profit for the period 3,207 7,824 29,819 Adjustments for: â€ƒDepreciation of property and equipment 110 148 294 â€ƒAmortisation of deferred acquisition costs 3,618 3,040 5,737 â€ƒAmortisation of acquired value of in-force business 4,554 5,637 8,148 â€ƒAmortisation of acquired value of customer relationships 383 442 1,182 â€ƒAmortisation of software assets 910 527 1,176 â€ƒTax expense 603 4,194 4,467 â€ƒInterest receivable (14,378) (6,752) (16,913) â€ƒDividends receivable (21,915) (13,749) (31,090) Interest expense 2,626 650 1,280 Change in fair value of investment properties (2,088) - (113) Fair value losses/(gains) on financial assets 24,688 31,095 (252,456) Loss/(profit) on sale of property and equipment 50 (2) 2 Profit arising on business combination - (989) (15,864) Share of (profit)/loss of associate net of impairment (293) 101 (597) Interest received 13,837 6,363 16,370 Dividends received 12,832 13,064 30,792 Increase in intangible assets related to insurance and investment contracts (6,253) (4,479) (10,343) Changes in operating assets and liabilities Decrease/(increase) in financial assets 74,752 (44,764) (78,785) Decrease/(increase) in reinsurers share of insurance contract provisions 3,950 (1,859) (31,471) Decrease/(increase) in amounts deposited with reinsurers 206 485 (3,208) (Increase)/decrease in insurance and other receivables (75,453) (6,983) 1,305 (Increase)/decrease in prepayments (198) 376 80 Decrease/(increase) in assets held for sale 388 - (380) (Decrease)/increase in liabilities held for sale (388) - 380 (Decrease)/increase in insurance contract provisions (60,042) (14,575) 121,382 Increase in investment contract liabilities 7,415 50,682 270,801 (Decrease)/increase in provisions (342) 244 370 (Decrease)/increase in reinsurance payables (6,536) 7,422 5,677 Increase/(decrease) in payables related to direct insurance and investment contracts 3,844 (1,119) (6,050) Increase/(decrease) in other payables 24,392 4,564 (422) -------- -------- -------- Cash (utilised by)/generated from operating activities (5,521) 41,587 51,570 Income tax paid (2,125) (4,694) (4,537) -------- -------- -------- Net cash (utilised by)/generated from operating activities (7,646) 36,893 47,033 ======== ======== ======== Cash flows from investing activities Business combinations net of cash acquired - 1,830 (46,483) Investment in associates - - (38) Development of software (1,217) (1,079) (2,541) Purchases of property and equipment 18 (193) (296) -------- -------- -------- Net cash (utilised by)/generated from investing activities (1,199) 558 (49,358) ======== ======== ======== 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 (2,149) (6,177) (7,236) Dividends paid (12,174) (10,454) (16,340) Interest paid (2,648) (853) (2,365) -------- -------- -------- Net cash (utilised by)/generated from financing activities (16,971) (17,484) 39,809 ======== ======== ======== Net (decrease)/increase in cash and cash equivalents (25,816) 19,967 37,484 Cash and cash equivalents at beginning of the year 191,980 152,929 152,929 Effect of exchange rate changes on cash and cash equivalents 927 (303) 1,567 -------- -------- -------- Cash and cash equivalents at end of the period 167,091 172,593 191,980 ======== ======== ======== CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE SIX MONTHS ENDED 30 JUNE 2011 Unaudited six months ended 30 June 2011 Share Share Other Treasury Retained capital premium reserves shares earnings Total GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 Equity shareholders' funds at 1 January 2011 42,024 42,523 7,716 (217) 111,223 203,269 Profit for the period attributable to shareholders - - - - 3,207 3,207 Dividends paid - - - - (12,174) (12,174) Foreign exchange translation reserve - - 1,972 - - 1,972 -------- -------- -------- -------- -------- -------- Equity shareholders' funds at 30 June 2011 42,024 42,523 9,688 (217) 102,256 196,274 ======== ======== ======== ======== ======== ======== Unaudited six months ended 30 June 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 attributable to shareholders - - - - 7,824 7,824 Dividends paid - - - - (10,454) (10,454) Foreign exchange translation reserve - - (329) - - (329) -------- -------- -------- -------- -------- -------- Equity shareholders' funds at 30 June 2010 41,501 20,458 3,102 (3,379) 95,114 156,796 ======== ======== ======== ======== ======== ======== 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 year attributable to shareholders - - - - 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 translation reserve - - 4,285 - - 4,285 -------- -------- -------- -------- -------- -------- Equity shareholders' funds at 31 December 2010 42,024 42,523 7,716 (217) 111,223 203,269 ======== ======== ======== ======== ======== ======== NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1 Basis of preparation This condensed set of consolidated financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the EU. As required by the Disclosure and Transparency Rules of the Financial Services Authority, the condensed set of consolidated financial statements has been prepared applying the accounting policies and presentation that were applied in the preparation of the Group's published consolidated financial statements for the year ended 31 December 2010, which were prepared in accordance with IFRS as adopted by the EU. Any judgements and estimates applied in the condensed set of financial statements are consistent with those applied in the preparation of the Group's published consolidated financial statements for the year ended 31 December 2010. The financial information shown in this half-year review is unaudited and does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. The comparative figures for the financial year ended 31 December 2010 are not the Company's statutory accounts for that financial year. Those accounts have been reported on by the Company's auditors and delivered to the Registrar of Companies. The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statements under section 498(2) or (3) of the Companies Act 2006. 2 Earnings per share Earnings per share are based on the following: Unaudited Year ended Six months ended 30 June 31 December 2011 2010 2010 Profit for the year attributable to shareholders (GBP000) 3,207 7,824 29,819 -------- -------- -------- Weighted average number of ordinary shares 114,848,651 101,492,591 102,642,750 -------- -------- -------- Basic earnings per share 2.79p 7.71p 29.05p -------- -------- -------- Diluted earnings per share 2.79p 7.71p 29.05p ======== ======== ======== The weighted average number of ordinary shares in respect of the six months ended 30 June 2011 is based on 115,047,662 shares in issue at the beginning and end of the period less 199,011 own shares held in treasury at the beginning and end of the period. The weighted average number of ordinary shares in respect of the six months ended 30 June 2010 is based on 104,588,785 shares in issue at the beginning and end of the period less 3,096,194 own shares held in treasury at the beginning and end of the period. 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 year 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. 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. There were no share options outstanding during the periods under review. Accordingly, there is no dilution of the average number of ordinary shares in issue in respect of these periods. 3 Retained earnings Unaudited Year Six months ended ended 30 June 31 December 2011 2010 2010 GBP000 GBP000 GBP000 Retained earnings attributable to equity holders of the parent company comprise Balance at 1 January 111,223 97,744 97,744 Profit for the period 3,207 7,824 29,819 Dividends â€ƒFinal approved and paid for 2009 - (10,454) (10,454) â€ƒInterim approved and paid for 2010 - - (5,886) â€ƒFinal approved and paid for 2010 (12,174) - - -------- -------- -------- Balance at 30 June / 31 December 102,256 95,114 111,223 ======== ======== ======== The interim dividend in respect of 2010, approved and paid in 2010, was paid at the rate of 5.80p per share. The final dividend in respect of 2010, approved and paid in 2011, was paid at the rate of 10.60p per share so that the total dividend paid to the equity shareholders of the parent company in respect of the year ended 31 December 2010 was made at the rate of 16.40p per share. An interim dividend of 5.95p per share in respect of the year ending 31 December 2011, payable on 14 October 2011 to equity shareholders of the parent company registered at the close of business on 9 September 2011, the dividend record date, was approved by the Directors after 30 June 2011. The resulting interim dividend of GBP6.8m has not been provided in these financial statements. The following summarises dividends per share in respect of the year ended 31 December 2010 and 31 December 2011: 2011 2010 p p Interim dividend 5.95 5.80 ======== Final dividend 10.60 -------- Total 16.40 ======== 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 30 June 2011 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. There were no changes to the basis of segmentation during the six months ended 30 June 2011. 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 six months ended 30 June 2011 and the year ended 31 December 2010. (i) Segmental income statement for the year ended 30 June 2011 Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Insurance premium revenue 37,545 5,727 19,608 - 62,880 Insurance premium ceded to reinsurers (6,588) (130) (10,844) - (17,562) -------- -------- -------- -------- -------- Net insurance premium revenue 30,957 5,597 8,764 - 45,318 Fee and commission income 19,918 752 14,170 - 34,840 Net investment return 25,815 14,183 (30,233) 111 9,876 -------- -------- -------- -------- -------- Total revenue (net of reinsurance payable) 76,690 20,532 (7,299) 111 90,034 Other operating income 1,994 3,275 6,494 - 11,763 -------- -------- -------- -------- -------- Segmental income 78,684 23,807 (805) 111 101,797 -------- -------- -------- -------- -------- Insurance contract claims and benefits incurred Claims and benefits paid to insurance contract holders (78,007) (54,632) (8,157) - (140,796) Net decrease in insurance contract provisions 19,526 35,594 1,332 - 56,452 Reinsurers' share of claims and benefits 10,070 47 3,160 - 13,277 -------- -------- -------- -------- -------- Net insurance contract claims and benefits incurred (48,411) (18,991) (3,665) - (71,067) -------- -------- -------- -------- -------- Change in investment contract liabilities (15,093) (1,758) 30,435 - 13,584 Reinsurers' share of investment contract liabilities 326 - - - 326 -------- -------- -------- -------- -------- Net change in investment contract liabilities (14,767) (1,758) 30,435 - 13,910 -------- -------- -------- -------- -------- Fees, commission and other acquisition costs (577) (33) (8,245) - (8,855) Administrative expenses (4,574) (3,765) (8,211) (1,172) (17,722) Other operating expenses Charge for amortisation of acquired value of in-force business (1,835) (482) (2,237) - (4,554) Charge for amortisation of acquired value of customer relationships - - (383) - (383) Other (508) - (6,530) 55 (6,983) -------- -------- -------- -------- -------- Segmental expenses (70,672) (25,029) 1,164 (1,117) (95,654) -------- -------- -------- -------- -------- Segmental income less expenses 8,012 (1,222) 359 (1,006) 6,143 Share of profit from associates - - 293 - 293 Profit recognised on acquisition of subsidiary - - - - - -------- -------- -------- -------- -------- Segmental operating profit/(loss) 8,012 (1,222) 652 (1,006) 6,436 Financing costs - (25) (1,871) (730) (2,626) -------- -------- -------- -------- -------- Profit/(loss) before tax 8,012 (1,247) (1,219) (1,736) 3,810 Income tax (expense)/ credit (1,131) 809 (281) - (603) Non-controlling interest - - - - - -------- -------- -------- -------- -------- Profit/(loss) after tax attributable to shareholders 6,881 (438) (1,500) (1,736) 3,207 ======== ======== ======== ======== ======== (ii) Segmental income statement for the year ended 30 June 2010 Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Insurance premium - revenue 41,851 17,193 - 59,044 Insurance premium ceded - to reinsurers (7,391) (11,608) - (18,999) -------- -------- -------- -------- -------- Net insurance premium - revenue 34,460 5,585 - 40,045 Fee and commission - income 21,379 12,479 - 33,858 Net investment return (7,947) - 7,689 108 (150) -------- -------- -------- -------- -------- Total revenue (net of reinsurance payable) 47,892 - 25,753 108 73,753 Other operating income 1,560 - 5,468 - 7,028 -------- -------- -------- -------- -------- Segmental income 49,452 - 31,221 108 80,781 -------- -------- -------- -------- -------- Insurance contract claims and benefits incurred Claims and benefits paid to insurance contract holders (58,361) - (5,984) - (64,345) Net (increase)/decrease in insurance contract provisions 18,318 - (4,312) - 14,006 Reinsurers' share of claims and benefits 7,888 - 7,161 - 15,049 -------- -------- -------- -------- -------- Net insurance contract claims and benefits incurred (32,155) - (3,135) - (35,290) -------- -------- -------- -------- -------- Change in investment contract liabilities 7,673 - (8,138) - (465) Reinsurers' share of investment contract liabilities (303) - - - (303) -------- -------- -------- -------- -------- Net change in investment contract liabilities 7,370 - (8,138) - (768) -------- -------- -------- -------- -------- Fees, commission and other acquisition costs (711) - (6,919) - (7,630) Administrative expenses (4,723) - (7,659) (890) (13,272) Other operating expenses Charge for amortisation of acquired value of in-force business (1,847) - (3,789) - (5,636) Charge for amortisation of acquired value of customer relationships - - (442) - (442) Other (591) - (5,466) 54 (6,003) -------- -------- -------- -------- -------- Segmental expenses (32,657) - (35,548) (836) (69,041) -------- -------- -------- -------- -------- Segmental income less expenses 16,795 - (4,327) (728) 11,740 Share of profit from associates - - (101) - (101) Profit recognised on acquisition of subsidiary - - 989 - 989 -------- -------- -------- -------- -------- Segmental operating profit/(loss) 16,795 - (3,439) (728) 12,628 Financing costs - - (621) (29) (650) -------- -------- -------- -------- -------- Profit/(loss) before tax 16,795 - (4,060) (757) 11,978 Income tax (expense)/ credit (4,238) - 44 - (4,194) Non-controlling interest - - 40 - 40 -------- -------- -------- -------- -------- Profit/(loss) after tax attributable to shareholders 12,557 - (3,976) (757) 7,824 ======== ======== ======== ======== ======== (iii) 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 - ceded to reinsurers (14,563) (21,132) - (35,695) -------- -------- -------- -------- -------- Net insurance premium revenue 65,594 372 13,289 - 79,255 Fee and commission income 38,532 77 24,801 - 63,410 Net investment return 178,664 16,949 108,023 214 303,850 -------- -------- -------- -------- -------- Total revenue (net of reinsurance payable) 282,790 17,398 146,113 214 446,515 Other operating income 3,481 201 5,534 - 9,216 -------- -------- -------- -------- -------- 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 claims and benefits 37,084 - 8,551 - 45,635 -------- -------- -------- -------- -------- Net insurance contract claims and benefits incurred (177,138) (17,167) (6,102) - (200,407) -------- -------- -------- -------- -------- Change in investment contract liabilities (71,672) - (108,349) - (180,021) Reinsurers' share of investment contract liabilities 3,904 - - - 3,904 -------- -------- -------- -------- -------- Net change in investment contract liabilities (67,768) - (108,349) - (176,117) -------- -------- -------- -------- -------- 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 expenses Charge for amortisation of acquired value of in-force business (3,661) - (4,446) - (8,107) Charge for amortisation of acquired value of customer relationships - - (952) - (952) Other (1,236) - (6,072) 210 (7,098) -------- -------- -------- -------- -------- Segmental expenses (260,579) (17,375) (154,764) (4,026) (436,744) -------- -------- -------- -------- -------- Segmental income less expenses 25,692 224 (3,117) (3,812) 18,987 Share of profit from associates - - 597 - 597 Profit recognised on acquisition of subsidiary - - 376 15,488 15,864 -------- -------- -------- -------- -------- 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 interest - - 118 - 118 -------- -------- -------- -------- -------- Profit/(loss) after tax attributable to shareholders 20,952 161 (3,060) 11,766 29,819 ======== ======== ======== ======== ======== (iv) Segmental balance sheet as at 30 June 2011 Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Intangible assets 25,645 8,573 84,491 - 118,709 Property and equipment 64 - 449 - 513 Investment in associates - - 2,150 - 2,150 Reinsurers' share of insurance contract provisions 226,047 7,410 44,025 - 277,482 Amounts deposited with reinsurers 30,058 - - - 30,058 Investment properties 648 125,036 - - 125,684 Financial assets 1,501,862 1,240,745 1,379,731 364 4,122,702 Reinsurers' share of accrued policyholder claims 4,599 86 - - 4,685 Income tax - 5,072 24 - 5,096 Cash and cash equivalents 106,468 4,690 24,493 33,169 168,820 Assets held for sale - - - - - -------- -------- -------- -------- -------- Total assets 1,895,391 1,391,612 1,535,363 33,533 4,855,899 -------- -------- -------- -------- -------- Liabilities held for sale - - - - - Bank overdrafts 1,474 255 - - 1,729 Insurance contract provisions 1,106,865 1,174,704 65,002 - 2,346,571 Unallocated divisible surplus - - - - - Investment contracts at fair value through income 644,751 108,361 1,302,027 - 2,055,139 Liabilities relating to policyholders' funds held by the group - - 57,899 - 57,899 Borrowings - - 21,906 39,387 61,293 Derivative financial instruments 8 1,095 - - 1,103 Provisions 1,480 - - - 1,480 Deferred tax liabilities 6,591 10,505 898 - 17,994 Reinsurance payables 1,802 20 14,633 - 16,455 Payables related to direct insurance and investment contracts 22,240 10,678 6,969 - 39,887 Deferred income 11,013 - - - 11,013 Income taxes 1,828 1,151 4,223 - 7,202 Other payables 25,828 6,136 8,535 1,361 41,860 -------- -------- -------- -------- -------- Total liabilities 1,823,880 1,312,905 1,482,092 40,748 4,659,625 -------- -------- -------- -------- -------- Net assets 71,511 78,707 53,271 (7,215) 196,274 Non-controlling interest - - - - - -------- -------- -------- -------- -------- Net assets attributable to shareholders 71,511 78,707 53,271 (7,215) 196,274 ======== ======== ======== ======== ======== (v) Segmental balance sheet as at 30 June 2010 Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Intangible assets 30,093 - 70,123 - 100,216 Property and equipment - - 681 - 681 Investment in associates - - 943 - 943 Reinsurers' share of insurance contract provisions 208,715 - 30,363 - 239,078 Amounts deposited with reinsurers 26,571 - - - 26,571 Investment properties 3,355 - - - 3,355 Financial assets 1,350,351 - 1,046,773 303 2,397,427 Reinsurers' share of accrued policyholder claims 3,996 - - - 3,996 Income tax 546 - - 395 941 Cash and cash equivalents 123,603 - 19,125 31,455 174,183 Assets held for sale - - - - - -------- -------- -------- -------- -------- Total assets 1,747,230 - 1,168,008 32,153 2,947,391 -------- -------- -------- -------- -------- Liabilities held for sale - - - - - Bank overdrafts 1,590 - - - 1,590 Insurance contract provisions 1,023,893 - 41,254 - 1,065,147 Unallocated divisible surplus - - - - - Investment contracts at fair value through income 584,921 - 979,895 - 1,564,816 Liabilities relating to policyholders' funds held by the group - - 44,336 - 44,336 Borrowings - - 22,452 - 22,452 Derivative financial instruments 1,542 - - - 1,542 Provisions 1,696 - - - 1,696 Deferred tax liabilities 8,870 - 686 2 9,558 Reinsurance payables 2,476 - 19,629 - 22,105 Payables related to direct insurance and investment contracts 19,975 - 9,164 - 29,139 Deferred income 12,254 - - - 12,254 Income taxes 4,600 - 2,943 - 7,543 Other payables 3,178 - 4,261 978 8,417 -------- -------- -------- -------- -------- Total liabilities 1,664,995 - 1,124,620 980 2,790,595 -------- -------- -------- -------- -------- Net assets 82,235 - 43,388 31,173 156,796 Non-controlling interest - - - - - -------- -------- -------- -------- -------- Net assets attributable to shareholders 82,235 - 43,388 31,173 156,796 ======== ======== ======== ======== ======== (vi) 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 4,640,535 -------- -------- -------- -------- -------- 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 ======== ======== ======== ======== ======== 5 Borrowings Unaudited 30 June 31 December 2011 2010 2010 GBP000 GBP000 GBP000 Bank loan 39,387 - 39,287 Amount due in relation to financial reinsurance 21,906 22,340 23,406 Other - 112 1 -------- -------- -------- Total 61,293 22,452 62,694 ======== ======== ======== The bank loan, 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 30 June 2011 was GBP40,000,000 (31 December 2010: GBP40,000,000). The fair value of amounts due in relation to financial reinsurance as at 30 June 2011 was GBP22,314,675 (30 June 2010: GBP22,885,000 and 31 December 2010: GBP24,590,409). The fair value of other borrowings was not materially different from its carrying value at any of the period ends under review. 6 Approval of consolidated report for the six months ended 30 June 2011 This condensed consolidated report was approved by the Board of Directors on 30 August 2011. A copy of the report will be available to the public at the Company's registered office, Harbour House, Portway, Preston, PR2 2PR, UK and at www.chesnara.co.uk. STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION The Directors have chosen to prepare Supplementary Information in accordance with the EEV Principles issued in May 2004 by the CFO Forum of European Insurance Companies and expanded by the Additional Guidance on European Embedded Value Disclosures issued in October 2005. When compliance with the EEV Principles is stated, those principles require the Directors to prepare supplementary information in accordance with the Embedded Value Methodology (`EVM') contained in the EEV Principles and to disclose and explain any non-compliance with the EEV guidance included in the EEV Principles. In preparing the EEV supplementary information, the Directors have: â— Prepared the supplementary information in accordance with the EEV Principles; â— Identified and described the business covered by the EVM; â— Applied the EVM consistently to the covered business; â— Determined assumptions on a realistic basis, having regard to past, current and expected future experience and to any relevant external data, and then applied them consistently; â— Made estimates that are reasonable and consistent; and â— Described the basis on which business that is not covered business has been included in the supplementary information, including any material departures from the accounting framework applicable to the Group's financial statements. INDEPENDENT AUDITOR'S REVIEW REPORT TO THE DIRECTORS OF CHESNARA PLC ON THE EEV BASIS SUPPLEMENTARY INFORMATION We have been engaged by the Company to review the Supplementary Information - European Embedded Value Basis in the half-yearly financial report for the six months ended 30 June 2011 which comprises the summarised consolidated income statement, the summarised consolidated balance sheet and the related notes 1 to 9. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the Supplementary Information - European Embedded Value Basis. We have reported separately on the condensed financial statements of Chesnara plc for the six months ended 30 June 2011. The information contained in the Supplementary Information - European Embedded Value Basis should be read in conjunction with the condensed set of financial statements prepared on an IFRS basis. This information is described within the Chesnara plc condensed set of financial statements in the half-yearly financial report as having been reviewed. This report is made solely to the Company's directors in accordance with our engagement letter and solely for the purpose of expressing an opinion as to whether anything has come to our attention that causes us to believe that the Supplementary information - European Embedded Value Basis for the six months ended 30 June 2011 is not prepared, in all material respects, 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. Our work has been undertaken so that we might state to the Company's directors those matters we are required to state to them in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company's directors, for our review work, for this report, or for the conclusions we have formed. Directors' responsibilities The Supplementary Information - European Embedded Value Basis is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the Supplementary Information - European Embedded Value Basis 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. Our responsibility Our responsibility in relation to the Supplementary Information - European Embedded Value Basis is to express to the Company a conclusion on the Supplementary Information - European Embedded Value Basis based on our review. Scope of Review We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the Supplementary information - European Embedded Value Basis for the six months ended 30 June 2011 is not prepared, in all material respects, 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. Deloitte LLP Chartered Accountants and Statutory Auditor Manchester, United Kingdom 30 August 2011 SUPPLEMENTARY INFORMATION - EUROPEAN EMBEDDED VALUE BASIS SUMMARISED CONSOLIDATED INTERIM INCOME STATEMENT FOR THE SIX MONTHS ENDED 30 JUNE 2011 Unaudited Year ended Six months ended 31 30 June December 2011 2010 2010 Note GBP000 GBP000 GBP000 Operating profit/(loss) of covered business 6 832 (4,679) 6,364 Other operational result (605) (2,662) (6,114) -------- -------- -------- Operating profit/(loss) 227 (7,341) 250 Variation from longer -term investment return 6 (4,698) 8,169 26,941 Effect of economic assumption changes 6 4,823 (5,834) (4,453) -------- -------- -------- Profit/(loss) before tax and before exceptional item 352 (5,006) 22,738 Exceptional items Profit recognised on business combinations 6 - 989 41,043 Effect of modelling adjustments 6 (5,267) 10,363 13,239 -------- -------- -------- (Loss)/profit before tax (4,915) 6,346 77,020 Tax 6 (1,890) (2,399) (4,014) -------- -------- -------- (Loss)/profit after tax (6,805) 3,947 73,006 -------- -------- -------- Attributable to: Shareholders (6,805) 3,947 73,124 Non-controlling interest - - (118) -------- -------- -------- (6,805) 3,947 73,006 ======== ======== ======== (Loss)/earnings per share Based on (loss)/profit for the period attributable to shareholders (5.93)p 3.89p 71.24p -------- -------- -------- Diluted (loss) /earnings per share Based on (loss) /profit for the period attributable to shareholders (5.93)p 3.89p 71.24p -------- -------- -------- SUPPLEMENTARY INFORMATION - EUROPEAN EMBEDDED VALUE BASIS SUMMARISED CONSOLIDATED BALANCE SHEET AS AT 30 JUNE 2011 Unaudited 31 30 June December 2011 2010 2010 Note GBP000 GBP000 GBP000 Assets Value of in force business 5,8 265,495 188,074 265,415 Deferred acquisition costs arising on unmodelled business 734 640 616 Acquired value of customer relationships 876 1,416 983 Software assets - 5,456 6,829 Property and equipment 513 681 671 Investment in associate 2,150 943 1,783 Reinsurers' share of insurance contract provisions 242,704 209,555 247,432 Amounts deposited with reinsurers 28,828 25,299 29,002 Investment properties 125,684 3,355 120,820 Deferred tax assets - 1,638 - Financial assets â€ƒEquity securities at fair value through income 460,834 397,509 492,321 â€ƒHoldings in collective schemes at fair value through income 3,153,838 1,537,247 3,177,265 â€ƒDebt securities at fair value through income 319,406 380,057 319,516 â€ƒInsurance and other receivables 119,506 27,477 33,234 â€ƒPrepayments 4,197 3,396 3,908 â€ƒPolicyholders' funds held by the group 57,899 44,336 52,337 â€ƒDerivative financial instruments 7,022 7,405 9,707 -------- -------- -------- Total financial assets 4,122,702 2,397,427 4,088,288 -------- -------- -------- Reinsurers' share of accrued policy claims 4,685 3,996 3,678 Income taxes 5,096 941 5,486 Cash and cash equivalents 168,820 174,183 194,134 Assets held for sale - - 380 -------- -------- -------- Total assets 4,968,287 3,013,604 4,965,517 -------- -------- -------- Liabilities Liabilities held for sale - - 380 Bank overdraft 1,729 1,590 2,154 Insurance contract provisions 2,309,733 1,035,702 2,370,948 Unallocated divisible surplus 13,349 - 14,930 Financial liabilities â€ƒInvestment contracts at fair value through income 2,065,127 1,578,342 2,010,954 â€ƒBorrowings 67,693 28,558 70,148 â€ƒDerivative financial instruments 1,103 1,542 137 â€ƒLiabilities relating to policyholders' funds held by the group 57,899 44,336 52,337 -------- -------- -------- Total financial liabilities 2,191,822 1,652,778 2,133,576 -------- -------- -------- Provisions 1,480 1,696 1,822 Deferred tax liabilities 5,087 - 5,578 Reinsurance payables 15,994 21,608 21,830 Payables related to direct insurance and investment contracts 39,887 29,139 35,808 Income taxes 7,202 7,543 6,923 Other payables 41,860 8,417 16,932 -------- -------- -------- Total liabilities 4,628,143 2,758,473 4,610,881 -------- -------- -------- Net assets 340,144 255,131 354,636 ======== ======== ======== Equity Share capital 42,024 41,501 42,024 Share premium 42,523 20,458 42,523 Treasury shares (217) (3,379) (217) Foreign exchange reserve 19,543 4,592 15,056 Other reserves 50 50 50 Retained earnings 236,221 191,909 255,200 -------- -------- -------- Total shareholders' equity 340,144 255,131 354,636 Non-controlling interest - - - -------- -------- -------- Total equity 340,144 255,131 354,636 ======== ======== ======== NOTES TO THE SUPPLEMENTARY INFORMATION (UNAUDITED) 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 condensed consolidated interim financial statements prepared on the IFRS basis. S&P was acquired on 20 December 2010: accordingly, the results relating thereto for the year ended 31 December 2010, as reflected in segmental analysis are for a period of 11 days. Prior year information in respect of the financial position as at 30 June 2010 and in respect of the results for the six months then ended is designated as Â£nil in respect of S&P, while other prior year data relating to S&P 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 as disclosed in the KPIs section on page 12 are not consistent with this definition, as they include non-covered business. New business premium volume for the period which is consistent with the analysis of profit/(loss) in Note 6 is as follows: Unaudited Six months ended Year ended Pensions and savings covered business 30 June 31 December 2011 2010 2010 GBPm GBPm GBPm New business premium income 16.8 14.1 26.9 -------- -------- -------- * Basis: annualised premium plus 1/10 single premium translated into sterling at the 2011 average rate of SEK 10.3 = 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, the value reported as at 30 June 2011 makes allowance for planned reductions in corporation tax, as announced by the Chancellor in his budget speech on 23 March 2011. Values as at 30 June 2010 and 31 December 2010 have not been restated to allow for this announcement. 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 The valuation approach used, 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. The value of the guarantee is ignored as it is 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 short to 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 the end of the reporting period. 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 (as at 30 June 2010 and as at 31 December 2010: 50 basis points) and 70 basis points for Movestic (as at 30 June 2010 and as at 31 December 2010: 70 basis points). 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; (ii) variances between the actual experience over the period and the assumptions 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 CA, 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 Unaudited Unaudited Unaudited 30 Jun 31 Dec 30 Jun 31 Dec 30 Jun 31 Dec 2011 2010 2010 2011 2010 2010 2011 2010 2010 Investment Return % 3.10 2.90 3.10 5 year 2.55 n/a 2.69 3.26 2.39 3.18 10 year 3.71 n/a 3.70 3.52 2.97 3.61 15 year 4.19 n/a 4.09 3.64 3.23 3.80 20 year 4.29 n/a 4.15 3.67 3.41 3.94 25 year 4.30 n/a 4.12 3.67 3.41 3.94 30 year 4.25 n/a 4.04 3.67 3.41 3.94 Inflation- RPI % 3.00 2.70 2.95 3.50 n/a 3.50 2.00 2.00 2.30 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 23 March 2011, so reflect a reduction from the current rate of 26% to 23% in steps of 1%. Values at 30 June 2010 and 31 December 2010 have not been restated to allow for this announcement. (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 governancecosts 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 30 June 2010 and 31 December 2010: 50 basis points and S&P as at 31 December 2010: 50 basis points) and 70 basis points for Movestic (as at 30 June 2010 and 31 December 2010: 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 profits 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 30 June 2011 (unaudited) Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Regulated entities Capital 29,651 25,561 12,630 - 67,842 required Free 22,623 43,344 11,200 - 77,167 surplus -------- -------- -------- -------- -------- Shareholders' net worth of regulated entities 52,274 68,905 23,830 - 145,009 Adjustments to shareholder net worth Deferred - - (54,490) - (54,490) acquisition costs Financial - - (5,229) - (5,229) reinsurance liability Adjustment to provisions on - 2,876 - - 2,876 insurance contracts - (13,349) - - (13,349) Unallocated divisible surplus Deferred - (619) - - (619) tax - 5,000 - - 5,000 Ineligible surplus Other - - 941 - 941 asset / liability adjustments -------- -------- -------- -------- -------- Adjusted 52,274 62,813 (34,948) - 80,139 shareholder net worth In-force 74,109 43,981 147,405 - 265,495 value of covered business -------- -------- -------- -------- -------- Embedded 126,383 106,794 112,457 - 345,634 value of regulated entities Less: amount - (39,387) - - (39,387) financed by borrowings -------- -------- -------- -------- -------- Embedded value of regulated 126,383 67,407 112,457 - 306,247 entities attributable to shareholders Net equity of - - 1,391 32,506 33,897 other group companies -------- -------- -------- -------- -------- Total 126,383 67,407 113,848 32,506 340,144 shareholders' equity During the six months ended 30 June 2011, adjustments to shareholder net worth have been amended in respect of the treatment of software assets. Whereas, for all reporting periods up to 31 December 2010, software assets were reflected within shareholder net worth at their net written down value on an IFRS basis, subsequent to that date such assets are reflected on a fully amortised basis within shareholder net worth and there is a corresponding reduction in the assumption regarding future maintenance expenses in the calculation of the value in force. There has been an associated net reduction of GBP0.9m in net embedded value during the six months ended 30 June 2011 as the two adjustments do not fully offset. Prior periods have not been re-stated to reflect this change. 30 June 2010 (unaudited) Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Regulated entities Capital 31,712 - 10,608 - 42,320 required Free 26,811 - 11,552 - 38,363 surplus -------- -------- -------- -------- -------- Shareholders' net worth of regulated entities 58,523 - 22,160 - 80,683 Adjustments to shareholder net worth Deferred - - (44,576) - (44,576) acquisition costs Financial - - (5,232) - (5,232) reinsurance liability Adjustment to provisions on - - - - - insurance contracts Unallocated divisible surplus - - - - - Deferred - - - - - tax Ineligible surplus - - - - - Other - - 6,872 - 6,872 asset / liability adjustments -------- -------- -------- -------- -------- Adjusted 58,523 - (20,776) - 37,747 shareholder net worth In-force 73,581 - 114,493 - 188,074 value of covered business -------- -------- -------- -------- -------- Embedded 132,104 - 93,717 - 225,821 value of regulated entities Less: amount - - - - - financed by borrowings -------- -------- -------- -------- -------- Embedded value of regulated 132,104 - 93,717 - 225,821 entities attributable to shareholders Net equity of - - (2,194) 31,504 29,310 other group companies -------- -------- -------- -------- -------- Total 132,104 - 91,523 31,504 255,131 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 43,691 10,931 - 94,798 surplus -------- -------- -------- -------- -------- Shareholders' net worth of regulated entities 70,348 69,747 23,321 - 163,416 Adjustments to shareholder net worth Deferred - - (51,243) - (51,243) acquisition costs Financial - - (6,145) - (6,145) reinsurance liability Adjustment to provisions on - 2,773 - - 2,773 insurance contracts - (14,930) - - (14,930) Unallocated divisible surplus Deferred - (630) - - (630) tax - 5,000 - - 5,000 Ineligible surplus 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 ======== ======== ======== ======== ======== The movement in the in-force value of covered business comprises: Six months ended 30 June 2011 CA S&P Movestic Total (unaudited) GBP000 GBP000 GBP000 GBP000 Value at beginning of period 79,360 41,307 144,748 265,415 Amount credited to foreign exchange - - 5,569 5,569 reserve Amount credited/charged to operating (5,251) 2,674 (2,912) (5,489) profit -------- -------- -------- -------- Value at end of period 74,109 43,981 147,405 265,495 ======== ======== ======== ======== Six months ended 30 June 2010 CA S&P Movestic Total (unaudited) GBP000 GBP000 GBP000 GBP000 Value at beginning of period 85,559 - 112,753 198,312 Amount charged to foreign exchange - - (1,193) (1,193) reserve Amount credited/charged to operating (11,978) - 2,933 (9,045) profit -------- -------- -------- -------- Value at end of period 73,581 - 114,493 188,074 ======== ======== ======== ======== Year ended 31 December 2010 CA S&P Movestic Total GBP000 GBP000 GBP000 GBP000 Value at beginning of period 85,559 - 112,753 198,312 Amount arising on acquisition - 42,391 - 42,391 Amount credited to foreign exchange - - 11,913 11,913 reserve Amount credited/charged to operating (6,199) (1,084) 20,082 12,799 profit -------- -------- -------- -------- Value at end of period 79,360 41,307 144,748 265,415 ======== ======== ======== ======== 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 installments 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 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/(loss) (a) Changes in equity may be summarised as: Six months ended Year ended Statement of changes in equity 30 June 31 December 2011 2010 2010 GBP000 GBP000 GBP000 Shareholders' equity at beginning of period 354,636 262,585 262,585 Effect of modeling adjustments (5,267) 10,363 13,239 -------- -------- -------- Shareholders' equity at beginning of period restated 349,369 272,948 275,824 (Loss)/profit for the period attributable to shareholders (1,538) (6,416) 59,885 Issue of new shares Share capital - - 523 Share premium - - 22,065 Sale of treasury shares - - 3,162 Foreign exchange reserve movement 4,487 (947) 9,517 Dividends paid (12,174) (10,454) (16,340) -------- -------- -------- Shareholders' equity at end of period 340,144 255,131 354,636 -------- -------- -------- 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. During the six months ended 30 June 2011: (i) a further improvement was introduced into the Movestic modelling system in respect of projected fee income from investment contracts where the fee is premium based, such contracts hitherto not being differentiated; and (ii) errors were detected relating to certain parameters and discounting periods specified at inception of the new model and the correction of these has given rise to a reduction in embedded value of GBP7.7m. The amount of GBP(5.3)m reflected above is stated net of this amount and prior periods have not been re-stated. The European Embedded value principles issued by the European CFO Forum in May 2004, together with supplemental guidance, do not provide specific guidance on how such errors should be treated and presented. The effect of the modelling adjustments is classified as an exceptional item in the consolidated income statement and is presented after operating profit. (b) The profit for the period is analysed as: Six months ended 30 Other June 2011 (unaudited) Group Activities CA S&P Movestic Total GBP000 GBP000 GBP000 GBP000 GBP000 Covered business New business 353 11 2,004 - 2,368 contribution Return from in-force business Expected return 2,089 133 2,905 - 5,127 Experience 2,088 (854) (6,703) - (5,469) variances Operating (2,145) - (797) - (2,942) assumption changes Return on shareholder 434 1,314 - - 1,748 net worth -------- -------- -------- -------- -------- Operating profit/ (loss) of covered business 2,819 604 (2,591) - 832 Variation from longer-term investment return 947 515 (6,160) - (4,698) Effect of economic (746) 2,887 2,682 - 4,823 assumption changes -------- -------- -------- -------- -------- Profit/(loss) on covered business before tax 3,020 4,006 (6,069) - 957 Tax thereon (1,442) (170) - - (1,612) -------- -------- -------- -------- -------- Profit/(loss) on covered business after tax 1,578 3,836 (6,069) - (655) Results of non-covered business and of other group companies Profit/(loss) before tax, and exceptional items - - 24 (629) (605) Tax - - (278) - (278) -------- -------- -------- -------- -------- Profit/(loss) after 1,578 3,836 (6,323) (629) (1,538) tax Non-controlling - - - - - interest -------- -------- -------- -------- -------- Profit/(loss) for the period attributable to shareholders 1,578 3,836 (6,323) (629) (1,538) ======== ======== ======== ======== ======== Six months ended 30 Other June 2010 (unaudited) Group Activities CA S&P Movestic Total GBP000 GBP000 GBP000 GBP000 GBP000 Covered business New business 383 - 288 - 671 contribution Return from in-force business Expected return 2,688 - 1,529 - 4,217 Experience 7,204 - (5,374) - 1,830 variances Operating (853) - (11,074) - (11,927) assumption changes Return on shareholder 530 - - - 530 net worth -------- -------- -------- -------- -------- Operating profit/ (loss) of covered business 9,952 - (14,631) - (4,679) Variation from longer-term investment return 4,069 - 4,100 - 8,169 Effect of economic (8,918) - 3,084 - (5,834) assumption changes -------- -------- -------- -------- -------- Profit/(loss) on covered business before tax 5,103 - (7,447) - (2,344) Tax thereon (2,428) - - - (2,428) -------- -------- -------- -------- -------- Profit/(loss) on covered business after tax 2,675 - (7,447) - (4,772) Results of non-covered business and of other group companies Loss before tax, and - - (1,900) (762) (2,662) exceptional item Exceptional profit recognised on - business - - 989 - 989 combination of Aspis Tax - - 29 - 29 -------- -------- -------- -------- -------- Profit/(loss) after 2,675 - (8,329) (762) (6,416) tax Non-controlling - - - - - interest -------- -------- -------- -------- -------- Profit/(loss) for the period attributable to shareholders 2,675 - (8,329) (762) (6,416) ======== ======== ======== ======== ======== Year ended 31 Other December 2010 Group Activities CA S&P Movestic 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/(loss) on covered business before tax 23,586 (1,283) 6,549 - 28,852 Tax thereon (4,695) 359 - - (4,336) -------- -------- -------- -------- -------- Profit/(loss) on covered business after tax 18,891 (924) 6,549 - 24,516 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 - - 376 - 376 combination of Aspis - business - - - 40,667 40,667 combination of S&P Tax - - 177 145 322 -------- -------- -------- -------- -------- Profit/(loss) after 18,891 (924) 3,428 38,372 59,767 tax Non-controlling - - 118 - 118 interest -------- -------- -------- -------- -------- Profit/(loss) 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 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. 7 Sensitivities to alternative assumptions The following tables show the sensitivity of the embedded value as reported at 30 June 2011, and of the new business contribution of Movestic for the six months then ended, 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 six months ended 30 June 2011 as the reported level of new business contribution is not considered to be material (see Note 3(a) above). New Business Embedded Value Contribution CA S&P Movestic Movestic GBPm GBPm GBPm GBPm Published value as at 30 June 2011 126.4 67.4 113.8 2.0 -------- -------- -------- -------- Changes in embedded value/new business contribution arising from: Economic sensitivities 100 basis point increase in yield (4.5) 10.8 (0.6) (0.1) curve 100 basis point reduction in yield 2.4 (16.6) 0.6 0.1 curve 10% decrease in equity and property (3.3) (8.5) (9.7) - values Operating sensitivities 10% decrease in maintenance expenses 2.5 4.7 5.9 0.3 10% decrease in lapse rates 2.3 (1.5) 9.7 0.7 5% decrease in mortality/morbidity rates Assurances 1.5 0.6 0.4 - Annuities (1.7) (0.3) - - Reduction in the required capital to 0.6 1.5 0.1 - statutory minimum 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 Â£20 per policy pa reducing to Â£18 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; (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; and (v) 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 Unaudited 30 June CA S&P Movestic Activities Total 2011 GBP000 GBP000 GBP000 GBP000 GBP000 Shareholders' equity 71,177 39,320 53,271 32,506 196,274 on the IFRS basis Adjustments Deferred acquisition costs Investment contracts (5,894) - (10,562) - (16,456) Deferred income 10,282 - - - 10,282 Adjustment to provisions on investment contracts, net of amounts deposited with reinsurers (10,521) - - - (10,521) Adjustments to provisions on insurance contracts, (93) 2,118 - - 2,025 net of reinsurers' share Adjustments to provisions on unallocated - (13,349) - - (13,349) divisible surplus Acquired in-force (14,559) (6,344) (63,029) - (83,932) value Acquired value of - - (1,885) - (1,885) customer relationships Amortisation of - - (7,405) - (7,405) software asset Adjustment to - - (6,400) - (6,400) borrowings Deferred tax 1,882 1,681 2,453 - 6,016 -------- -------- -------- -------- -------- Shareholder net 52,274 23,426 (33,557) 32,506 74,649 Value of in-force 74,109 43,981 147,405 - 265,495 -------- -------- -------- -------- -------- Shareholders' equity 126,383 67,407 113,848 32,506 340,144 on the EEV basis ======== ======== ======== ======== ======== Shareholder net worth comprises: Shareholder net 52,274 62,813 (34,948) - 80,139 worth in regulated entities Shareholders' net equity in other group companies - - 1,391 32,506 33,897 Debt finance - (39,387) - - (39,387) -------- -------- -------- -------- -------- Total 52,274 23,426 (33,557) 32,506 74,649 ======== ======== ======== ======== ======== Other Group Unaudited 30 June CA S&P Movestic Activities Total 2010 GBP000 GBP000 GBP000 GBP000 GBP000 Shareholders' equity 81,904 - 43,388 31,504 156,796 on the IFRS basis Adjustments Deferred acquisition costs Investment contracts (6,656) - (3,121) - (9,777) Deferred income 11,465 - - - 11,465 Adjustment to provisions on investment contracts, net of amounts deposited with reinsurers (14,009) - - - (14,009) Adjustments to provisions on insurance contracts, (78) - - - (78) net of reinsurers' share Adjustments to provisions on unallocated divisible surplus - - - - - Acquired in-force (16,909) - (57,408) - (74,317) value Acquired value of - - (2,082) - (2,082) customer relationships Amortisation of - - - - - software asset Adjustment to - - (6,106) - (6,106) borrowings Deferred tax 2,806 - 2,359 - 5,165 -------- -------- -------- -------- -------- Shareholder net 58,523 - (22,970) 31,504 67,057 worth Value of in-force 73,581 - 114,493 - 188,074 business -------- -------- -------- -------- -------- Shareholders' equity 132,104 - 91,523 31,504 255,131 on the EEV basis ======== ======== ======== ======== ======== Shareholder net worth comprises: Shareholder net 58,523 - (20,776) - 37,747 worth in regulated entities Shareholders' net equity in other group companies - - (2,194) 31,504 29,310 Debt finance - - - - - Total 58,523 - (22,970) 31,504 67,057 ======== ======== ======== ======== ======== Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 31 December 2010 Shareholders' equity 90,301 39,858 52,799 20,311 203,269 on the IFRS basis Adjustments Deferred acquisition costs Investment contracts (6,265) - (7,298) - (13,563) Deferred income 10,885 - - - 10,885 Adjustment to provisions on investment contracts, net of amounts deposited with reinsurers (10,739) 1,997 - - (8,742) Adjustments to provisions on insurance contracts, (180) - - - (180) net of reinsurers' share Adjustments to provisions on unallocated - (14,847) - - (14,847) divisible surplus Acquired in-force (15,563) (6,610) (62,866) - (85,039) value Acquired value of - - (2,049) - (2,049) customer relationships Amortisation of - - - - - software asset Adjustment to - - (7,454) - (7,454) borrowings Deferred tax 1,909 2,275 2,757 - 6,941 -------- -------- -------- -------- -------- Shareholder net 70,348 22,673 (24,111) 20,311 89,221 worth Value of in-force 79,360 41,307 144,748 - 265,415 business -------- -------- -------- -------- -------- Shareholders' equity 149,708 63,980 120,637 20,311 354,636 on the EEV basis ======== ======== ======== ======== ======== Shareholder net worth comprises: Shareholder net 70,348 61,960 (25,418) - 106,890 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 ======== ======== ======== ======== ======== 9 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 SEK10.3046= GBP1 ruling in the six months ended 30 June 2011(six months ended 30 June 2010 SEK11.2608 = GBP1 and year ended 31 December 2010: SEK11.1249 = GBP1), while all items in the balance sheet are stated at the closing rates ruling at the reported balance sheet date, being SEK10.1320 = Â£1 at 30 June 2011 (SEK11.6438 = GBP1 at 30 June 2010 and SEK10.5250 = GBP1 at 31 December 2010). 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:Â£ exchange rate. Had the exchange rate as at 30 June 2011 been 10% higher at SEK11.1452 = GBP1, then the reported embedded value of GBP340.1m as at 30 June 2011 would have been reported as GBP329.8m.

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