Final Results

RNS Number : 4070A

Chesnara PLC

30 March 2012

Chesnara plc

Continued dividend growth despite challenging market conditions

30 March 2012

Chesnara today reported final results for the year ended 31 December 2011. These are the first set of results which follow the transfer of the business of Save & Prosper Insurance Limited and its subsidiary Save & Prosper Pensions Limited (together 'S&P'), acquired in December 2010, into Chesnara's principal UK subsidiary, Countrywide Assured plc ('CA').

· Profit on IFRS basis before tax for the year ended 31 December of £22.4m (2010: £18.3m excluding profit of £15.9m arising on acquisitions)

· Reduction in EEV from £354.6m to £294.5m predominantly due to adverse economic experience and assumption changes of £49.4m giving rise to an EEV post-tax loss of £29.8m excluding exceptional items (2010:profit of £18.7m excluding exceptional items)

· Pre-tax operating EEV profit increased to £12.5m (2010: £0.3m)

· Strong cash generation continues at £25.4m (2010: £42.6m including £23.8m arising on acquisition of S&P)

· Shareholder equity on EEV basis (pre proposed final dividend payment) now £2.56p per share (2010: £3.09p per share)

· Earnings per share on IFRS basis of 22.35p (2010: 29.05p)

· Successful operational integration of S&P business and transfer of funds from S&P into CA with strong capital, fiscal and operational benefits

· Solvency ratios remain strong with Group at 198%(2010: 200%), CA at 183% (2010: 213%) and Movestic 245% (2010: 188%)

· Final proposed dividend increased to 10.9p (2010:10.6p). Total dividend for the year increased by 2.8% to 16.85p (2010:16.4p).

· Board remains committed to providing shareholders with an attractive dividend stream

· Acquisition opportunities continue to be examined

Graham Kettleborough, Chief Executive said:

'2011 saw a great deal of uncertainty in the Eurozone which contributed to falls in equity markets and reductions in the yield curve. Both of these had a significant effect but, due to our prudent approach to the management of our businesses and the successful Part VII transfer of S&P, we have emerged in good financial health. The recovery in the markets in early 2012 is welcome and, even if this does not persist, we remain well placed to continue to deliver on our aims.

On the acquisition front we continue to seek suitable opportunities and will continue to be selective and only pursue opportunities which will deliver an acceptable value uplift and/or support Chesnara's future dividend paying capability.

The Board are pleased to recommend an increase in the final dividend to 10.9p per share. This gives rise to a total dividend for the year of 16.85p per share which represents a 2.8% increase.'

The Board approved this statement on 29 March 2012.

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 Ltd and its subsidiary Save & Prosper Pensions Ltd (together 'S&P') and Movestic Livförsäkringar 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')and with effect from 30 June 2006, CWA's policies and assets were transferred into CA. S&P was acquired on 20^th December 2010. S&P was closed to new business prior to acquisition and it operated an outsourced business model which is complementary to Chesnara's existing UK operations. With effect from 31 December 2011, the business of S&P was transferred into CA.

Movestic, a Swedish life assurance company which originally focused on pensions and savings, was acquired on 23 July 2009. 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 Försäkringar Liv AB which has a risk and health product bias.

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, currency exchange 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

The principal reporting segments of the Group are:

(1) CA, which comprises the business of Countrywide Assured plc, the Group's original UK operating subsidiary, and of City of Westminster Assurance Company Limited, which was acquired by the Group in 2005 and the long-term business of which was transferred to Countrywide Assured plc during 2006;

(2) S&P, which was acquired on 20 December 2010 and is the balance of the Group's UK business. This business was transferred from Save & Prosper Insurance Limited and Save & Prosper Pensions Limited to Countrywide Assured plc on 31 December 2011 under the provisions of Part VII of the Financial Services and Markets Act 2000 (referred to in this document as' the Part VII' Transfer); and

(3) Movestic, which comprise the Group's Swedish business, Movestic Livförsäkring AB and its subsidiary and associated companies.

In this preliminary announcement:

(i) The CA and S&P segments may also be collectively referred to as the 'UK Business';

(ii) The Movestic segment may also be referred to as the 'Swedish Business';

(iii) 'CA' may also refer to Countrywide Assured plc, as the context implies;

(iv) 'CWA' refers to City of Westminster Assurance Company Limited or to its long-term business funds transferred to Countrywide Assured plc.

(v) 'S&P' may also refer collectively to Save & Prosper Insurance Limited and Save & Prosper Pensions Limited, as the context implies;

(vi) Where it is necessary to distinguish reference to Save & Prosper Insurance Limited and Save & Prosper Pensions Limited, or to the businesses subsisting in those companies prior to the transfer referred to above, they are designated 'SPI' and 'SPP' respectively; and

(vii) 'Movestic' may also refer to Movestic Livförsäkring AB, as the context implies.

2011 Highlights ^{Note 1}

Financial

§ Increase in IFRS pre-tax profits of 22% to £22.4m (2010: £18.3m, excluding exceptional profits on the acquisition of S&P and Aspis of £15.9m)

§ IFRS pre-tax profits for 2011 include £12.4m profit arising from the alignment of actuarial assumptions following the Part VII Transfer.

§ Reduction in EEV from £354.6m to £294.5m mainly arising from adverse economic experience and assumption changes of £49.5m.

§ Pre-tax operating EEV profit (including uncovered business) increased to £12.4m from £0.3m.

§ Net cash generated during 2011 of £25.4m ^{Note 2} (2010: £42.6m)

§ Strong Insurance Group Directive solvency cover of 198% (2010: 200%).

§ Proposed final dividend increased by 2.8% to 10.9p per share

Operational

§ Successful Part VII Transfer of S&P funds into CA.

§ Effective operational integration of S&P into the Chesnara Group, with full integration of governance procedures.

§ Constructive ongoing re-negotiation of core outsource arrangement in the UK.

§ Good regulatory compliance record continues.

§ Increase in new business market share in the core Movestic unit-linked pensions target market.

Notes

1) Throughout the Chairman's Statement, Chief Executive Review and Financial Review sections following, all results quoted at business segment level exclude the impact of consolidation adjustments relating to the amortisation of acquired VIF and other consolidation adjustment arising on the acquisition of Movestic. These consolidation adjustments are analysed by business segment.

2) Net cash generation in the year is defined as the net amount of the following items:

(i) The change in the excess of actual regulatory capital resource over target capital resource in respect of the CA and S&P operating segments to the extent that distribution of the excess to shareholder funds is not restricted;

(ii) Capital contributions made by the Group to the Movestic operating segment; and

(iii) Cash utilised by Parent Company operations

Chairman's Statement

As with any Financial Services organisation, Chesnara is influenced by the general economic climate in which it operates. During 2011 there was a decline in both UK and Swedish equity markets and also a marked reduction in global bond yields, together with a general level of uncertainty and lack of confidence due to the Eurozone crisis. Whilst, clearly, the Board of Chesnara cannot directly influence market conditions, we do have the responsibility to ensure we make business decisions to ensure the Group can weather economic downturns and continue to create shareholder value.

I am reassured that the Chesnara Group has proven to be resilient to the current difficult economic climate in terms of IFRS earnings, solvency, cash and dividend paying capacity. The EEV results have, predominantly due to investment market effects, fared less well. We benefit from our long established values which put responsible risk management at the heart of all decisions we make. The cumulative impact of our responsible risk-based decision making has resulted in a business that has minimised the level of exposure to external economic conditions:

· Unit-linked policies are at the core of Chesnara's in-force book (78% of our year-end UK and Swedish liabilities relate to unit-linked contracts), with the policyholder bearing market risk.

· Our stringent acquisition assessment criteria and investment management frameworks have resulted in only minimal exposure to high risk sovereign debt.

· Investment policy is strongly influenced by the objective to protect capital and minimise market and credit risk. Chesnara's outsourced investment management mandates and executive remuneration schemes create no positive incentive to pursue complex, short-term or high-risk investment portfolios and as such our financial assets have limited exposure to derivative instruments.

In short we have a relatively low-risk and transparent investment model and an efficient operating platform.

There has, however, inevitably been a degree of investment market strain on the underlying results. The S&P with-profit guarantees become, by their nature, increasingly onerous as bond yields decline and the core fund-based income streams for the Movestic Pensions and Savings business suffer as equity values fall. Results on an EEV basis are significantly more sensitive to investment market volatility than the IFRS results. This is because the EEV result recognises the cumulative future impact of any short term adverse investment market conditions. High-level analysis of the financial results, including specific reference to investment market impacts, is provided later in my statement.

Despite the short term pressure on the results of the recently acquired businesses, I am encouraged by the continued development and integration of both S&P and Movestic.

As expected, the acquisition of S&P has resulted in an increased level of earnings volatility for the UK business. In light of this the successful integration of S&P into the Group governance and risk management framework has been a priority during 2011. A key requirement to drive shareholder value from the S&P acquisition was to transfer the long-term insurance funds into the CA fund. The successful Part VII Transfer during the year was, therefore, a significant achievement and the year-end results incorporate fiscal and capital synergies arising from the transfer. Such benefits have effectively sheltered the Group from any underlying with-profit strain during the year resulting from the decline in bond yields. In light of the above, I remain confident that the long-term value from the S&P acquisition will significantly outweigh the impacts from short-term volatility.

Trading conditions have been difficult for Movestic. The short-term focus has been on enhancing the core Pension and Savings proposition. Operating platforms have been improved and new products are being developed such that we are in a good position to take advantage of any future recovery in the investment and new business markets. This is evidenced by an encouraging increase in new business market share towards the end of 2011.

CA IFRS profits have continued to prove relatively immune to investment market movement and this, together with the effect of distributions from surplus funds arising on the acquisition of S&P in 2010, has contributed to a strong proposed cash distribution to Chesnara of £44m. The CA operation remains at the heart of our business model and as such the level of continuing cash generation is encouraging.

IFRS Results

On the IFRS basis, we have achieved a pre-tax profit of £22.4m for the year ended 31 December 2011. This compares to a pre-tax profit, excluding £15.9m of profits arising on the acquisition of S&P and Aspis, of £18.3m for the year ended 31 December 2010. Profits from the core CA closed book which is in run-off, have remained relatively resilient to adverse investment market conditions (2011 - £25.7m: 2010 - £29.4m). The 2011 result includes a £7.5m profit from the recently acquired S&P business for which the benefits accruing from the Part VII Transfer, including the recognition of a £12.4m profit arising from the alignment of actuarial assumptions, have exceeded the adverse impact of a reduction in bond yields. There is a £2.8m improvement in the Movestic result which has moved from loss to a small profit. The IFRS results are analysed in more detail within the "Financial Review" section.

EEV Results

On the EEV basis of reporting, excluding the profit arising on the acquisition of S&P and Aspis and the effects of modelling adjustments in Movestic, we made a loss after tax of £(29.8)m for the year ended 31 December 2011, compared with a profit after tax of £18.9m for the year ended 31 December 2010. Investment market factors directly account for a year-on-year decline of £71.9m. Adverse economic experience and assumption items of £49.4m dominate the 2011 loss. However, in contrast to this, the underlying operating result has improved by £12.2m in 2011. The EEV results are analysed in more detail within the "Financial Review" section.

Solvency and Cash Generation

The capacity of the Group to pursue its dividend policy relies on the continuing generation of cash in the UK businesses. During 2011 cash generation was £25.4m including significant synergies of £12.4m arising from the Part VII Transfer. This healthy outcome supports a proposed dividend of £44m from CA to Chesnara and is reinforced by a strong post-dividend solvency ratio of 183% in CA as at 31 December 2011. The associated Group solvency ratio was also strong at 198%.

We have continued to make good progress on the implementation of Solvency II requirements.

Dividend

Continuing surplus generated from the CA book together with the positive impact of the Part VII Transfer of S&P, enables the Group to continue its progressive dividend policy. The 2011 full year dividend of £19.3m represents a 2.8% increase over the prior year.

People and Business Partners

The fact that we end the year in good shape and well positioned for the future is largely due to the skill and dedication of our people and those within our outsource partners.

I greatly value the professional relationship with our operational and investment management partners. In light of this, the ongoing renegotiation of the outsourcing contract with HCL is a positive development which is expected to ensure UK CA policyholders and shareholders will continue to benefit from the servicing and commercial benefits of our UK operating model for the long term.

Delivery of the strategic objectives of the Group is highly dependent on the skills, professionalism and integrity of our people. The successful implementation of the Part VII Transfer, the continued positive relationship with regulators and the significant level of business change undertaken in Sweden are all testament to the quality and dedication of all involved.

In recognition of this key dependence on our people, we have invested in the governance infrastructure during the year and have achieved impressive levels of staff retention.

During the year we set up a Share-save scheme that enables UK staff to invest in the future success of the Group.

Business Development

Whilst the Group has weathered the storms in investment markets in 2011 we are not complacent regarding future challenges particularly as regards the economic impact that may arise from any Euro bond default. Therefore we will continue to work to protect shareholder value whilst not unnecessarily restricting any upside the expected recovery in markets may bring. As part of this we will continue to investigate acquisition opportunities and we will only progress these where we see value and a clear strategic fit. Businesses in the UK and Western Europe will be considered and, as ever, we will continue to apply strict financial and risk criteria when we assess them.

Outlook

Investment markets have shown signs of recovery in the first quarter of 2012. However, we do not take market recovery for granted and our financial and capital management procedures will continue to recognise the risk of continued poor or indeed worsening economic conditions. The decline in EEV earnings for 2011 is considered to be of a short-term nature and even if investment market recovery does not arise, the modelling of our business, indicates continued healthy cash generation and a solvency capital surplus in both base and adverse stress scenarios.

Peter Mason

Chairman

29 March 2012

Chief Executive's Review

Challenging times, especially in investment markets, but we remain well placed to meet our objectives. The highlights are:

· Despite difficult investment market conditions the Group delivered an IFRS pre-tax profit of £22.4m (2010: £18.3m excluding exceptional profits on the acquisition of S&P of £15.9m).

· The increase in IFRS pre-tax profits for 2011 includes £12.4m arising from the alignment of actuarial assumptions following the Part VII Transfer.

· Movestic has generated a first-time IFRS pre-tax profit of £0.4m (2010: £2.6m loss).

· Equity market performance and the falling yield curve, have had an adverse impact of £49.4m on the EEV result.

· Despite investment market conditions both cash generation and group solvency remain strong.

· Full and effective integration of Save & Prosper, including completion of the Part VII Transfer.

· Constructive ongoing re-negotiation of the core outsource arrangement to provide longevity of the UK business model.

Review of the Year

Insurance Group Directive Solvency 198% (2010: 200%)

Group IFRS pre-tax profit £22.4m (2010: £18.3m excluding exceptional profits on the acquisition of S&P of £15.9m)

Group EEV net of tax result £(29.8)m loss (2010: £18.9m profit) excluding exceptional profits on acquisition and the impact of EEV modeling adjustments (2011: £(10.3)m loss; 2010: £13.2m profit).

Both IFRS and EEV results during the year have been impacted by the downturn in equity markets and the general decline in bond yields, although benefits from the successful Part VII Transfer of S&P have mitigated this impact. Other than a slight positive effect, on both the IFRS and EEV bases, arising from falling bond yields in the CA book of business, market movements have been universally adverse. The acquisitions of S&P, in December 2010, and Movestic have increased the volatility of profits, particularly in terms of short-term sensitivities. S&P is, as highlighted at the time of purchase, sensitive to falling bond yields due to a portion of the product base having investment return guarantees for policyholders whilst Movestic is sensitive to equity market movements as a significant part of its current and future earnings arise from the value of funds under management.

Investment in our operating model, which is required to ensure we continue to provide high quality service to our policy-holders and to protect the longevity of the UK business outsource operating model upon which our strategy is based, has had an adverse impact on the Group cost base. Revised commercial terms have been agreed in principle with HCL, which has resulted in an increase in IFRS reserves of some £8m and EEV reserves of some £7m. The impact on the 2011 results is partially mitigated by the release of an opening £4.5m provision. Further information regarding the performance of our major business segments, namely the UK closed book operations and Movestic, our open book operation in Sweden, is presented in the following sections together with a number of Key Performance Indicators. The IFRS and EEV results are analysed in more detail within the Financial Review. On the positive side, cash generation from the UK book has proved resilient to the adverse market conditions and the Group and subsidiary solvency positions remain strong, which enables us to continue with our progressive dividend policy. We have minimal exposure to euro-denominated sovereign debt.

Outlook

Clearly management does not take market recovery for granted and our financial and capital management procedures recognise the risk of continued poor or indeed worsening economic conditions. However, we regard decline in earnings for 2011 as being of a short-term nature. Even if this is not the case, the projections we produce as an integral part of our financial management procedures indicate continued healthy cash generation and a solvency capital surplus in both base and adverse stress scenarios.

The Group continues to investigate further acquisition opportunities and we will progress these where we see value and a clear strategic fit. We remain open-minded as to location in the UK and Western Europe and, as ever, we will continue to apply our strict financial and risk criteria when we assess them.

UK Business Review

Despite difficult investment market conditions the core CA business reported a pre-tax IFRS profit of £25.7m (before consolidation adjustment) which contributed to a proposed distribution to the Chesnara parent company of £44m.

Highlights:

· Benefits from the Part VII Transfer of S&P, including the recognition of a £12.4m profit arising from the alignment of actuarial assumptions, exceed the adverse impact of reductions in bond yields such that S&P has posted a £7.5m IFRS pre-tax profit during the year.

· Continued, effective operational integration of S&P into the Chesnara Group, with full integration of governance procedures.

· Successful Part VII Transfer of the S&P business into CA.

· Good progress regarding renegotiation of the core outsource arrangement with HCL.

· Policy attrition rates better than expected and prior year.

· Good regulatory compliance record continues.

Review of the Year

This year has been focused on three areas - management of the assets in the light of the turmoil in equity markets and a falling UK yield curve, integration of S&P into the CA business including completion of the Part VII Transfer and seeking longevity as regards our outsourcing arrangements.

Management of Assets

The acquisition of S&P has resulted, as signalled at the time of acquisition, in an increased level of earnings volatility for the UK business. S&P has a proportion of its product base that provides guaranteed returns. As asset values fall the cost of guaranteeing those returns increases, with a consequential impact on profitability. The converse of this is that as asset values rise, as might be expected in the medium term, the cost of the guarantees will fall. Linked to the cost of guarantees is the return we use in calculating our liabilities to policyholders - which in turn is linked to the yield curve. As the yield curve falls the rate we can use to value the liabilities to meet those guarantees also falls. Although there is a rise in the capital value of the matching assets this is outweighed by the effect of the yield drop in calculating the future returns. However, there are two elements of mitigation. Firstly the CA book of business acts as a partial hedge as the effect on that book is the reverse of the effect on the S&P book. This has mitigated, but clearly not wholly negated, the effects of the fall in the yield curve. The second element of mitigation has been the purchase of further higher-yielding fixed interest securities in the fourth quarter which has the effect of moving the valuation rate slightly upwards.

KEY PERFORMANCE INDICATORS:

IFRS Profit Before Tax £33.2m (2010: £29.6m) Excluding profits on the acquisition of S&P and AVIF amortisation.

Cash Transfer to Chesnara Parent Company £44m (2010:£26m) Includes the effect of the distributions from surplus funds arising on acquisition of S&P in 2010.

EEV Result net of tax £(13.7)m loss (2010: £18.0m profit) Excluding profit on acquisition of S&P.

Annual Policy Attrition Rate

	2011	2010
CA	7.3%	8.0%
S&P	5.8%	6.5%
Total UK	6.5%	7.2%

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 received will be of a higher magnitude. Returns on two of the funds in 2011 are below the comparable sector average although not considerably so and the longer term returns continue to be above benchmarks.

	2011	2010
CA Pension Managed	-5.6%	15.9%
CWA Balanced Managed Pension	-3.7%	12.1%
S&P Managed Pension	-5.5%	16.2%
Benchmark - ABI Mixed Inv 40%-85% shares	-5.0%	12.3%

We have taken a measured approach to this as, in the medium to long-term, we see the yield curve moving upwards and do not want to significantly restrict the upside. It follows that the effective steps we have undertaken, together with the continued earnings stability from the CA and CWA books, mitigate the impact of short term S&P earnings volatility, such that, on a UK consolidated basis, the Board remain confident that the long-term value from the S&P acquisition will significantly outweigh short-term volatility experience.

Integration of S&P

We are very pleased that we have completed the operational integration of S&P within expected timescales. The business now operates in line with practice and procedures that have proven resilient for CA and, where appropriate, we have adopted existing S&P practices. In particular we have established a With-Profits Committee which is responsible for ensuring that the interests of the with-profits policyholders are maintained. We are also particularly pleased that the Part VII Transfer was completed at the end of the year. Despite some testing timescales the team worked hard to ensure that the process was completed before year end which allowed the transfer of the S&P long-term business into CA on 31 December 2011. Capital efficiencies will accrue immediately and we anticipate that further funds will be released when we deregulate the two S&P companies in the second quarter of 2012.

Outsourcing Arrangements

Following the acquisition of S&P we decided to investigate the possibility of extending the term of our outsourcing agreements. The original CA agreement with HCL was due to end in early 2015 and the S&P agreement was of indefinite term but contained provisions that allowed either party to terminate the agreements at two years notice or less. We took the view that we would seek a longer-term agreement and, as well as negotiating with HCL, we benchmarked costs by comparing with other potential suppliers indicative terms. The commercial terms were agreed in principle in late December and give rise to an increase in the total cost base. An opening provision of £4.5m to cover this potential outcome restricted the adverse impact on the IFRS result to £3.5m and the impact on the EEV loss to £2.8m. Legal negotiations continue and we fully expect to sign the formal agreement in the very near future. The agreement will give us certainty of terms for the next 10 years with an agreed pricing basis for administrative services thereafter.

Unit Costs

A key area of focus for the UK operations is the management of expenses incurred in servicing the in-force life and pensions policy base. In particular we seek, through outsourcing arrangements, to maximise the proportion of costs which vary with policy volume. Continued attention to expense management, combined with the positive in-force book retention and the apportionment of fixed overheads across the broadening business segment base following the acquisitions of Movestic and S&P, has resulted in a small reduction in the maintenance unit costs for the CA fund (2011: £42.50 per policy; 2010: £44.60 per policy).

No corresponding analysis is provided for S&P because prior year comparisons are not available. That said, management are confident that S&P unit costs are effectively controlled due to:

i) a significant proportion of the cost base is variable in line with book run off, due to both asset management and policy administration being outsourced with variable charging structures;

ii) policy attrition is relatively low; and

iii) the S&P operation has been integrated into the Chesnara Group without a significant increase in total governance overhead thereby creating significant synergies.

Unit-linked Funds Under Management

The continuing level of unit-linked funds under management is an indicator of the ongoing level of profitability of the UK businesses as fund-related charges are an important component of profit. 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.

The combined impact of these three drivers has resulted in a reduction in Unit-linked Assets under Management from £2,475m at the end of 2010 to £2,190m at the end of 2011.

Other Issues

With regard to Solvency II implementation, a significant and increasing amount of work means that our progress remains in line with plans. Based on QIS5 calculations we do not foresee that any increase in solvency capital will be required.

Cash generation, despite the adverse market influences, remains strong. Whilst, in the short term, the expectation of cash releases from S&P has diminished, we do not see this as a particular issue as S&P was acquired as a medium to long-term underpin to the stronger, shorter-term cash generation from CA and CWA.

Swedish Business Review

First time IFRS pre-tax profit but Embedded Value negatively affected by investment markets and modelling adjustments.

Highlights:

· First time IFRS pre-tax profit of £0.4m (2010: £(2.6)m loss) before consolidation adjustments.

· Market shares showing gradual improvement

· EEV adversely impacted by falls in value of investments and modelling adjustments

· Expansion of fund range with new distributor agreements

· Measures introduced to stem policy attrition

Review of the year

2011 was a challenging year for Movestic. In particular investment market performance, both in equities and fixed interest securities, has dented investor confidence and, in turn, affected Movestic's results and business opportunities. As well as this, a system migration, necessary to prepare the business for future growth, allow greater product development flexibility and deliver administrative efficiencies, introduced some short-term administrative issues. These, in turn, led to a reduction in IFA support. As previously reported, errors found in the company's EEV modelling systems have also contributed to a testing year. It is, therefore, particularly pleasing that we are able to report a profit on an IFRS pre-tax basis of £0.4m (2010: £(2.6)m loss). Unfortunately the picture is less attractive on the EEV measure. Although a profit was made on new business of £3.1m (2010: £2.1m), the adverse impact of investment markets outweighed this significantly such that a net of tax loss of £14.2m (2010: £3.1m profit) was incurred: these amounts excludes the impact of modeling adjustments and exceptional profits arising on the acquisition of Aspis. A detailed breakdown of the constituents of this is provided in the Financial Review. EEV modelling adjustments have affected the Movestic EEV for the last two years, with a £13.2m positive impact in 2010 and a £9.7m adverse impact in 2011. In light of this, we undertook a line-by-line review of the model used to calculate embedded value and are not expecting any further significant adjustments to be necessary.

It is clear that the Swedish market as a whole has suffered and, although our new business premiums have reduced, our market share has slightly increased. This demonstrates the viability of our business model and is particularly pleasing bearing in mind the systems and consequent administrative issues we have had. In the fourth quarter we introduced measures aimed at reducing the attrition in the business and, although they will not be reflected in these results, initial indications show that they are proving to be successful with reductions in attrition beginning to be seen.

Movestic has continued to move administrative functions away from Stockholm to its lower cost base operation in Norrköping. This process is now nearing completion and cost benefits are expected to flow through in 2012.

Looking forward we continue to seek to build on the good relationships that we have with IFAs. In particular we have recently launched bespoke funds for one of the larger IFA organisations and we maintain close relationships with all the key broker organisations. In terms of systems we aim to capitalise on the investments we made in 2011 and we are recruiting internally in the IT area to bring more expertise in-house and improve our specification and testing capabilities for future changes. As for new initiatives, we will continue to research new fund and investment opportunities, plan to launch a new single premium product in the second quarter and are also planning revisions and new offerings within our risk and health product portfolio.

KEY PERFORMANCE INDICATORS:

IFRS pre-tax Profit £0.4m (2010: £(2.6)m loss) excluding consolidation adjustments of £(1.1)m

EEV Result net of tax £(14.2)m loss (2010:£3.1m profit) excluding modelling adjustments and profit on acquisition of Aspis

Funds Under Management £1,220m (2010: £1,284m)

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 those values. Whilst the fall in assets under management is, at face value, disappointing, when taken in the context of the general falls in equity markets we consider that they have held up well.

Premium Income

	2011	2010
	£m	£m
Pensions and Savings	230.0	260.3
Risk and Health	39.0	38.0
Total	269.0	298.3

Premium income, in the form of new business and continuing premiums into existing contracts, is key to the success of Movestic. Policy attrition combined with a reduction in new business volumes during the year has resulted in the reduction in total premiums earned.

New Business Market Share

(excluding "tick the box" market)

2011

2010

Total Unit linked Pension business

7.2%

5.8%

Movestic's primary target market is that of unit-linked pension business and, within that, company-paid contribution business. The steady general growth in share of the total market is encouraging, especially in the last quarter when our service was compromised by some issues arising from an IT system migration. This is a strong testament to our product offering and the effectiveness of the sales and marketing teams.

New Business Premium Income

	2011	2010
	£m	£m
Pensions and Savings	46.9	52.3
Risk and Health	1.9	8.0
Total	48.8	60.3

New business markets have been difficult during the year and the gradual reduction in new Pensions and Savings volumes reflects a general decline in total market size. As stated above we have gained market share and hence are well positioned to take advantage of any future market recovery. The 2010 Risk and Health comparison included one-off transfers associated with the acquisition of Aspis.

Fund Performance

	2011	2010
Outperformed against the relevant index	17	18
Underperformed against the relevant index	30	12
No relevant index	9	6

One of Movestic's key differentiators is its approach to selecting the funds available to investors. Rather than adopt mainstream funds, which, in Sweden, are those predominantly managed by subsidiaries of banks which also have life assurance subsidiaries, they select a limited number of funds from a wide range of independent fund managers.

The funds selected are, in general, actively managed funds with a value approach. The performance of all funds is closely monitored and regular contact is undertaken with managers to ensure that the underlying reason for the performance, whether positive or negative, is fully understood. Funds that do not perform favourably compared to the relevant index are wholly replaced if there are no acceptable strategies for improvement in the returns. During the year further funds were added to fill perceived gaps in the range. However, the general weighting towards Swedish equities, value and emerging markets together with the historically low bond yields affected general performance. The natural corollary of this is that funds would be expected to perform strongly as markets recover.

Annual Policy Attrition Rate

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.

	2011	2010
Surrenders (Endowments)	14.7%	13.4%
Transfers (Pensions)	5.3%	4.6%
Lapses (Pensions and Endowments)	16.2%	19.8%

The above percentages are, for surrenders and transfers, based on the capital amount surrendered or transferred, divided by the amount of capital potentially transferable. For lapses, it is the annual premium of lapsed policies, divided by the total annual premium in force at the start of the year.

We have continued with relatively high rates of attrition to which negative investment markets and sentiment in 2011 have contributed. In order to counter the rate of attrition a team was established to research and review the reasons behind policy attrition. Acting on their findings we have introduced transfer penalties on pensions, which are in line with the market norm and we have also instigated procedures that require a policyholder to confirm their desire to transfer and advising them of the consequences of transfer before processing the request. This was introduced in September 2011 and the early results are encouraging although they will have had little effect on the reported figures.

In addition to this the team are reviewing individual IFA accounts for levels of activity in this area which the sales team follow up, again, with a view to understanding and curtailing such activity.

Financial Review

Key Financial Performance Indicators

The Group's key financial performance indicators as at 31 December 2011 and for the year ended on that date demonstrate the financial performance and strength of the Group as a whole. A summary of these is shown below and further analysis is provided in the following sections:

1. IFRS pre-tax Earnings £22.4m (2010: £34.2m)

The presentation of the results in accordance with International Finance Reporting Standards (IFRS) aims to smooth the recognition of profit arising from written business over the life of insurance and investment contracts. For businesses in run-off the reported profit is closely aligned with, and a strong indicator of, the emergence of surpluses arising within the long-term insurance funds of those businesses.

Highlights

· IFRS pre-tax profit of £22.4m, shows a decline from the prior year. The prior year comparison includes one-off profits arising on business combinations of £15.9m.

· Profits from the core CA closed book have remained relatively resilient to book run-off and adverse investment market conditions (2011: - £25.7m; 2010: - £29.4m).

· The 2011 result includes a £7.5m profit from the recently acquired S&P business for which benefits from the Part VII Transfer, including the recognition of a £12.4m profit arising from the alignment of actuarial assumptions, more than offset the adverse impact of a reduction in bond yields.

· There was a £3.0m improvement in the Movestic result which has moved from loss to a small profit.

2. Cash Generation £25.4m (2010: £42.6m)

Cash generation is a key measure, because it is the net cash flows to the Chesnara Parent Company from its Life and Pensions businesses which support Chesnara's dividend capacity. The dominating aspect of cash generation is the change in amounts freely transferable from the operating businesses, taking into account target statutory solvency requirements which are determined by the boards of the respective businesses. It follows that cash generation is not only influenced by the level of surplus arising but also by the level of target solvency capital.

Highlights

· At £21.8m cash generation in CA continues to be robust and shelters a net depletion in S&P of £2.6m.

· Significant favourable synergistic effects of £12.4m arising from the Part VII Transfer

3. EEV Earnings, net of tax£(29.8)m loss (2010: £59.9m profit) excluding modelling adjustments (2011: £(10.3)m; 2010: £13.2m profit).

In recognition of the longer-term nature of the Group's insurance and investment contracts, supplementary information is presented in accordance with European Embedded Value 'EEV' principles. By recognising the net present value of expected future cash flows arising from the contracts (in-force value), a different perspective is provided in the performance of the Group and on the valuation of the business.

The principal underlying components of the EEV result are:

i) The expected return from existing business (being the effect of the unwind of the rates used to discount the value in force).

ii) value added by the writing of new business

iii) variations in actual experience from that assumed in the opening valuation.

iv) the impact of restating assumptions underlying the determination of expected cash flows.

Highlights

· The marked reduction in EEV profits is dominated by two factors. Firstly, the 2010 result included an exceptional business combinations profit of £41m. Secondly investment market conditions had an adverse impact during 2011 of £49.5m compared with a positive impact of £22.5m in 2010.

· The underlying operating profit has improved by £12.2m

4. European Embedded Value (EEV) £294.5m (2010: £354.6m)

As it takes into account expected future earnings streams on a discounted basis, EEV is an important reference point by which to assess Chesnara's market capitalisation. A life and pensions group may typically be characterised as trading at a discount or premium to its embedded value. Analysis of EEV, distinguishing value in force by segment and by product type, provides additional insight into the development of the business over time.

Highlights

· EEV reduction follows from decline in investment markets over the year.

· Good balance of EEV across the operating segments.

· Good product diversification within value in-force.

IFRS pre-tax Earnings - £22.4m (2010:£34.2m)

Executive summary

IFRS earnings arising from CA have historically proved to be relatively stable and resilient to external economic market movements. This has continued to be the case during 2011 with a CA IFRS pre-tax result of £25.7m (2010:£29.4m). The acquisition of S&P in late 2010 has added a more volatile component to the Group IFRS result due to the cost of with-profit guarantees being sensitive to movements in equity values and interest rates. The operating IFRS pre-tax result for Movestic has moved into profit during 2011.

The Group IFRS result is analysed by operating segment as follows:

	2011	2010
	£m	£m
CA	25.7	29.4
S&P	7.5	0.2
Movestic	0.4	(2.6)
Chesnara	(5.5)	(4.0)
Profit arising on acquisition of S&P and Aspis	-	15.9
Adjustments arising on consolidation	(5.7)	(4.7)
Total profit before tax	22.4	34.2
Tax	3.3	(4.4)
Total profit after tax	25.7	29.8

S&P was acquired by Chesnara plc late in 2010 and therefore the 2010 figures reflect an 11 days trading period only.

The increase in losses in the Chesnara parent company component relates to the setting up of a £1.5m provision to cover future vacant property costs associated with the head office building in Preston.

The adjustments arising on consolidation are analysed below.

	2011	2010
	£m	£m
CA - Amorisation of AVIF	(3.6)	(3.6)
S&P - Amortisation of AVIF	(1.0)	-
Movestic - Amortisation of AVIF	(4.4)	(4.4)
Movestic - Write back of DAC	3.3	3.3
Movestic - Other	-	-
Total Movestic	(1.1)	(1.1)
Total	(5.7)	(4.7)

The IFRS results by business segment are analysed in more detail as follows:

Despite continued run off of the CA in force book and a general decline in investment market conditions during 2011, the CA pre-tax IFRS result has held up well. There are many complex aspects to the IFRS result but the primary drivers of the decline in profit from 2010 to 2011 are illustrated as follows:

	£m
2010 IFRS pre-tax profit	29.4
Claims provision release in 2010	(3.2)
Run off of product based surpluses	(2.4)
Increase in expense assumption	(1.1)
Reserve changes and mismatch items	3.0
2011 IFRS pre-tax profit	25.7

The key components of the 2011 IFRS result are summarised as follows:

	£m	Note
Product deductions	26.6	1
Gains and interest on retained surplus	5.9	1
Administration expenses	(8.3)
Other effects due to investment markets	4.3	2
Expense assumption changes	(2.1)	3
Other	(0.7)
	25.7

Note 1 - Product-based deductions and returns on retained surplus remain significantly in excess of recurring administration expenses.

Note 2 - The impact of investment market conditions is generally muted for the CA book. That said, during 2011, the surplus generated from non-linked income exceeded associated actuarial and tax reserve movements.

Note 3 - During the year we have agreed in principle, terms for extending the outsourcing contract with HCL. The new terms result in a general increase in servicing charges. The majority of the potential impact of the increased costs was recognised in the 2010 closing valuations and hence the 2011 IFRS charge is less marked than the total contract charge increase might suggest.

S&P

S&P posted a pre-tax IFRS profit of £7.5m for 2011, the key components of the result being:

	£m	Note
Product deductions	12.2
Income on with-profits shareholder capital	2.5
Administration expenses	(6.1)
Losses due to market conditions	(10.2)	1
Expense assumption changes	(4.4)	2
Alignment of actuarial assumptions	12.4	3
Other	1.1
Total profit before tax	7.5	4

Note 1 - The S&P IFRS result is sensitive to equity values and bond yields, both of which have declined during 2011. This has resulted in a total loss of £10.2m, largely arising from the strain in the with profits funds due to the increased cost of guarantees.

Note 2 - During the year we agreed in principle, terms for extending the outsourcing contract with HCL. This has resulted in an increase in actuarial reserves of £3.5m. This together with other expense related assumption changes leads to a total expense assumption change loss of £4.4m.

Note 3 - The alignment of actuarial assumptions, to be consistent with those adopted for the CA fund, as a result of the Part VII Transfer has resulted in the recognition of profit of £12.4m. The pre-existing S&P methodology was to artificially reduce valuation interest rates to remove the need for a resilience capital reserve. Changing this approach results in an increase in effective valuation interest rates and a corresponding reduction in the strain of with-profits guarantees.

Note 4 - Furthermore the S&P Insurance component of with-profits reserves has reduced by £5m primarily as a result of improving mortality assumptions. This does not result in a corresponding IFRS profit due to the fact that an "Unallocated Divisible Surplus (UDS)" reserve is set up to reflect the future potential policyholder liabilities regarding this value.

Movestic

	2011	2010	Note
	£m	£m
Pensions & Savings	(1.5)	(1.3)	1
Risk & Health	2.4	-	2
Other	(0.5)	(0.8)
Writedown of assets subsidiary	-	(0.5)
Total profit before tax	0.4	(2.6)
Tax	0.3	0.2
Total profit after tax	0.7	(2.4)

Note 1 - The Pensions and Savings business model is directly dependent upon fees and rebates earned on assets under management (AUM). Average AUM during the year were higher than in 2010 (despite the closing position being lower than the prior year equivalent). The resultant increase in fee and rebate income of £1.4m is broadly offset by an increase in internal costs. The internal costs were higher in 2011 due to significant investment in the policy administration systems. In addition, some employees joined part way through 2010 and hence the cost impact in 2011 is more marked.

Note 2 - The Risk and Health result has improved as a direct result of a 20% increase in retained earned premiums. This is the combined impact of gross premiums increasing by 2.5% and premiums ceded to reinsurers falling by 7%. This is due to a reduction in levels of reinsurance for certain lines of business. In addition the product mix within the old Aspis business (ceded to Swiss Re) differs somewhat between the two years and as the reinsurance programme is different for different products, the result is that the reinsurer is attributed with a lower share in 2011.

Cash Generation £25.4m (2010:£42.6m)

The Group's cash flows are generated principally from the interest earned on capital, the release of excess capital as the life funds run down, policyholder charges and management fees earned on assets under management. The Group's closed life funds provide predictable fund maturity and liability profiles, creating stable long-term cash flows for distribution to shareholders and for repayment of outstanding debt. Cash flow generation will naturally decline over time as the UK businesses run off.

Although investment returns are less predictable, a significant portion of the investment risk is borne by policyholders. However, the acquisition of S&P, while extending the longevity of cash generation within the Group, has introduced an element of volatility over shorter periods. This arises from the impact of investment market movements and the cost to shareholders of guarantees within the S&P with profits funds. Although the short-term measure of this cost follows the fortunes of investment markets, we proactively manage the risk taking a longer-term perspective.

The following identifies the source of internal net cash generation within the Group, representing the net change in funds available to service debt (interest and loan principal repayment) and equity (dividends):

	Year ended 31 December
Cash generated from/(utilised by):	2011	2010
	£m	£m

CA
Surplus and profits arising in the year	21.8	26.5
Change in target capital requirement	1.2	-

S & P
Surplus arising in the year	9.1	0.2
Change in target capital requirement	(11.7)	-
Excess of solvency capital resources over target solvency capital arising on acquisition	-	23.8

Synergistic effects of Part VII transfer	12.4	-

Movestic
Additional capital contributions	(5.3)	(3.9)

Chesnara
Cash utilised by operations	(2.1)	(4.0)

Net cash generation	25.4	42.6

This information illustrates that in spite of a challenging environment in 2011 net cash generation within the Group remains robust. Key aspects underpinning the outcome are:

· Continuing strong emergence of surplus in CA which offsets net adverse impacts in S&P.

· S&P surplus arising in the year of £9.1m includes £12.4m surplus arising from the alignment of actuarial assumptions following the Part VII Transfer. This gave rise to a consequential significant increase in S&P target capital requirement.

· Significant beneficial effects arising from the Part VII Transfer, reflected through significant solvency capital synergies.

· Movestic capital contributions, which support the ongoing development of the Swedish business and which are in line with expectations.

In addition to the above a further cash generation of £7m is expected to arise in 2012 on the winding up of the S&P companies subsequent to the Part VII Transfer.

EEV Earnings (excluding modelling adjustments) £(29.8)m loss (2010:£59.9m profit)

EEV Result

Summary

The headline EEV result for the year deteriorated significantly in 2011. The following chart shows the major components of the year on year decline.

Actual 2010	59.9
Reduction in tax charge	11.1
Pre tax operating result (Covered and Uncovered)	12.2
Exceptional profit on acquisition of S&P	(41.0)
Movement in economic items	(72.0)
Actual 2011	(29.8)

EEV results presented above exclude the impact of Movestic and S&P modelling adjustments. The 2010 EEV result benefited by £13.2m from modelling adjustments whereas similar items identified during 2011 have resulted in a reduction in EEV of £10.3m.

The year-on-year movement is dominated by two aspects:

i) Investment markets in 2010 generally performed better than assumed resulting in a significant EEV profit, whereas in 2011, falls in both equity markets and bond yields have resulted in a large corresponding loss. This 2011 investment market driven loss is the primary reason for the absolute EEV loss in the year.

ii) The 2010 result benefited from the one-off impact of the acquisition of S&P.

The operating result, upon which management have the most direct and immediate influence, has improved by £12.1m from the prior year. This is primarily due to Movestic year-on-year improvements. Movestic strengthened operating assumptions in 2010 resulting in a £10.1m operating assumption loss. The Risk and Health result has also improved year on year.

The following tables analyse the Group EEV result by operating segment and by profit category:

Analysis of the EEV result in the year by business segment

	2011	2010
	£m	£m
CA	2.7	23.6
S&P	(22.0)	(1.3)
Movestic	(14.5)	2.9
Chesnara	(3.1)	(2.4)
Exceptional items	-	41.0
Total pre-tax (loss)/profit	(36.9)	63.8
Tax	7.1	(4.0)
Minority interest	-	0.1
(Loss)/profit after tax	(29.8)	59.9

Analysis of the EEV result in the year by earnings type

	2011	2010
	£m	£m
New business contribution	3.5	2.7
Return from in-force business
Expected return	10.2	11.4
Experience variances	0.1	3.5
Operating assumption changes	(2.6)	(12.1)
Return on Shareholder net worth	4.1	0.9
Operating profit of covered business	15.3	6.4
Variation from longer term investment	(16.9)	26.9
Effect of economic assumption changes	(32.5)	(4.4)
(Loss)/profit on covered business before tax	(34.1)	28.9
Tax thereon	5.6	(4.4)
(Loss)/profit on covered business after tax	(28.5)	24.5
Uncovered business and other Group activities	(2.8)	(6.1)
Exceptional profits on business combinations	-	41.0
Tax on uncovered business	1.5	0.4
Minority interest	-	0.1
(Loss)/profit after tax	(29.8)	59.9

Economic conditions

As referred to in the earlier movements analysis, the EEV result is heavily influenced by economic conditions. Economic experience and assumption variances contribute a loss in 2011 of £49.5m as compared to a profit in 2010 of £22.4m. During 2011 there has been a general decline in equity markets and bond yields and the Chesnara result is sensitive to both these factors (further sensitivity analysis is provided in Note 3 of EEV Supplementary Information). The impact of such economic effects on each operating segment is illustrated below:

	2011	2010
	£m	£m
CA	(5.7)	7.6
S&P	(25.5)	(1.5)
Movestic	(18.3)	16.4
	(49.5)	22.5

The Movestic business is adversely impacted by any reduction in equity markets due to its core income stream being dependent upon management charges levied primarily on equity based funds under management. S&P is also adversely affected by any falls in equity markets but, in addition, the strain of guarantees on with-profit contracts is more prominent when bond yields and hence discount rates decline. The CA result is less volatile.

New business contribution

The new business contribution relates to the Movestic Pensions and Savings business. Movestic also writes Risk and Health policies but due to their more short term nature the Risk and Health business is reported as uncovered business and hence does not contribute to the new business result.

Experience variances

	2011	2010
	£m	£m
CA	5.2	11.3
S&P	(0.2)	0.1
Movestic	(4.9)	(7.9)
	0.1	3.5

The CA 2011 experience variance relates to policy persistency and mortality experience being better than assumed. The level of persistency variance has fallen from the prior year figure, primarily due to assumption changes at the end of 2010. In addition, the 2010 comparison benefits from a one off claims provision release of £3.2m.

Operating assumption changes

	2011	2010
	£m	£m
CA	(2.4)	(2.0)
S&P	0.4	-
Movestic	(0.6)	(10.1)
	(2.6)	(12.1)

The UK 2011 figures include £2.8m relating to an increase in expense assumptions as a direct result of the ongoing renegotiation of the HCL outsource arrangements during the year. Other operating assumption changes, including persistency, partially compensate such that the UK components are broadly in line with 2010.

During 2010 Movestic strengthened its persistency and expense assumptions. Despite continued adverse experience variances in 2011 no corresponding assumption changes were considered appropriate in 2011 due to the introduction of new retention initiatives.

Tax

The significant movement in tax includes the positive impact of tax synergies arising on the Part VII transfer of S&P into CA.

Uncovered business and other Group activities

	2011	2010
	£m	£m
Chesnara Parent	(3.1)	(2.4)
Movestic	0.3	(3.7)
	(2.8)	(6.1)

The uncovered result includes an element of Chesnara parent company costs relating to corporate governance and business development, and as such not attributable to the covered life fund results.

The Movestic result relates primarily to its Risk and Health business which is less long term in nature and hence not modelled as covered business. The Risk and Health result has improved due to a 20% increase in retained earned premiums.

Exceptional items

The 2010 result included the one off impact of profit of £40.7m arising on the acquisition of S&P together with a profit of £0.3m arising on the acquisition of Aspis.

European Embedded Value (EEV) £294.5m (2010:£354.6m)

Movement in EEV

The following summarises the movement in EEV:

Statement of changes in equity	Year ended 31 December		Year ended 31 December
	2011	2011	2010	2010
	£m	£m	£m	£m
Shareholders' equity at beginning of the year		354.6		262.6
(Loss)/profit for the period attributable to shareholders before modelling adjustments	(29.8)		59.9
Effect of modelling adjustments	(10.3)		13.2
(Loss)/profit for the year		(40.1)		73.1
Issue of new shares
Share capital		-		0.5
Share premium		-		22.1
Sale of treasury shares		-		3.1
Foreign exchange reserve movement		(1.0)		9.5
Dividends paid		(19.0)		(16.3)
Shareholders' equity at end of the year		294.5		354.6

EEV at end of year is stated before recognition of the final proposed dividend of £12.5m (2010: £12.2m). The net-of-tax results for 2010 and 2011 are commented on in detail in the preceding section.

The effect of modelling adjustments arises from the introduction in 2010 by Movestic of a new system for modelling the value of its in-force policies. This provided the capacity to project cash flows at a greater level of granularity. In 2010 this led to a significant accretion to embedded value arising from the capability to more accurately model (i) the impact on commission outflows of policies becoming paid-up and of (ii) future fee income on a case-by-case basis, whereas previously it was necessary to adopt high-level estimates, particularly as regards investment mix. In 2011 a further improvement in respect of projected fee income from investment contracts where the fee is premium-based, rather than investment-asset based, was introduced, giving rise to a further accretion to embedded value of £2.7m. However as previously reported, during 2011 errors were detected relating to certain parameters and discounting periods utilised in the new model, which gave rise to a diminution in embedded value of £12.4m and are the major constituents of the 2011 modelling adjustments of £10.3m reduction in EEV presented above.

The significant foreign exchange reserve movements arise from the impact of a 1% depreciation of the Swedish Krona against Sterling during 2011, following its appreciation of 9% during 2010.

The amounts relating to the issue of share capital and to the disposal of Treasury Shares in 2010 arose in connection with the acquisition of S&P.

Composition of EEV

The tables below show the composition of EEV by operating segment:

	31 December 2011
	CA	S&P	Movestic	Other Group Activities	Total
	£000	£000	£000	£000	£000
Value of in-force business	50,941	20,816	127,803	-	199,560
Other net assets	66,156	41,763	(26,815)	13,825	94,929
	117,097	62,579	100,988	13,825	294,489
Represented by:
Embedded value of regulated entities	117,097	98,065	99,656	-	314,818
Less: amount financed by borrowings	-	(35,486)	-	-	(35,486)
EEV of regulated entities attributable to shareholders	117,097	62,579	99,656	-	279,332
Net equity of other Group companies	-	-	1,332	13,825	15,157
EEV	117,097	62,579	100,988	13,825	294,489

	31 December 2010
	CA	S&P	Movestic	Other Group Activities	Total
	£000	£000	£000	£000	£000
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 of regulated entities	149,708	103,267	119,330	-	372,305
Less: amount financed by borrowings	-	(39,287)	-	-	(39,287)
EEV of regulated entities attributable to shareholders	149,708	63,980	119,330	-	333,018
Net equity of other Group companies	-	-	1,307	20,311	21,618
EEV	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:

	31 December 2011				31 December 2010
	CA	S&P	Movestic	Total	CA	S&P	Movestic	Total
Number of policies	000's	000's	000's	000's	000's	000's	000's	000's
Endowment	44	6	14	64	50	8	15	73
Protection	48	6	-	54	52	6	-	58
Annuities	6	-	-	6	5	1	-	6
Pensions	49	136	77	262	48	143	75	266
Other	4	14	-	18	7	14	-	21
Total	151	162	91	404	162	172	90	424

	31 December 2011				31 December 2010
	CA	S&P	Movestic	Total	CA	S&P	Movestic	Total
Value of in-force business	£m	£m	£m	£m	£m	£m	£m	£m
Endowment	29.7	4.3	9.7	43.7	34.1	8.3	14.0	56.4
Protection	46.2	3.9	-	50.1	49.1	2.6	-	51.7
Annuities	(0.8)	1.0	-	0.2	0.5	1.5	-	2.0
Pensions	30.7	52.4	118.2	201.3	31.1	68.1	131.0	230.2
Other	2.2	4.1	-	6.3	1.7	0.7	-	2.4
Total at product level	108.0	65.7	127.9	301.6	116.5	81.2	145.0	342.7
Valuation adjustments	-	-	-	-	-	-	-	-
Holding company expenses	(15.1)	-	-	(15.1)	(8.6)	-	-	(8.6)
Other	(27.8)	(41.7)	-	(69.5)	(23.4)	(22.0)	-	(45.4)
Cost of capital/frictional costs	(1.2)	(3.2)	(0.1)	(4.5)	(1.0)	(3.7)	(0.3)	(5.0)
Value in-force pre-tax	63.9	20.8	127.8	212.5	83.5	55.5	144.7	283.7
Taxation	(13.0)	-	-	(13.0)	(4.1)	(14.2)	-	(18.3)
Value in-force post-tax	50.9	20.8	127.8	199.5	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 flows.

'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.

As at 31 December 2011, following the Part VII Transfer, taxation in the value in force is modelled on a combined CA and S&P basis and, in the analysis above, is attributed wholly to the CA segment. As at 31 December 2010 taxation in the value in force was modelled for CA and S&P separately.

Financial Management

Objectives

The Group's financial management framework is designed to provide security for all shareholders, while meeting the expectations of policyholders and shareholders. Accordingly it:

i) safeguards policyholders' interests by meeting regulatory requirements established by the regulators of the insurance markets in which the Group's regulated companies operate, while not retaining unnecessary excess capital;

ii) seeks to meet the dividend expectations of shareholders and to optimise the gearing ratio to ensure an efficient capital base;

iii) ensures there is sufficient liquidity to meet obligations to policyholders, debt financiers and creditors as they fall due; and

iv) maintains the Group as a going concern so that it continues to provide returns and to meet obligations to all shareholders.

Capital Structure and Cash Flows

The Group's UK operations are ordinarily financed through retained earnings and through the current emergence of surplus in the UK life businesses. Movestic is financed by a combination of external financial reinsurance arrangements and capital contributions from Chesnara. With respect to acquisitions the Group seeks to finance these through a suitable mix of debt and equity, within the constraints imposed by the operation of regulatory rules over the level of debt finance which may be borne by Insurance Groups without breaching solvency requirements. The acquisition of S&P in December 2010 for £63.5m was accomplished by way of debt:equity financing broadly in a ratio of 2:1. This introduced a modest level of gearing to the structure of Group financing.

Other factors which may place a demand on capital resources in the future include the costs of unavoidable large scale systems development such as those which may be involved with changing regulatory requirements. To the extent that ongoing administration of the UK life businesses is performed within the terms of its third-party outsourcing agreements, the Group is sheltered, to a degree, from these development costs as they are likely to be on a shared basis.

The Group's longer-term cash flow cycle continues to be characterised by the strong inflow to shareholders' funds of transfers from the long-term insurance funds of CA, which is supported by the emergence of surplus within those funds. These flows are used (i) to repay our debt obligations as set out in the note to the IFRS of these financial statements; (ii) to support dividend distributions to shareholders; and (iii) to support the medium-term requirements of Movestic to meet regulatory solvency capital requirements as it expands.

Methods

In order to meet our obligations we employ and undertake a number of methods which are centered on:

i) regulatory solvency capital resource and capital requirements analysis, where the relevant Boards set minimum targets for solvency capital resources; and

ii) longer-term projections of key financial variables, including the regulatory solvency calculations set out in (i); and

iii) the setting of policies and investment manager guidelines for the investment of policyholder and shareholder funds.

Regulatory solvency capital resources and requirements

The Group's businesses are subject to the operation of the UK, Swedish and EU regulatory regimes with respect to solvency capital requirements at the individual regulated company and Group level. Minimum target solvency ratios are set and established at a level which aims to balance policyholder and shareholder interests. A higher target affords a greater degree of protection to policyholders, but constrains the level of cash generated and transferable by the UK businesses which are in run-off and absorbed by Movestic which is in a development phase. In respect of the UK businesses, statutory regulations require:

i) a Pillar 1 calculation, which compares regulatory capital resource requirements, based on the characteristics of the in-force life business, with an associated measure of capital as prescribed by regulation; and

ii) a Pillar 2 calculation which compares a risk-based assessment of solvency capital with an associated measure of capital based on a realistic assessment of insurance liabilities; and

iii) the amount of required regulatory solvency capital is then determined by the method which gives rise to the lower excess of regulatory capital over requirements.

These calculations are updated quarterly (at least on a high level).

Longer-term projections

On a six monthly basis, longer-term projections are prepared on a Group basis embracing:

(i) Segmental earnings and surplus arising in the long-term insurance funds;

(ii) Chesnara company cash flows;

(iii) Regulatory solvency and capital resources and requirements on a regulated individual entity basis and on a consolidated Group basis; and

(iv) European embedded value.

The projections are prepared for a base case and for various sensitivities, the base case follows the latest assumptions approved by the respective boards, regarding:

i) the calculation of actuarial liabilities for longer-term insurance contracts; and

ii) cash flows within the embedded value calculation.

The sensitivities which are prepared include the impact of adverse movements in;

i) the equity, property and bond markets;

ii) variations in anticipated new business volumes in the Swedish business; and

iii) adverse movements in the Sterling: Swedish Krona exchange rate.

In addition,

· for the UK businesses, financial condition reports are prepared on an annual basis which include assessments of the ability of the business to withstand key adverse events, including increased rates of policy lapse, expense overruns and unfavourable market conditions, and

· Reverse stress testing techniques are employed which identify the circumstances in which Chesnara would become incapable of paying a dividend and the probability of those circumstances arising.

Investment management

An element of meeting policyholders' expectations and thereby, promoting customer retention is the pursuit of good relative investment performance in the policyholder funds;

· The CA funds are primarily managed by Schroder Investment Management Limited while the CWA funds continue to be managed by Irish Life Investment Managers Limited and the S&P funds continue to be managed by JPMorgan.

· We meet formally with fund managers on a quarterly basis to assess past performance and future strategy. Investment guidelines for investment fund managers are established for each fund having regard to the nature of the fund and to contractual obligations to policyholders. For the with profits funds these are also in accordance with the published Principles and Practice of Financial Management.

· Movestic funds are managed by a carefully selected range of fund managers who have strong performance records in the relevant sector. Performance is monitored very closely and regular meetings are held with fund managers. Should underperformance continue then an alternative manager is sourced and appointed to manage the relevant assets. Where a new market niche or specific opportunity is identified new funds may also be added.

· The CA Board continues to have a conservative approach to the investment of shareholders' funds in the UK life businesses, which underpins our strong solvency position. For the UK businesses, where the greater part of shareholders' funds subsist, this approach targets the investment of 100% of available funds in cash and fixed interest securities. In the light of recent volatility in financial markets, particular attention is given to the mix and spread of these investments to ensure that we are not unduly exposed to particular sectors and that our counterparty limits are strictly adhered to.

Outcomes

Key outcomes from our financial management process, in terms of meeting our objectives are set out below:

Solvency and Regulatory Capital

For the whole of the periods presented below the Pillar 1 calculation for the UK business, as described above, gave rise to the lower measure of excess capital. The statutory solvency position of the individual businesses may accordingly be summarised as:

		31 December 2011		31 December 2010
		Solvency ratio	Excess Capital	Solvency ratio	Excess Capital
		%	£m's	%	£m's
CA

	Pre proposed dividend to Chesnara	259	91.4	338	49.4

	Post proposed dividend to Chesnara	183	47.4	213	23.4

S&P		115	0.9	268	43.7

Movestic		245	17.5	188	10.9

Group (Consolidated EU Insurance Groups Directive basis post proposed dividend)		198	75.4	200	60.6

(i) The position as at 31 December 2011 reflects the impact of the Part VII Transfer, as a result of which CA includes the transfer of all the long-term business funds and certain of the share-holder funds of S&P.

(ii) The amounts reported as S&P as at 31 December 2011 accordingly represent residual S&P shareholder funds which have been retained to cover the minimum EU regulatory capital resource requirements for regulated entities.

(iii) Excess capital is determined by the minimum regulatory capital resource targets set by the respective boards, except for the Group solvency ratio for which no target is set above the regulatory minimum of 100%. Reliance is placed instead on the efficacy of targets set at the subsidiary level.

(iv) The information provided in respect of CA and the Group illustrates:

(a) A robust protection for policyholders; and

(b) a favourable position from which Chesnara, which relies on dividend distributions from CA, continues to service its loan commitments and to pursue a progressive dividend policy.

(v) The information in respect of Movestic also illustrates robust policyholder protection and provides the context in which Chesnara makes further capital contributions as the business expands.

Returns to Shareholders

The Board's primary aim is to continue to provide a reliable and progressive dividend flow to shareholders within the context of the emergence of surplus in the UK businesses. Returns to shareholders are underpinned by the emergence of surpluses in, and transfer of surpluses from long-term insurance funds to shareholder funds and by the return on shareholder net assets representing shareholder net equity. These realisations are utilised in the first instance for the repayment and servicing of debt. The surpluses arise from the realisation of in-force value of UK businesses, which are in run-off. The return on shareholder net assets is determined by the Group's investment policy. Shareholder funds bear central corporate governance costs which cannot be fairly attributed to the long-term insurance funds and which arise largely in connection with Chesnara's obligations as a listed company.

Between early March 2010 and the end of November 2010 the share price averaged 220p per share. During that period it generally traded within a range of 200p to 250p per share and was subject to sharp fluctuations within the range, generally reflecting wider market conditions.

Following the announcement of the acquisition of S&P on 20 December 2010 up to mid-March 2011, the share price steadily strengthened so that it was consistently trading within a range of 240p to 260p per share. Based on total proposed dividends for 2010 of 16.4p per share, this implied a yield of between 6.3% and 6.8%, with the shares trading at a discount of between 13% to 19% to the latest published embedded value of £354.6m at 31 December 2010.

Over the period from mid-March 2011 to mid-November 2011 the share price declined steadily from a high in the range of 255p to 260p per share to a low in the range of 160p to 165p per share. This fall was largely driven by the decline in global investment markets and followed the fortunes of the life insurance sector as a whole. However, the share price has, from mid-November 2011 to mid-March 2012, fluctuated within a range of 165p to 186p and this has not reflected the upturn in the sector as a whole. Based on total proposed dividends for 2011 of 16.85p per share this implies a yield of between 9.1% and 10.2% with the shares trading at a discount of between 29% and 36% to EEV as at 31 December 2011.

Returns to Policyholders

Key aspects of policyholder fund performance in respect of the UK Business and in respect of the Swedish Business are set out in the Chief Executive's Review.

Liquidity

The current profile and mix of investment asset holdings between fixed-interest securities is such that realisations to meet obligations to third parties and to support dividend distributions can be made in an orderly and efficient way.

Going Concern

The Group's cash flow position together with the return on financial assets in the parent company, supports the ability to trade in the short term. Accordingly, the underlying solvency position of the UK life businesses and their ongoing ability to generate surpluses which support cash transfers to shareholders' funds is critical to the ongoing ability of the Group to continue trading and to meet its obligations as they fall due.

The information set out in `Solvency and Regulatory Capital' above indicates a strong solvency position as at 31 December 2011 as measured at both the individual regulated life company levels in both the UK and Sweden and at the Group level. In addition, in respect of CA and S&P the financial condition report and reverse stress testing assessments indicate that the CA and S&P businesses are able to withstand the impact of adverse scenarios, including the effect of significant investment market falls, while the business's outsourcing arrangements protect it from significant expense overruns.

Notwithstanding that the Group is well capitalised, the current financial and economic environment continues to present specific threats to its short-term cash flow position and it is appropriate to assess other relevant factors. In the first instance, the Group does not rely on the renewal or extension of bank facilities to continue trading - indeed, as indicated, its normal operations are cash generative. The Group does, however, rely on cash flow from the maturity or sale of fixed interest securities which match certain obligations to policyholders: in the current economic environment there remains a continuing higher risk of bond default, particularly in respect of financial institutions. In order to manage this risk we ensure that our bond portfolio is actively monitored and well diversified. Other significant counterparty default risk relates to our principal reassurers. We monitor their financial position and are satisfied that any associated credit default risk is low. It is noteworthy that we have negligible exposure to Euro-denominated sovereign debt.

Our expectation is that, notwithstanding the risks set out above, the Group will continue to generate surplus in its UK long-term businesses sufficient to meet its debt obligations as they fall due, to continue to pursue a reliable and progressive dividend policy and to meet the short-term financing requirements of Movestic, which is expected to become cash-generative within one to two years.

Consolidated Financial Statements - IFRS Basis

Consolidated Statement of Comprehensive Income for the period ended 31 December 2011

	Year ended 31 December
	2011	2010
	£000	£000
Insurance premium revenue	121,976	114,950
Insurance premium ceded to reinsurers	(34,970)	(35,695)
Net insurance premium revenue	87,006	79,255
Fee and commission income	67,863	63,410
Net investment return	(192,402)	303,850
Total revenue net of reinsurance payable	(37,533)	446,515
Other operating income	21,782	9,216
Total income net of investment return	(15,751)	455,731
Insurance contract claims and benefits incurred
Claims and benefits paid to insurance contract holders	(267,691)	(139,424)
Net decrease/(increase) in insurance contract provisions	204,864	(106,618)
Reinsurers' share of claims and benefits	17,401	45,635
Net insurance contract claims and benefits	(45,426)	(200,407)
Change in investment contract liabilities	164,166	(180,021)
Reinsurers' share of investment contract liabilities	(1,500)	3,904
Net change in investment contract liabilities	162,666	(176,117)
Fees, commission and other acquisition costs	(17,276)	(14,688)
Administrative expenses	(38,798)	(29,375)
Other operating expenses
Charge for amortisation of acquired value of in-force business	(9,032)	(8,145)
Charge for amortisation of acquired value of customer relationships	(758)	(952)
Other	(9,664)	(7,060)
Total expenses net of change in insurance contract provisions and investment contract liabilities	41,712	(436,744)
Total income less expenses	25,961	18,987
Share of (loss)/profit of associate	(152)	597
Profit recognised on business combinations	-	15,864
Operating profit	25,809	35,448
Financing costs	(3,388)	(1,280)
Profit before income taxes	22,421	34,168
Income tax credit/(expense)	3,244	(4,467)
Profit for the period	25,665	29,701
Attributable to:
Shareholders	25,665	29,819
Non-controlling interest	-	(118)
	25,665	29,701
Foreign exchange translation differences arising on the revaluation of foreign operations	(738)	4,285
Total comprehensive income for the year	24,927	33,986
Attributable to:
Shareholders	24,927	34,104
Non-controlling interest	-	(118)
	24,927	33,986

Basic earnings per share (based on profit for the year attributable to shareholders)	22.35p	29.05p

Diluted earnings per share (based on profit for the year attributable to shareholders)	22.35p	29.05p

Consolidated Balance Sheet at 31 December 2011

	31 December
	2011	2010
	£000	£000
Assets
Intangible assets
Deferred acquisition costs	19,720	14,659
Acquired value of in-force business	83,346	93,046
Acquired value of customer relationships	2,255	3,032
Software assets	6,744	6,829
Property and equipment	385	671
Investment in associates	1,613	1,783
Investment properties	132,128	120,820
Reinsurers' share of insurance contract provisions	263,792	280,743
Amounts deposited with reinsurers	28,031	30,264
Financial assets
Equity securities at fair value through income	404,431	492,321
Holdings in collective investment schemes at fair value through income	2,917,935	3,177,265
Debt securities at fair value through income	330,610	319,516
Policyholders' funds held by the Group	49,080	52,337
Insurance and other receivables	30,799	33,225
Prepayments	3,234	3,908
Derivative financial instruments	10,308	9,707
Total financial assets	3,746,397	4,088,279
Reinsurers' share of accrued policyholder claims	4,667	3,678
Income taxes	6,956	5,486
Cash and cash equivalents	195,920	194,134
Assets held for sale	-	380
Total assets	4,491,954	4,843,804

Liabilities
Liabilities held for sale	-	380
Bank overdrafts	834	2,154
Insurance contract provisions	2,184,685	2,404,079
Unallocated divisible surplus	6,254	83
Financial liabilities
Investment contracts at fair value through income	1,876,463	2,002,712
Liabilities relating to policyholders' funds held by the Group	49,080	52,337
Borrowings	54,753	62,694
Derivative financial instruments	144	137
Total financial liabilities	1,980,440	2,117,880
Provisions	2,811	1,822
Deferred tax liabilities	15,390	20,526
Reinsurance payables	16,336	22,310
Payables related to direct insurance and investment contracts	40,651	35,808
Deferred income	10,000	11,647
Income taxes	947	6,923
Other payables	24,417	16,923
Total liabilities	4,282,765	4,640,535
Net assets	209,189	203,269

Shareholders' equity
Share capital	42,024	42,024
Share premium	42,523	42,523
Treasury shares	(217)	(217)
Other reserves	6,978	7,716
Retained earnings	117,881	111,223
Total shareholders' equity	209,189	203,269

Consolidated Statement of Cash Flows for the year ended 31 December 2011

	Year ended 31 December
	2011	2010
	£000	£000
Profit for the year	25,665	29,819
Adjustments for:
Depreciation of property and equipment	219	294
Amortisation of deferred acquisition costs	7,339	5,737
Amortisation of acquired value of in-force business	9,032	8,148
Amortisation of acquired value of customer relationships	758	1,182
Amortisation of software assets	1,968	1,176
Tax (recovery) / expense	(3,244)	4,467
Interest receivable	(28,632)	(16,913)
Dividends receivable	(40,261)	(31,090)
Interest expense	3,388	1,280
Change in fair value of investment properties	(4,233)	(113)
Fair value losses/(gains) on financial assets	272,517	(252,456)
Loss on sale of property and equipment	-	2
Profit arising on business combinations	-	(15,864)
Share of loss/(profit) of associate net of impairment	152	(597)
Interest received	27,874	16,370
Dividends received	40,350	30,792
Increase in intangible assets related to insurance and investment contracts	(12,642)	(10,343)
Changes in operating assets and liabilities
Decrease/(increase) in financial assets	44,697	(78,785)
Decrease/(increase) in reinsurers share of insurance contract provisions	15,442	(31,471)
Decrease/(increase) in amounts deposited with reinsurers	2,233	(3,208)
Decrease in insurance and other receivables	2,967	1,305
Decrease in prepayments	659	80
Decrease/(increase) in assets held for sale	380	(380)
(Decrease)/increase in liabilities held for sale	(380)	380
(Decrease)/Increase in insurance contract provisions	(212,424)	121,382
(Decrease)/Increase in investment contract liabilities	(115,100)	270,801
Increase in provisions	989	370
(Decrease)/Increase in reinsurance payables	(5,859)	5,677
Increase/(decrease) in payables related to direct insurance and investment contracts	4,981	(6,050)
Increase/(decrease) in other payables	5,719	(422)
Cash generated from operations	44,554	51,570
Income tax paid	(9,119)	(4,537)
Net cash generated from operating activities	35,435	47,033

Cash flows from investing activities
Business combinations, net of cash acquired	-	(46,483)
Investment in associates	-	(38)
Development of software	(1,968)	(2,541)
Disposals/(purchases) of property and equipment	63	(296)
Net cash utilised by investing activities	(1,905)	(49,358)

Cash flows from financing activities
Proceeds from the issue of share capital	-	22,588
Repayment of borrowings	(7,510)	(7,236)
Proceeds from borrowings	-	40,000
Sale of treasury shares	-	3,162
Dividends paid	(19,007)	(16,340)
Interest paid	(3,625)	(2,365)
Net cash (utilised by)/generated from financing activities	(30,142)	39,809

Net increase in cash and cash equivalents	3,388	37,484
Cash and cash equivalents at beginning of period	191,980	152,929
Effect of exchange rate changes on cash and cash equivalents	(282)	1,567
Cash and cash equivalents at end of the year	195,086	191,980

Consolidated Statement of Changes in Equity for the year ended 31 December 2011

	Year ended 31 December 2011
	Share capital	Share premium	Other reserves	Treasury shares	Retained earnings	Total
	£000	£000	£000	£000	£000	£000

Equity shareholders' funds at 1 January 2011	42,024	42,523	7,716	(217)	111,223	203,269
Profit for the period representing total recognised income and expenses	-	-	-	-	25,665	25,665
Dividends paid	-	-	-	-	(19,007)	(19,007)
Foreign exchange translation reserve	-	-	(738)	-	-	(738)
Equity shareholders' funds at 31 December 2011	42,024	42,523	6,978	(217)	117,881	209,189

	Year ended 31 December 2010
	Share capital	Share premium	Other reserves	Treasury shares	Retained earnings	Total
	£000	£000	£000	£000	£000	£000

Equity shareholders' funds at 1 January 2010	41,501	20,458	3,431	(3,379)	97,744	159,755
Profit for the period representing total recognised income and expenses	-	-	-	-	29,819	29,819
Dividends paid	-	-	-	-	(16,340)	(16,340)
Issue of new shares	523	22,065	-	-	-	22,588
Sale of treasury shares	-	-	-	3,162	-	3,162
Foreign exchange 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 consolidated financial statements - IFRS Basis

1. Basis of presentation

The preliminary announcement is based on the Group's financial statements for the year ended 31 December 2011, which are prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union ('Adopted IFRSs') as adopted by the EU.

The financial information contained in the preliminary announcement does not constitute the company's consolidated statutory financial statements for the years ended 31 December 2011 or 2010, but is derived from those financial statements. Financial Statements for the year ended 31 December 2010 have been delivered to the Registrar of Companies and those for the year ended 31 December 2011 will be delivered following the company's annual general meeting. The auditors have reported on those financial statements; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under s498 (2) or (3) Companies Act 2006.

2. Significant accounting policies

The accounting policies applied by the Group in determining the IFRS basis results in this report are the same as those previously applied in the Group's consolidated financial statements for the year ended 31 December 2010.

3. Operating segments

The Group considers that it has no product or distribution-based business segments. It reports segmental information on the same basis as reported internally to the Chief Operating Decision Maker, which is the Board of Directors of Chesnara plc.

The segments of the Group as at 31 December 2011 comprise:

This segment is part of the Group's UK life insurance and pensions run-off portfolio and comprises the original business of Countrywide Assured plc, the Group's principal UK operating subsidiary, and of City of Westminster Assurance Company Limited which was acquired in 2005 and the long-term business of which was transferred to Countrywide Assured plc during 2006. It is responsible for conducting unit-linked and non-linked business.

S&P

This segment, which was acquired on 20 December 2010, is the balance of the Group's UK life insurance and pensions run-off portfolio and comprises the business of Save & Prosper Insurance Limited and its subsidiary Save & Prosper Pensions Limited. It is responsible for conducting both unit-linked and non-linked business, including a with-profits portfolio, which carries significant additional market risk. On 31 December 2011 the whole of the business of this segment was transferred to Countrywide Assured plc under the provisions of Part VII of the Financial Services and Markets Act 2000.

Movestic

This segment comprises the Group's Swedish life and pensions business, Movestic Livförsäkring AB (`Movestic') and its subsidiary and associated companies, which are open to new business and which are responsible for conducting both unit-linked and non-linked business.

Other Group Activities

The functions performed by the parent company, Chesnara plc, are defined under the operating segment analysis as Other Group Activities. Also included therein are consolidation and elimination adjustments.

Apart from the changes set out above, there were no changes to the basis of segmentation during the year ended 31 December 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 year ended 31 December 2011

(i) Segmental income statement for the year ended 31 December 2011

	CA	S&P	Movestic	Other Group Activities	Total
	£000	£000	£000	£000	£000
Insurance premium revenue	72,892	10,699	38,385	-	121,976
Insurance premium ceded to reinsurers	(13,331)	(259)	(21,380)	-	(34,970)
Net insurance premium revenue	59,561	10,440	17,005	-	87,006
Fee and commission income	37,675	2,768	27,420	-	67,863
Net investment return	(19,009)	(21,685)	(151,938)	230	(192,402)
Total revenue (net of reinsurance payable)	78,227	(8,477)	(107,513)	230	(37,533)
Other operating income	3,584	11,702	6,446	50	21,782
Segmental income	81,811	3,225	(101,067)	280	(15,751)
Insurance contract claims and benefits incurred
Claims and benefits paid to insurance contract holders	(148,964)	(102,901)	(15,826)	-	(267,691)
Net (increase)/decrease in insurance contract provisions	83,323	122,009	(468)	-	204,864
Reinsurers' share of claims and benefits	8,660	(1,045)	9,786	-	17,401
Net insurance contract claims and benefits incurred	(56,981)	18,063	(6,508)	-	(45,426)
Change in investment contract liabilities	13,231	(963)	151,898	-	164,166
Reinsurers' share of investment contract liabilities	(1,500)	-	-	-	(1,500)
Net change in investment contract liabilities	11,731	(963)	151,898	-	162,666
Fees, commission and other acquisition costs	(1,293)	(63)	(15,920)	-	(17,276)
Administrative expenses	(8,734)	(11,687)	(15,342)	(3,035)	(38,798)
Other operating expenses
Charge for amortisation of acquired value of in-force business	(3,640)	(964)	(4,428)	-	(9,032)
Charge for amortisation of acquired value of customer relationships	-	-	(758)	-	(758)
Other	(729)	(1,087)	(6,457)	(1,391)	(9,664)

Segmental expenses	(59,646)	3,299	102,485	(4,426)	41,712
Segmental income less expenses	22,165	6,524	1,418	(4,146)	25,961
Share of profit from associates	-	-	(152)	-	(152)
Profit recognised on acquisition of subsidiary	-	-	-	-	-
Segmental operating profit/(loss)	22,165	6,524	1,266	(4,146)	25,809
Financing costs	-	(12)	(1,957)	(1,419)	(3,388)
Loss recognised on disposal of subsidiary	-	-	-	-	-
Profit/(loss) before tax	22,165	6,512	(691)	(5,565)	22,421
Income tax (expense)/credit	(1,307)	3,079	275	1,197	3,244
Profit/(loss) after tax attributable to shareholders	20,858	9,591	(416)	(4,368)	25,665

(ii) Segmental income statement for the year ended 31 December 2010

	CA	S&P	Movestic	Other Group Activities	Total
	£000	£000	£000	£000	£000
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	(4,897)	-	(11,470)	210	(16,157)
Charge for amortisation of acquired value of in-force business	(3,661)	-	(4,446)	(38)	(8,145))
Charge for amortisation of acquired value of customer relationships	-	-	(952)	-	(952)
Other	(1,236)	-	(6,072)	248	(7,060)
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

(iii) Segmental balance sheet as at 31 December 2011

	CA	S&P	Movestic	Other Group Activities	Total
	£000	£000	£000	£000	£000
Intangible assets	23,210	8,091	80,764	-	112,065
Property and equipment	55	-	330	-	385
Investment in associates	-	-	1,613	-	1,613
Reinsurers' share of insurance contract provisions	214,719	6,008	43,065	-	263,792
Amounts deposited with reinsurers	28,031	-	-	-	28,031
Investment properties	648	131,480	-	-	132,128
Financial assets	1,353,290	1,152,265	1,240,546	296	3,746,397
Reinsurers' share of accrued policyholder claims	4,644	23	-	-	4,667
Income tax	-	448	5,311	1,197	6,956
Cash and cash equivalents	150,267	5,894	24,122	15,637	195,920
Total assets	1,774,864	1,304,209	1,395,751	17,130	4,491,954

Bank overdrafts	828	6	-	-	834
Insurance contract provisions	1,042,030	1,078,873	63,782	-	2,184,685
Unallocated divisible surplus	-	6,254	-	-	6,254
Financial liabilities	599,587	105,599	1,239,768	35,486	1,980,440
Provisions	1,311	-	-	1,500	2,811
Provision for write-down of assets held for sale	-	-	-	-	-
Deferred tax liabilities	6,077	8,546	767	-	15,390
Reinsurance payables	1,901	20	14,415	-	16,336
Payables related to direct insurance and investment contracts	21,864	10,269	8,518	-	40,651
Deferred income	10,000	-	-	-	10,000
Income taxes	947	-	-	-	947
Other payables	4,833	5,906	11,591	2,087	24,417
Total liabilities	1,689,378	1,215,473	1,338,841	39,073	4,282,765
Net assets	85,486	88,736	56,910	(21,943)	209,189

(iv) Segmental balance sheet as at 31 December 2010

	CA	S&P	Movestic	Other Group Activities	Total
	£000	£000	£000	£000	£000
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
Financial liabilities	646,746	108,862	1,322,985	39,287	2,117,880
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

4. Borrowings

	31 December
	2011	2010
	£000	£000
Bank loan	35,486	39,287
Amount due in relation to financial reinsurance	19,267	23,406
Other	-	1
Total	54,753	62,694

Current	12,472	13,107
Non-current	42,281	49,587
Total	54,753	62,694

The bank loan subsisting at 31 December 2011, which was drawn down on 20 December 2010 under a facility made available on 17 November 2010, is unsecured and is repayable in five increasing annual instalments on the anniversary of the draw down date. The outstanding principal on the loan bears interest at a rate of 2.25 percentage points above the London Inter-Bank Offer Rate and is repayable over a period which varies between one and six months at the option of the borrower.

The fair value of the bank loan at 31 December 2011 was £36,000,000 (31 December 2010: £40,000,000).

The fair value of amounts due in relation to financial reinsurance was £20,672,526 (31 December 2010: £24,590,409).

The fair value of other borrowings is not materially different from their carrying value.

5. Earnings per share

Earnings per share are based on the following:

	Year ended 31 December
	2011	2010
Profit for the year attributable to shareholders (£000)	25,665	29,819
Weighted average number of ordinary shares	114,848,651	102,642,750
Basic earnings per share	22.35p	29.05p
Diluted earnings per share	22.35p	29.05p

The weighted average number of ordinary shares in respect of the year ended 31 December 2011 is based upon 115,047,662 shares in issue less 199,011 own shares held in treasury.

The weighted average number of ordinary shares in respect of the year ended 31 December 2010 is based on 104,588,785 shares in issue at the beginning of the period less 3,096,194 own shares held in treasury and on 115,047,662 shares in issue at the end of the period, less 199,011 own shares held in treasury, taking account of the timing of the issue of new shares and of the sale of treasury shares.

There were no share options outstanding during the year ended 31 December 2010 or during the year ended 31 December 2011. Accordingly, there is no dilution of the average number of ordinary shares in issue in respect of these periods.

Earnings per share for the year ended 31 December 2010 includes the impact of £15,864,000 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.

6. Retained Earnings

	31 December
	2011	2010
	£000	£000
Retained earnings attributable to equity holders of the parent company comprise
Balance at 31 January	111,223	97,744
Profit for the year	25,665	29,819
Dividends
Final approved and paid for 2009	-	(10,453)
Interim approved and paid for 2010	-	(5,887)
Final approved and paid for 2010	(12,174)	-
Interim approved and paid for 2011	(6,833)	-
Balance at 31 December	117,881	111,223

The interim dividend in respect of 2010, approved and paid in 2010 was paid at the rate of 5.8p per share. The final dividend in respect of 2010, approved and paid in 2011, was paid at the rate of 10.6p 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 16.4p per share.

The interim dividend in respect of 2011, approved and paid in 2011, was paid at the rate of 5.95p per share to equity shareholders of the Parent Company registered at the close of business on 9 September 2011, the dividend record date.

A final dividend of 10.9p per share in respect of the year ended 31 December 2011 payable on 22 May 2012 to equity shareholders of the Parent Company registered at the close of business on 13 April 2012, the dividend record date, was approved by the Directors after the balance sheet date. The resulting total final dividend of £12.5m has not been provided for in these financial statements and there are no income tax consequences.

The following summarises dividends per share in respect of the year ended 31 December 2011 and 31 December 2012:

	2011	2010
	p	p
Interim - approved and paid	5.95	5.80
Final - proposed	10.90	10.60
Total	16.85	16.40

Supplementary Information - European Embedded Value Basis

Summarised EEV consolidated income statement

	Year ended 31 December
	2011	2010
	£000	£000

Operating profit of covered business	15,314	6,364
Other operational result	(2,811)	(6,114)
Operating profit	12,503	250
Variation from longer-term investment return	(16,929)	26,941
Effect of economic assumption changes	(32,479)	(4,453)
(Loss)/profit before tax and before exceptional item	(36,905)	22,738
Exceptional items
Profit recognised on business combinations	-	41,043
Effect of modelling adjustments	(10,328)	13,239
(Loss)/profit before tax	(47,233)	77,020
Tax	7,123	(4,014)
(Loss)/Profit for the year	(40,110)	73,006
Attributable to:
Shareholders	(40,110)	73,124
Non-controlling interest	-	(118)
	(40,110)	73,006

Earnings per share

Based on profit for the period attributable to shareholders

(34.92)p

71.24p

Diluted earnings per share

Based on profit for the period attributable to shareholders

(34.92)p

71.24p

Summarised EEV consolidated balance sheet

	31 December
	2011	2010
Assets	£000	£000
Value of in-force business	199,560	265,415
Deferred acquisition costs arising on unmodelled business	834	616
Acquired value of customer relationships	694	983
Software assets	-	6,829
Property and equipment	385	671
Investment in associate	1,613	1,783
Reinsurers' share of insurance contract provisions	230,891	247,432
Amounts deposited with reinsurers	26,637	29,002
Investment properties	132,128	120,820
Financial assets
Equity securities at fair value through income	404,431	492,321
Holdings in collective investment schemes at fair value through income	2,917,935	3,177,265
Debt securities at fair value through income	330,610	319,516
Insurance and other receivables	30,799	33,234
Prepayments	3,234	3,908
Policyholders' funds held by the Group	49,080	52,337
Derivative financial instruments	10,308	9,707
Total financial assets	3,746,397	4,088,288
Reinsurers' share of accrued policy claims	4,667	3,678
Income taxes	6,932	5,486
Cash and cash equivalents	195,920	194,134
Assets held for sale	-	380
Total assets	4,546,658	4,965,517

Liabilities
Liabilities held for sale	-	380
Bank overdraft	834	2,154
Insurance contract provisions	2,149,676	2,370,948
Unallocated divisible surplus	15,644	14,930
Financial liabilities
Investment contracts at fair value through income	1,887,261	2,010,954
Borrowings	61,765	70,148
Derivative financial instruments	144	137
Liabilities relating to policyholders' funds held by the Group	49,080	52,337
Total financial liabilities	1,998,250	2,133,576
Provisions	2,811	1,822
Deferred tax liabilities	3,080	5,578
Reinsurance payables	15,883	21,830
Payables related to direct insurance and investment contracts	40,651	35,808
Income taxes	923	6,923
Other payables	24,217	16,932
Total liabilities	4,252,169	4,610,881
Net assets	294,489	354,636

Equity
Share capital	42,024	42,024
Share premium	42,523	42,523
Treasury shares	(217)	(217)
Foreign exchange reserve	14,026	15,056
Other reserves	50	50
Retained earnings	196,083	255,200
Total shareholders' equity	294,489	354,636

Notes to the EEV Supplementary Information

1. Basis of preparation

This section sets out the detailed methodology followed for producing these Group financial statements which are supplementary to the Group's primary financial statements which have been prepared in accordance with International Financial Reporting Standards ('IFRS'). These financial statements have been prepared in accordance with the European Embedded Value ('EEV') principles issued in May 2004 by the European CFO Forum and supplemented by Additional Guidance on EEV Disclosures issued by the same body in October 2005. The principles provide a framework intended to improve comparability and transparency in embedded value reporting across Europe.

In order to improve understanding of the Group's financial position and performance, certain of the information presented in these financial statements is presented on a segmental basis. The S&P business 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.

2. Summarised statement of changes in equity and analysis of profit/(loss)

(a) Changes in equity may be summarised as:

Statement of changes in equity	Year ended 31 December		Year ended 31 December
	2011	2011		2010	2010
	£000	£000		£000	£000
Shareholders' equity at beginning of the year		354,636			262,585
(Loss)/profit for the period attributable to shareholders before modelling adjustments	(29,782)			59,885
Effect of modelling adjustments	(10,328)			13,239
(Loss)/profit for the year		(40,110)			73,124
Issue of new shares
Share capital		-			523
Share premium		-			22,065
Sale of treasury shares		-			3,162
Foreign exchange reserve movement		(1,030)			9,517
Dividends paid		(19,007)			(16,340)
Shareholders' equity at end of the year		294,489			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 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 this resulted in an increase in embedded value of £2.7m.

(ii) Movestic modelling 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 £12.4m.

(iii) S&P model enhancements giving rise to a further £0.6m reduction in EEV, account for the balance of the total modelling adjustments of £(10.3)m for the year ended 31 December 2011, as presented above.

The European Embedded Value principles issued by the European CFO Forum in May 2004, together with supplementary guidance, do not provide specific guidance on how the errors identified in (ii) above 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/(loss) for the year before modelling adjustments is analysed as:

Year ended 31 December 2011	CA	S&P	Movestic	Other Group Activities	Total
	£000	£000	£000	£000	£000
Covered business
New business contribution	398	42	3,074	-	3,514
Return from in-force business
Expected return	4,072	257	5,902	-	10,231
Experience variances	5,203	(157)	(4,922)	-	124
Operating assumption changes	(2,397)	372	(592)	-	(2,617)
Return on shareholder net worth	1,126	2,936	-	-	4,062
Operating profit of covered business	8,402	3,450	3,462	-	15,314
Variation from longer-term investment return	3,066	(1,762)	(18,233)	-	(16,929)
Effect of economic assumption changes	(8,754)	(23,706)	(19)	-	(32,479)
Profit/(loss) on covered business before tax	2,714	(22,018)	(14,790)	-	(34,094)
Tax thereon	(11,804)	17,455	-	-	5,651
(Loss)/profit on covered business after tax	(9,090)	(4,563)	(14,790)	-	(28,443)

Results of non-covered business and of other group companies
Profit/(loss) before tax	-	-	308	(3,119)	(2,811)
Tax	-	-	280	1,192	1,472
Loss after tax	(9,090)	(4,563)	(14,202)	(1,927)	(29,782)

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.

Year ended 31 December 2010	CA	S&P	Movestic	Other Group Activities	Total
	£000	£000	£000	£000	£000
Covered business
New business contribution	685	-	2,057	-	2,742
Return from in-force business
Expected return	5,203	6	6,207	-	11,416
Experience variances	11,315	101	(7,942)	-	3,474
Operating assumption changes	(1,985)	-	(10,142)	-	(12,127)
Return on shareholder net worth	736	123	-	-	859
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 assumption changes	(7,248)	(1,513)	4,308	-	(4,453)
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 exceptional items	-	-	(3,674)	(2,440)	(6,114)
Exceptional profit recognised on
- business combination of Aspis	-	-	376	-	376
- business combination of S&P	-	-	-	40,667	40,667
Tax	-	-	177	145	322
Profit/(loss) after tax	18,891	(924)	3,428	38,372	59,767
Non-controlling interest	-	-	118	-	118
Profit/(loss) for the period attributable to shareholders	18,891	(924)	3,546	38,372	59,885

3. Sensitivities to alternative assumptions

The following tables show the sensitivity of the embedded value as reported at 31 December 2011, and of the new business contribution of Movestic, to variations in the assumptions adopted in the calculation of the embedded value. Sensitivity analysis is not provided in respect of the new business contribution of CA and S&P for the year ended 31 December 2011 as the reported level of new business contribution is not considered to be material.

	Embedded Value			New Business Contribution
	CA	S&P	Movestic	Movestic
	£m	£m	£m	£m
Published value as at 31 December 2011	117.1	98.1	101.0	3.1

Changes in embedded value/new business contribution arising from:

Economic sensitivities
100 basis point increase in yield curve	-	8.7	(0.2)	(0.1)
100 basis point reduction in yield curve	(3.2)	(23.3)	0.2	0.1
10% decrease in equity and property values	(3.4)	(9.2)	(8.0)	n/a

Operating sensitivities
10% decrease in maintenance expenses	2.1	3.1	6.4	0.6
10% decrease in lapse rates	2.2	(1.9)	8.5	1.1
5% decrease in mortality/morbidity rates
Assurances	1.2	0.4	0.4	-
Annuities	(2.0)	(0.5)	n/a	n/a
Reduction in the required capital to statutory minimum	0.8	0.9	-	-

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; and

(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 £20 per policy pa reducing to £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; and

(iv) the sensitivity to the reduction in the required capital to the statutory minimum shows the effect of reducing the required capital from that defined above to the minimum requirement prescribed by regulation.

In each sensitivity calculation all other assumptions remain unchanged except where they are directly affected by the revised economic conditions: for example, as stated, changes in interest rates will directly affect the reference rate.

4. Earnings per share

	Year ended 31 December
	2011	2010
	p	p
Basic earnings per share
Based on (loss)/profit for the period attributable to shareholders	(34.92)	71.24
Based on (loss)/profit for the period attributable to shareholders before exceptional item	(27.36)	31.26
Diluted earnings per share
Based on profit for the period attributable to shareholders	(34.92)	71.24
Based on profit for the period attributable to shareholders before exceptional item	(27.36)	31.26

This information is provided by RNS

The company news service from the London Stock Exchange

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