Final Results

RNS Number : 0697B

Chesnara PLC

28 March 2013

Chesnara plc

3% increase continues dividend growth at Chesnara

Chesnara today reported final results for the year ended 31 December 2012. The Group remains committed to offering shareholders an attractive long-term income stream arising from the profits of its life assurance businesses.

· IFRS profit before tax, excluding exceptional item, for the year ended 31 December 2012 increased by 9% to £24.5m (2011: £22.4m)

· Increase of 5% in EEV to £311.1m (31 December 2011: £294.5m)

· Increase of 24% in EEV pre-tax operating profit to £19.0m (31 December 2011: £15.3m), excluding modelling adjustments

· Strong and increased cash generation of £41.0m (2011: £31.4m)

· Group solvency ratio remains strong at 244% (31 December 2011: 198%)

· Subsidiary solvency ratios also strong and above targets. CA at 199% (31 December 2011: 183%) and Movestic at 280% (31 December 2011: 245%)

· Movestic increases IFRS pre-tax profit to £1.4m (2011: £0.4m)

· Shareholder equity on EEV basis (pre proposed final dividend payment) now £2.71p per share (2011: £2.56p per share)

· Earnings per share on IFRS basis of 24.33p (2011: 22.35p)

· Final proposed dividend increased by 3.2% to 11.25p (2011:10.9p). Total dividend for the year increased by 3% to 17.35p (2011:16.85p)

· Board remains focussed on offering shareholders an attractive dividend flow

· Acquisition opportunities continue to be sought and examined

Graham Kettleborough, Chief Executive said:

'The positive progression in all significant measures yet again underlines the resilience of our business model. The strong underlying core in the UK and improvements in sales and service performance in Sweden augur well for the future.

The Board is pleased to recommend an increase in the final dividend to 11.25p per share. This gives rise to a total dividend for the year of 17.35p which represents a 3% increase.'

The Board approved this statement on 27 March 2013.

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 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 the 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 comprises 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. 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

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

2012 highlights Note 1

Financial

· 9% increase in IFRS pre-tax profit to £24.5m, excluding exceptional item (2011: £22.4m).

· Net cash generated during 2012 of £41.0m (2011: £31.4m) Note 2.

· Increase in EEV of £16.6m from £294.5m to £311.1m after recognising the impact of £19.5m dividend distributions.

· Increase in pre-tax EEV operating profit to £19.0m from £15.3m.

· Strong Insurance Group Directive solvency cover of 244% (2011: 198%).

· Proposed final dividend increased by 3% to 11.25p per share.

Operational

· Final stages of the S&P Part VII Transfer programme completed releasing £7m of capital.

· S&P fully integrated into the UK business.

· Strong outsourcer performance: all administration and asset management partners have out-performed their respective targets and benchmarks.

· Movestic service improvements: process re-engineering programme successfully mitigated the servicing problems experienced in 2011 and into 2012.

· Good regulatory compliance record continues.

· Recovery in new business market share in the core Movestic unit-linked pensions target market during the second half of 2012.

Notes

1. Throughout the Chairman's Statement, Chief Executive's 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 value in force (VIF) and other adjustments, arising on the acquisition of Movestic. These consolidation adjustments are analysed by business segment within the IFRS pre-tax profit section of the Financial Review.

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

Continued strong operational performance in the UK, together with encouraging signs that Movestic is through the worst of its recent operating difficulties, when combined with the generally favourable investment market conditions during the year, means we end 2012 in good financial shape and well positioned to continue to deliver value to our stakeholders.

Chesnara has delivered a strong set of financial results, benefiting in part from generally favourable investment market conditions during the year.

Whilst we have benefited from investment markets performance during 2012, the Board remains mindful that the financial strength, and hence dividend paying capacity of the Group, remains sensitive to economic conditions outside of its direct control and, as such, the management of market risk remains a key priority.

The Chesnara Group has a relatively low risk and transparent investment model as a direct result of our long-established values which put responsible risk management at the heart of all decisions we make. During 2012 we have continued to enhance our management of market risk, in particular through improvements in the management of our asset and liability matching position and through the continuing development of long-term projection models.

Whilst the 2012 results illustrate the significant levels of cash generation available in favourable economic conditions, we remain vigilant to the fact that continued market recovery, growth and stability cannot be taken for granted. The ongoing improvements in our management of market risk gives me significant comfort regarding the ability of the Group to weather any future adverse investment market conditions that may arise.

Risk management and Solvency II

We have continued to progress the Solvency II programme such that I remain confident that we will be in a position to adhere to statutory requirements and timeframes ultimately agreed by both European and UK Regulators.

That said, whilst the Solvency II implementation will create a beneficial and consistent regulatory framework, it is my belief that Chesnara already embraces the core principles and purpose of Solvency II. Responsible, risk-based decision making has and continues to be at the heart of our business culture.

Regardless of the Solvency II regulatory requirements, we continue to develop our internal risk-based management model:

· The Board has approved the development of a risk-based business planning model, to be fully implemented by 2014.

· The first phase of risk-based projection modelling has been developed, with outputs used by the Board during 2012. Further enhancements are under development.

· Asset and liability matching is actively monitored and assessed throughout the year with investment changes implemented to ensure the most appropriate level of market risk for all stakeholders.

· During the year we have undertaken a full independent review of our UK Internal Audit function and will implement the relevant recommendations.

· Within Movestic we have begun the roll-out of the most appropriate elements of the well-established and effective UK risk management framework.

Financial results:

IFRS

On the IFRS basis, we have achieved a pre-tax profit of £24.5m, excluding an exceptional item, for the year ended 31 December 2012. This compares with a pre-tax profit of £22.4m for the year ended 31 December 2011. Pre-tax profit of £33.1m (2011: £33.2m) from the UK closed books which are in run-off, have remained resilient to policy attrition. The pre-tax contribution from CA at £18.5m has declined from the £25.7m contribution posted in 2011, although the core product-based surpluses which underpin long-term profit emergence have held up well. Conversely pre-tax contribution of £14.6m from the more volatile S&P business has improved significantly compared with the 2011 contribution of £7.5m, primarily reflecting more beneficial investment market conditions. Further, there is a £1.0m improvement in Movestic pre-tax profit which has increased from £0.4m to £1.4m. The IFRS results are analysed in more detail within the "Financial Review" section.

EEV

On the EEV basis of reporting, excluding the effect of modelling adjustments, we have posted a profit after tax of £31.2m compared with a loss after tax of £(29.8)m for the year ended 31 December 2011. Investment market factors directly account for a year-on-year improvement of £70.9m. During 2012 economic related profits were £21.5m (2011: £(49.4)m loss). The underlying operating result has improved by £3.7m to £19m in 2012 (2011: £15.3m). The EEV results are analysed in more detail within the "Financial Review" section.

Cash generation and solvency

The capacity of the Group to pursue its dividend policy relies on the continuing generation of cash in the UK businesses. During 2012 net cash generation within the Group was £41m. This healthy outcome reflects a proposed dividend of £40m from CA to Chesnara and is reinforced by a strong CA post-dividend solvency ratio of 199% as at 31 December 2012. The associated Group Solvency ratio was also strong at 244%.

Dividend

The proposed full year dividend of £19.9m, which is more than covered by the level of cash generated during the year, represents the continuation of our attractive dividend policy.

Existing business development:

S&P

During the year we have completed the final stages of the integration of S&P. The S&P regulated entities have been de-authorised, thereby releasing £7m of capital and giving rise to a corresponding cash generation. We have also finalised the transfer of operational and governance responsibilities into the core Chesnara head office structure, thereby ensuring consistent practice and generating cost synergies.

Movestic

Without question Movestic has been through a difficult period, partly due to market conditions but also due to internal systems and administration process deficiencies. The difficulties clearly had an adverse impact on the business during 2011 and through much of 2012. The servicing proposition failings resulted in a loss of IFA support with a direct impact on the main business performance indicators, namely new business growth and in-force book retention.

Against this backdrop I am encouraged by signs of recovery in the Movestic business as evidenced by the recent improvements in several measures, including investment performance, improved lapse rates and improvements in new business volumes in the last quarter of 2012.

Although the recent difficulties have had an adverse impact on the Movestic results, the impact has been mitigated in part by positive Swedish equity market performance. This, together with an improved level of management direction and focus, a recovery in levels of staff motivation and the early indication of a recovery in IFA confidence, means I am increasingly confident that Movestic is in a good position to generate the profitable growth required to add significant value to the Chesnara Group.

Corporate governance and board effectiveness

We note the continuing dialogue relating to the corporate governance of publicly-listed companies and I provide further comment in my overview.

We continually assess and challenge the effectiveness of the Board and of the Senior Management team. It is a long established view that the expertise of the Board and Senior Management team is a core strength of the Chesnara business model but that said, we always look to strengthen the team where possible. I am pleased to, therefore, report the appointment of three new Non-executive Directors who will add to the general effectiveness and diversity of the Board.

The appointments of Veronica France, David Brand and Mike Evans are consequent upon the planned departure of Mike Gordon, our current Senior Independent Director, and Terry Marris, who will have both served full nine-year terms and, therefore, in accordance with accepted corporate governance guidelines, are standing down. I would like to record the Group's, and my own personal, thanks to each of them for the notable contribution they have made to the development and success of Chesnara and, indeed, to their significant service to Countrywide Assured plc before it was demerged into Chesnara in 2004. I also wish to express sincere thanks to Ken Romney who steps down as Finance Director of Chesnara at the forthcoming Annual General Meeting. Not only has Ken been Finance Director of Chesnara since its inception in 2004, he has also been a loyal servant of Countrywide Assured since 1989 having been appointed as Finance Director to the Board of CA in 1997. Ken has been integral in the development of Chesnara and contributed significantly to its success.

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. All UK administration and asset management partners have out-performed their respective targets and benchmarks which is testament to their expertise and continued commitment. The Swedish business has been through a challenging year and that we are now in a significantly stronger position than 12 months ago is largely due to the drive, dedication and positive outlook of our Swedish colleagues. As always the Chesnara Head Office governance team continues to ensure the Group maintains and develops governance procedures that deliver a sound level of regulatory control across the business.

Outlook

Investment markets recovered during 2012 and this has continued into the early months of 2013. However, we do not take market recovery or stability for granted and our financial and capital management procedures will continue to recognise the risk of continued poor, or indeed worsening, economic conditions. The modelling of our business indicates continued healthy cash generation and a solvency capital surplus in both base and realistic adverse scenarios in the short to medium term.

Peter Mason

Chairman

27 March 2013

Chief Executive's Review

Highlights

· Growth in IFRS pre-tax profit, excluding exceptional item, to £24.5m (2011: £22.4m).

· Despite operational performance issues, Movestic has delivered growth in IFRS pre-tax profit to £1.4m (2011: £0.4m).

· Cash generation and Group solvency remain strong.

· Significant progress made to resolve Movestic servicing issues with a gradual recovery in IFA support.

· Increase in Group EEV by £16.6m after recognition of dividend payments of £19.5m.

· 3.6% increase in total group funds under management.

· Strong investment performance in both the UK and Sweden.

Business review

Financial

· Group IFRS pre-tax profit £24.5m, excluding exceptional item (2011: £22.4m)

· Group EEV net of tax result £31.3m (2011: £(29.8)m loss), excluding modelling adjustments

· Insurance Group Directive Solvency 244% (2011: 198%)

First and foremost I am extremely pleased with the levels of earnings on both the IFRS and EEV bases. The UK IFRS result underpins cash generation and cash transfers to the Chesnara parent company.

As was the case in 2011, the level of cash generation in the UK is more than sufficient to support the continuation of our attractive dividend strategy.

In addition, Movestic has required no further capital support during the year following a capital injection of £5.3m in 2011. The total cumulative cash generated at Chesnara Group level for 2011 and 2012 of £72.4m is equivalent to 188% of total dividends during the same period.

Net cash generation (£m)

	2012	2011
Net cash generation	41.0	31.4
Dividend payable	(19.5)	(19.0)
Excess cash	21.5	12.4

The surplus cash generation will have a positive effect in terms of ensuring we are able to sustain our dividend strategy through any potential short-term reductions in IFRS earnings.

Operational performance levels for the UK business remain strong with all administration and asset management partners out-performing their respective targets and benchmarks. This positive performance has contributed towards a modest increase in total UK funds under management during the year.

The revised outsource contract with HCL, who provide administration, finance and actuarial services for the S&P and CA books remains unsigned. Whilst this creates a degree of uncertainty which is not ideal, it is important to recognise that the level of inherent risk to the business model is considered to be relatively low. In the short term, HCL retain contractual responsibility for servicing the CA book for a further 2 years and the existing S&P arrangement is on a rolling 2 years basis. In addition, in the medium to long term, several realistic alternatives exist, all of which are not considered to have any detrimental impact on either operational effectiveness or the cost base.

Sweden

The performance issues in Movestic, namely the deterioration in service levels which resulted in a loss of IFA support, have been well documented in previous reports.

In light of the challenges faced, I have given significant attention to the Movestic business during the year. I am encouraged by the immediate positive impact the new Movestic Chief Executive, Lars Norstrand, has had on both the operational effectiveness and on the recovery of support from the IFA community.

Lars has overseen a process re-engineering programme that has successfully mitigated the service level deficiencies experienced during 2011 and into 2012. The positive impact of this will be further embedded through improvements to the operating structure, whereby certain processes critical to IFAs are being centralised into Stockholm, where they will benefit from the positive management environment. Despite the significant recent improvements, Movestic has more to do to fully recover and consolidate its market position. The business foundations are significantly stronger than last year and from this improved base I am confident that Movestic can begin to deliver longer-term financial benefits to the Chesnara Group.

Outlook

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. Whilst growth through acquisition remains a key strategic objective, projections do indicate that the Group remains able to deliver its core objectives, in the medium term, without any further acquisitions.

UK business review

Highlights

Good operational performance together with a positive investment market impact, result in strong financial results in terms of IFRS and EEV earnings, cash transfers to Chesnara and CA solvency.

· Pre-tax IFRS profit of £33.1m (2011: £33.2m) excluding exceptional item.

· £35.4m increase in EEV, excluding impact of dividend payments.

· £41.6m cash generation (2011: £38.8m).

· Increase in CA solvency ratio to 199% (2011: 183%).

· Core product-based deductions remain resilient to book run-off.

· Successful de-authorisation of the S&P regulated entities, thereby releasing £7.0m of capital.

· Full operational integration of S&P into the Chesnara Group has enabled the closure of the S&P London office with significant operational cost savings.

· Good regulatory compliance record continues.

Key performance indicators

· IFRS profit before tax, excluding exceptional item £33.1m (2011: £33.2m)

· Cash transfer to Chesnara Parent Company £40m ^{Note 1} (2011: £44m) ^{Note 2}

· EEV result net of tax Note 3 £22.8m profit (2011: £(10.9)m loss)

Note 1 - includes £7m arising on the de-authorisation of the S&P regulated entities.

Note 2 - includes the effect of distributions from surplus funds arising on the acquisition of S&P in 2010.

Note 3 - excludes impact of modelling adjustments.

Annual policy attrition rate

	2012	2011
CA	8.2%	7.3%
S&P	6.7%	5.8%
Total UK	7.4%	6.5%

There is no suggestion of a sustained worsening trend and the 2012 attrition rates align closely with the 2010 figures. The rate of run-off is influenced by maturities which can vary from year to year based on the original policy inception year. The increase in attrition rate corresponds to an absolute increase in policy exits of c4,000 policies.

Fund performance

	2012	2011
CA Pension Managed	10.9%	-5.6%
CWA Balanced Managed Pension	11.4%	-3.7%
S&P Managed Pension	11.5%	-5.5%
Benchmark - ABI Mixed Inv 40%-85% shares	9.9%	-5.0%

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.

Review of the year

This year has been focused on four areas - management of investment assets, regulatory compliance, finalising the integration of S&P into the UK business and ensuring we continue to provide a high quality service to policyholders in terms of administration service levels and investment return.

Management of assets

The acquisition of S&P, as signalled at the time of the acquisition, results in an increased level of earnings volatility for the UK business. S&P has a sizeable proportion of its product base that provides guaranteed returns. The probability of guarantees being of value to policyholders increases when the value of assets held to match the policy liabilities falls. To mitigate this risk, assets held by shareholders to provide security for these guarantees are invested in cash and long bonds. Consequently, our results are vulnerable to (a) falls in equity and property values, which impact assets backing policyholder liabilities; and (b) falls in bond yields, which impact the cost of providing guarantees.

Integration of S&P

As a final stage of the integration of S&P, the two S&P companies were de-authorised resulting in an additional cash generation of £7m. The full operational integration of the S&P processes and procedures has been completed during the year which has enabled the closure of the S&P London office. This has resulted in annualised cost savings of c£0.4m.

Policyholder service and investment return

Our administration and asset management outsource partners have all performed well in the year and exceeded service level arrangements and relevant benchmarks. Two initiatives with our outsourcing partners are worthy of mention. Firstly, in the first quarter of 2012 we completed, with HCL, the final phase of the offshoring project. To date, the quality of service and speed of turnaround have exceeded expectations. Secondly, building on our experience with HCL we initiated, with Capita, a retention program, whereby we offer information to customers intending to discontinue their policies, which has provided a significant return on our investment whilst providing policyholders with an improved service.

Regulation and legal

As ever in this highly regulated industry there have been a number of new and ongoing initiatives that have led to various levels of attention and challenge. We are pleased to report that none of these has given rise to significant issues and below I set out a list of the key activities and a little background.

· Solvency II - A significant and increasing amount of work means that our progress remained in line with our plans. We were able to ascertain that, based on QIS 5 calculations together with further Pillar I analysis, no increase in solvency capital is likely to be required. It has become increasingly clear that the original implementation date of 1 January 2014 has been postponed. However, in the expectation that interim measures will be introduced, we are continuing to develop the key aspects of the prospective regulations as they stand.

· FSA - We received the formal feedback from the FSA's ARROW visit, which took place in the final quarter of 2011, in April of 2012. The Risk Mitigation Plan contained a handful of issues which have been attended to. In addition we maintain our commitment to maintaining a compliant operating model and a good relationship with our regulator.

· ABI retirement code - The ABI issued a code which changes the way in which policyholders who are vesting their pensions are advised of their options with particular regard given to the notification of the availability of better-value annuities from other providers. We have successfully introduced all the measures the code requires.

· Treating Customers Fairly (TCF) - We have continued to monitor performance against and to continue the development of our TCF measures. The results are discussed, where relevant, with our outsourcing partners and are reviewed by senior management and reported to the CA Board. No issues of significance have arisen.

· Gender neutral rates - We considered in some detail whether we should implement gender neutral rates or limit policyholder flexibility such that gender neutral rates would not be required. In the event we decided on the latter route in the knowledge that we would remove some of the discretionary policy changes we had previously allowed. This decision has led to the closure of the small in-house sales and retention team which will lead to annual savings of c£0.2m. The retention capability of the former sales team work has been transferred to our outsourcing partner.

· Complaints - On the underlying business, complaints have remained at reasonable levels with no discernible change in the number of complaints referred to the Financial Ombudsman or the percentage of such referred complaints being successful. However, the absolute number of complaints has risen primarily due to Complaints Management companies submitting complaints to us alleging that we missold Payment Protection Insurance (PPI). Although we have never sold PPI policies and, therefore, cannot have any possible liability, we are still required to open a complaint file and formally respond.

· New life tax regime - A new regime pertaining to the taxation of Life Assurance companies came into effect at the end of the year. We have thoroughly planned for its implementation and developed appropriate models to calculate current and future liabilities. These show no significant changes to current levels of taxation. There is, however, a significant benefit on the IFRS basis of £6.1m relating to the recognition of brought forward pension losses.

· Retail Distribution Review (RDR) - Although significant in the wider market this regulation, which essentially moves IFA's to a fee-charging model by banning commission by providers, has little effect on our closed books of business. Some minor system and correspondence changes were necessary which were completed within required timescales.

· Policyholder investment funds - Through the auspices of the CA Investment Committee we have continued our oversight of policyholder funds through regular meetings with the investment managers. There have been a number of reviews and developments during the year in order to ensure the underlying investment mix is the most appropriate for policyholders. Measures undertaken include reviewing the investment mandates for the ex-S&P With-profit Funds, higher indexation for the ex-CWA Managed Funds and agreeing a programme to move the ex-S&P Pension Property Fund from direct investment to collective funds over an eighteen-month period to avoid any potential liquidity issues that could arise due to the natural decline in the size of the fund.

Cash generation

Cash generation remains strong. This is due in the main to core product-based surpluses remaining resilient.

The S&P book has made a significant contribution of £26.6m to cash generation in 2012. This is consistent with the fact that the S&P surplus is sensitive to investment market performance which was generally favourable during 2012.

2012 cash generation includes a £7m exceptional item relating to the de-authorisation of S&P residual companies. Whilst this level of S&P cash generation is welcomed, it is recognised that cash releases from S&P may be volatile. 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.

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 driven by:

(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 an increase in Unit-linked Funds under Management from £2,190m at the end of 2011 to £2,221m at the end of 2012.

Unit costs

A key area of focus for the UK business 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. Renewal costs, excluding the impact of the expected revisions to the HCL contract, have reduced by £1.2m (6%) compared with 2011. The impact of higher expected HCL charges in accordance with the proposed new arrangements has, however, resulted in a £1.5m increase in the cost base. The net cost increase, together with a 7% reduction in total policy count, results in an increase in unit cost to £47.40 per policy compared with £39.41 per policy in 2011. Management remain mindful of the risk of increasing unit costs in a closed-book business and continuing actions will be taken to manage the issue as effectively as possible. Recent examples include the closure of our internal sales team and the closure of our London office towards the end of 2012. The positive impact of these actions will be reflected in the 2013 results.

Swedish business review

Highlights

During the year the recent servicing problems have been addressed and there are encouraging signs of a return of IFA support.

· Increase in IFRS pre-tax profit to £1.4m (2011: £0.4m) before amortisation of intangibles.

· Funds under management and solvency ratio resilient to operational difficulties.

· Positive EEV development despite a strengthening of lapse assumptions.

· Process re-engineering programme has successfully mitigated the servicing problems experienced in 2011 and into 2012.

· Appointment of new Chief Executive with previous knowledge of the Movestic business and strong reputation within the IFA community.

· Lapse rates and new business levels show demonstrable signs of recovery during the final quarter of 2012 following a relatively poor performance earlier in the year.

· Gradual recovery in new business market share throughout the year.

Key performance indicators

· IFRS pre-tax profit £1.4m (2011: £0.4m), excluding amortisation of intangibles

· EEV result net of tax £12.7m profit (2011: £17m loss), excluding modelling adjustments

· Funds under management £1,361m (2011: £1,220m)

The value of funds 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. Funds under management increased despite the operational difficulties and their impact on new business volumes and policy attrition.

Premiums (£m)

	2012	2011
Pensions & Savings	194	223
Risk & Health	38	38
Total	232	261

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 premium income

New business markets have remained difficult. In particular, the unit-linked market has been less strong than the market for more traditional investment products which have a lower risk profile and continue to offer guarantees, which we believe to be unsustainable. This external factor, when combined with the reduction in average market share, is reflected in the reduction in total new business premium income in 2012.

						2012		2011
New business premium income (£m)						37.9		47.3

Fund performance

The increase in the number of funds out-performing their indices is a testament to our investment and fund selection strategy.

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, we 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 made with managers to ensure that the underlying reason for fund 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. During the year further funds were added to fill perceived gaps in the range.

Relative fund performance

	2012	2011
Under-performed against relevant index	49%	54%
Outperformed against relevant index	43%	30%
No relevant index	8%	16%

New business market share

Movestic's primary target market is unit-linked pensions business and, within that, company-paid contribution business. The servicing issues during 2011 which continued into 2012 have resulted in a loss of average market share compared with 2011.

This performance should be seen in the context of some of the traditional product providers having undertaken campaigns to move customers to 'new' unit-linked policies to address the challenges inherent in traditional guaranteed return products.

Total unit-linked pension business market share

(excluding 'tick the box' market)

							2012		2011
Total business							5.3%		6.0%

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.

We have continued with relatively high rates of attrition throughout much of 2012, although quarterly analysis does show a marked improvement in the most dominant category (pension transfers) during the second half of the year. Although the endowment surrender rate is relatively high this only affects a small proportion of the in-force book.

Year ended 31 December:	2012	2011
Surrenders (Endowments)	19.6%	14.7%
Transfers (Pensions)	5.4%	5.3%
Lapses/Paid-ups (Pensions and Endowments)	17.6%	16.2%

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

Review of the year

Financial results

While the Swedish business has been through a difficult period it is encouraging to see that the core financial dynamics of the business have proved resilient. In particular, given that the revenue model is largely dependent on the level of unit-linked funds under management it is pleasing to report that these have increased by 12% during 2012. Further, the solvency position is strong and cash generation is positive, resulting in Movestic requiring no additional capital support from Chesnara during the year (2011: £5.3m).

Earnings on both an IFRS and EEV basis have improved compared with 2011. Having moved into profit for the first time in 2011, the IFRS result has improved further in 2012 with £1.4m pre-tax profit for the year (2011: £0.4m). 2012 EEV net-of-tax earnings of £12.7m compare favourably with a predominantly investment market driven loss of £17m in 2011.

Business review

The priority during 2012 has been to address the servicing problems that emerged during 2011 as a result of a system migration. Significant progress has been made, and our current assessment is that the servicing proposition is now "fit for purpose". Work continues to ensure we continue to improve the service offering such that, again, it becomes a positive differentiator alongside our investment proposition.

New business

New business volumes have fallen by 20% compared with 2011. From our contact with the IFA community we fully understand the reasons for this decline. The current sentiment is that IFAs recognise that Movestic has addressed its servicing problems and there has been a recovery in levels of support and confidence. This is evident in the recovery of new business volumes during the final quarter of 2012.

					2012 Q1	2012 Q2	2012 Q3	2012 Q4
New business premium income (£m)					10.0	10.8	7.2	9.9

The improvement during the final quarter partly reflects the seasonality of the business (Q3 is traditionally a low sales period) but the level of shortfall of 10% against the final quarter of 2011 is significantly less marked than for the first 3 quarters. Clearly, we require new business volumes to recover to levels at least comparable with those experienced prior to the operational issues, but even at the reduced new business levels during 2012, Movestic has generated a modest EEV new business profit of £2.6m (including the value of increments to existing policies).

Policy attrition

Policy attrition has been higher than expected during the year. Again, as with the New Business results, the reasons are well understood and positive management action has been taken. Quarterly analysis illustrates the positive impact of this on the most significant attrition measures:

	2012 Q1	2012 Q2	2012 Q3	2012 Q4
Transfers (Pensions)	5%	5%	7%	4%
Lapses/Paid-ups (Pensions and Endowments)	24%	20%	12%	14%

The pension transfer rates during the final quarter of 2012 represent the lowest levels since Q1 2010.

Fund performance

The relative fund performance measure adopted within the KPI's below focuses on the number of funds under or over performing their relevant indices. An alternative and well established fund performance measure, produced by a respected industry magazine, compares the value of savers' average fund holdings. This measure best reflects the investment performance from a policyholder perspective. Movestic's fund range had the best performance over the period 2005 to 2010 and the second best performance for the period 2006 to 2011. The results for periods ended 31 December 2012 are not published until later in 2013.

Outlook

We believe that the Swedish business has substantially overcome its operating difficulties and has proved relatively resilient. The management team has remained focused and positive throughout and organisational changes initiated by the new Chief Executive further promote a positive outlook.

Movestic has seen a gradual recovery in its market share of the company-paid pension market during the second half of 2012, which supports the observation of a gradual recovery in IFA confidence, as a result of service level improvements and the focus of the senior management team.

Share of unit-linked pensions market 2012	2012 H1	2012 H2
Total business	5.1%	5.6%
Company-paid business	7.8%	8.7%

With a motivated workforce and significantly improved servicing processes, we are confident that these initial signs of a recovery in IFA support will continue throughout 2013.

Economic conditions in Sweden have remained sound and it has proved to be relatively immune to economic pressures experienced across the rest of Europe. However, there remains a general sense of uncertainty that has resulted in consumer preference for more traditional investment products than for equity-based unit-linked investments. Movestic remains committed to the unit-linked market and believes that, in time, as equity market confidence recovers and that as the traditional investment offerings become less sustainable for providers, there will be a general shift back towards unit-linked investments.

Financial Review

The Group's key financial performance indicators as at 31 December 2012 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:

IFRS pre-tax profit, excluding exceptional item £24.5m (2011: £22.4m)

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 £24.5m, shows a 9.4% improvement from the prior year of £22.4m, excluding exceptional item.

· Pre-tax profit from the core CA closed book remain significant albeit at a reduced level compared with 2011 (2012: £18.5m; 2011: £25.7m). The reduction is predominately due to some specific investment market movements, with the core underlying product-based surplus remaining resilient to book run off.

· The 2012 result includes a £14.6m pre-tax profit arising in the S&P business. This compares favourably with the 2011 pre-tax profit of £7.5m which benefited from the Part VII Transfer, including the recognition of a £12.4m profit, arising from the alignment of actuarial assumptions.

· There was a £1.0m improvement in the Movestic pre-tax result.

Cash generation £41m (2011: £31.4m)

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 £15m, cash generation in CA continues to be strong (2011: £23.0m).

· S&P has generated £19.6m cash in 2012 from the underlying business compared with £3.4m in 2011.

· In addition, there is an exceptional cash release of £7m arising from the de-authorisation of the S&P regulated entities. This adds to the favourable synergistic effects of £12.4m arising from the Part VII Transfer during 2011.

· Movestic has required no capital support during 2012 (2011: £5.3m).

EEV earnings, net of tax £31.2m profit (2011: £(29.8)m loss), excluding modelling adjustments of £3.6m in 2012 (2011: £(10.3)m)

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; and

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

Highlights

· Significant economic profit of £21.5m (2011: £(49.4)m loss).

· Increase in operating profit to £19.1m (2011: £15.3m).

· Movestic has generated a £12.7m EEV profit despite a significant strengthening of lapse assumptions.

· Notwithstanding a reduction in new business volumes, the Movestic new business operation continues to a make a positive contribution to earnings.

EEV £311.1m (2011: £294.5m)

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

· £36.1m increase in EEV before recognition of dividend payments.

· Modelling adjustments generate a £3.6m increase in EEV (2011: £(10.3)m reduction).

· Good balance of EEV across the operating segments.

· Good product diversification within the value in-force.

IFRS pre-tax profit, excluding exceptional item £24.5m (2011: £22.4m)

Executive summary

The IFRS results by business segment reflect the natural dynamics of each line of business. In summary the current financial model has three major components which can be characterised as: the "stable core", the "variable element", and the "growth operation". The results and financial dynamics of each segment are analysed further as follows:

Stable core

At the heart of surplus, and hence cash generation, is the CA non-profit business which is in run off. The requirement of this book is to provide a predictable and stable platform for the financial model and dividend strategy. As a closed book, the key is to sustain this income source as effectively as possible. The IFRS results during 2012 support this objective, with product-based deductions of £26.3m continuing to emerge in a predictable fashion and at a level that compares favourably against the prior-year equivalent of £25.8m. This level of product-based deductions has underpinned CA's ability to generate a significant level of IFRS pre-tax profit at £18.5m.

Variable element

S&P has introduced an element of IFRS earnings volatility to the Group, as illustrated by the cost of policy guarantees, which are sensitive to movements in investment markets and lapse rates. Investment market conditions during 2012 have had a net favourable impact of £2.5m: this has, however, been offset by the £3.3m adverse impact of lower lapse experience, as a greater number of policies are estimated to rank for guarantee payments. Investment returns of £6.3m on shareholder assets within the with-profits funds compensated for this increased cost, giving rise to an overall net favourable with-profits result of £3.6m. This compares with a loss of £3.3m in 2011, excluding the effect of a change in the valuation interest rate.

Growth operation

Although, at its current scale, Movestic has posted a small and increased IFRS profit, the long-term financial model is based on growth. Levels of new business are targeted to more than offset the impact of policy attrition, leading to a general increase in assets under management and, hence management fee income. Despite the difficult operating conditions referred to in the Swedish Business Review section, the 2012 results show a 12% increase in funds under management.

Year ended 31 December	2012 £m	2011 £m	Note
CA	18.5	25.7
S&P	14.6	7.5
Movestic	1.4	0.4
Chesnara	(5.8)	(5.5)
Consolidation adjustments	(4.2)	(5.7)
Total profit before tax and exceptional item	24.5	22.4
Exceptional item	(4.8)	-	1
Total profit before tax	19.7	22.4
Tax	8.2	3.3	1 & 2
Total profit after tax	27.9	25.7

Note 1 - An exceptional item of £4.8m relating to the reclassification of policyholder tax liabilities within the S&P segment has been charged to IFRS profits. There is a corresponding deferred tax release to income tax of £4.8m included in the tax item above. The net of tax impact of these adjustments, which were made to align the treatment within the S&P segment with that within the CA segment, is accordingly £nil.

Note 2 -The changes in the Life and Pensions tax regime has resulted in a deferred tax credit during 2012 of £6.1m.

The adjustments arising on consolidation are analysed below:

Year ended 31 December		2012 £m		2011 £m
CA - Amortisation of AVIF		(2.8)		(3.6)
S&P - Amortisation of AVIF		(0.8)		(1.0)
Movestic
Amortisation of AVIF	(4.0)		(4.4)
Write back of DAC	3.4		3.3
Total		(0.6)		(1.1)
Total		(4.2)		(5.7)

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

Despite a slight increase in product-based deductions, the core source of IFRS earnings, the overall CA IFRS result has declined compared with 2011. There are a number of complex aspects to the IFRS result but the primary drivers of the decline in profit from 2011 to 2012 are illustrated as follows:

Profit before tax movement - Year ended 31 December 2011 to 2012 (£m)

Actual 2011		25.7
Expense assumption changes	(note 1)	2.1
Other		(1.9)
Complaint costs	(note 2)	(2.4)
Other effects due to investment market movements	(note 3)	(5.0)
Actual 2012		18.5

Note 1 - During 2011 we agreed, in principle, commercial terms for extending the outsourcing contract with HCL with the new terms resulting in an increase in expense assumptions recognised in 2011. This adjustment does not replicate in 2012.

Note 2 - The level of complaints costs incurred has remained relatively constant year on year at c£0.8m. During 2011 there was a general reduction in complaints reserves over and above the impact of claims paid. During 2012 further review of potential future Mortgage Endowment mis-selling costs was undertaken, due to higher complaints volumes arising from an increase in claims management company activity, which resulted in a small £1.3m increase in the reserves.

Note 3 - The impact of investment market conditions is relatively muted for the CA book. However, during 2012, the cumulative impact of a number of different investment-related items was adverse as compared with 2011 when the impact, dominated by mismatch profits, was positive.

The key components of the 2012 IFRS result are summarised as follows:

Pre-tax IFRS profit	2012 £m	2011 £m	Note
Product-based deductions	26.3	25.8	1
Gains and interest on retained surplus	5.4	6.2	1
Administration expenses	(9.1)	(8.6)	1
Other effects due to investment market movements	(1.7)	3.3	2
Expense assumption changes (HCL)	-	(2.1)
Complaint costs	(2.3)	0.1	3
Other	(0.1)	1.0
Total	18.5	25.7

Note 1 - Product-based deductions and returns on retained surplus remain significantly in excess of recurring administration expenses. The total level of product-based deductions has increased despite the run-off of the book, reflecting an increase in mortality surplus and the positive impact of investment capital growth on funds under management, on which fees are based.

Note 2 - The impact of investment market conditions is generally relatively muted for the CA book compared with the value of the other key components. However, during 2012, the cumulative impact of a number of different investment-related items was slightly adverse compared with 2011 when the impact, dominated by mismatch profits, was positive. As a general observation, the investment market-driven result, although less significant, tends to hedge against investment market impacts in S&P.

Note 3 - 2012 complaints costs include the impact of strengthening the mortgage endowment misselling complaints reserve and as such, is not expected to recur at this level.

S&P

The S&P pre-tax profit has increased significantly compared with 2011:

Profit before tax movement 2011 to 2012 (£m)

Actual 2011		7.5
Change in sterling and expense reserves	(Note 5)	9.1
Income on with profit shareholder funds	(Note 2)	3.8
Change in cost of guarantees in with-profits funds	(Note 3)	3.1
Other		2.5
Product based deductions	(Note 1)	1.0
Change in valuation interest rate	(Note 4)	(12.4)
Actual 2012		14.6

S&P posted a pre-tax IFRS profit of £14.6m for 2012, the key components of the result being:

Pre-tax IFRS profit	2012 £m	2012 £m	2011 £m	2011 £m	Note
Product-based deductions		16.9		15.9	1
Administration expenses		(11.0)		(11.7)	1
Income on with-profits shareholder funds		6.3		2.5	2
Change in cost of guarantees in with-profit funds					3
- Investment market movements	9.0		5.1
- Change in yield curve	(6.5)		(10.3)
- Lapse experience	(3.3)		-
- Change in valuation interest rate	-		12.4		4
- Other	(1.9)		(0.6)
Total		(2.7)		6.6
Change in sterling and expense reserves		3.9		(5.2)	5
Other		1.2		(0.6)
Total profit before exceptional item and tax		14.6		7.5

Note 1 - Product deductions have held up well as the book runs off, aided to some extent by the impact of capital growth on funds under management. Product deductions exceed administration expenses by £5.9m and £4.2m in 2012 and 2011 respectively.

Note 2 - The income on with-profits shareholder funds is driven by investment market performance which has been significantly more favourable in 2012.

Note 3 - During 2012 there was a £2.7m increase in the cost of guarantees compared with a £5.8m increase in 2011, excluding the impact of £12.4m relating to an alignment in actuarial assumptions (see Note 4 below). The 2012 movement includes a £5.2m increase due to non-investment market items, principally reflecting a change in lapse assumptions. The investment market-related component during 2012 gave rise to a net reduction in cost of guarantees, of £2.5m. The corresponding investment market component in 2011 gave rise to an increase in the cost of guarantees of £5.2m, thereby illustrating the underlying sensitivity to investment markets.

Note 4 - A change in actuarial assumptions, to align them with those adopted for CA fund, as a result of the Part VII Transfer, resulted in the recognition of profit of £12.4m in 2011. The pre-existing S&P methodology was to reduce valuation interest rates to a level which eliminated the need for a resilience capital reserve.

Note 5 - Sterling and expense reserves are sensitive to both the expense base and to investment market movements. As investment markets improve, the level of sterling reserves (which provide against situations where future policy-based revenue does not cover future administration costs) reduces. The profit of £3.9m in 2012 is predominantly driven by investment market movements, whereas the loss of £5.2m in 2011 principally reflects the impact of a change in expense assumptions, resulting from the agreement in principle, of higher expense levels, following the prospective extension of the outsourcing contract with HCL.

Movestic

Pre-tax IFRS profit	2012 £m	2011 £m	Note
Pensions and savings	(0.3)	(1.5)	1
Risk and Health	0.9	2.3	2
Other	0.8	(0.4)	3
Total profit before tax	1.4	0.4

Note 1 - The Pensions and Savings business model is directly dependent upon fees and rebates earned on funds under management (FUM). Total FUM average has increased slightly during the year resulting in a £1.8m (9%) increase in fee and rebate income. This is partly offset by a £0.6m (6%) increase in internal costs.

Note 2 - The Risk and Health business, although not the core target growth operation, is significant to the Movestic financial and operating model. Unlike the longer-term Pension and Savings business the Risk and Health business tends to be cash generative in the short-term, thereby providing a source of internal funding. Further, the Risk and Health business is operationally significant due to the size of the book, there being 404,000 short-term policies in force as at 31 December 2012, which generated £36m of gross annual premiums. The reduction in pre-tax profit compared with 2011 is principally due to a 15% (£0.8m) increase in claims net of reinsurance and an 11% (£0.6m) increase in brokerage costs.

Note 3 - The "Other" component includes the results of the associate, Modernac, Movestic investment income and the impact of fair value adjustments to the Financial Reinsurance liability. The Modernac and Movestic investment income results have improved by £1.3m and £0.4m respectively year on year, while the financial reinsurance fair value adjustment has reduced by £0.4m. All of these movements are predominately a consequence of investment market conditions.

Cash generation £41.0m (2011: £31.4m)

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 funds under management.

Net cash generation within the Group continues to be robust. Key aspects underpinning the outcome are:

Highlights

· Net cash generation in the UK run-off businesses, supporting a £40m dividend to the parent company, has increased by some £8m year on year, driven by more favourable investment markets.

· A further significant benefit of £7m has arisen from the Part VII Transfer, following the de-authorisation of the S&P companies.

· There has been a pause in the Movestic funding requirements, although these are anticipated to resume at a modest level in 2013.

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 business 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 on 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):	2012 £m	2011 £m
CA
Surplus and profits arising in the year	13.3	21.8
Change in target capital requirement	1.7	1.2

S&P
Surplus and profits arising in the year	14.5	14.5
Change in target capital requirement	5.4	(11.8)
(Decrease)/increase in policyholder funds cover for target capital requirement	(0.3)	0.7

Synergistic effects of Part VII transfer	7.0	12.4

Movestic
Additional capital contributions	-	(5.3)

Chesnara
Cash utilised by operations	(0.6)	(2.1)
Net cash generation	41.0	31.4

EEV earnings, excluding exceptional item £31.2m profit (2011: £(29.8)m loss)

EEV result

Summary

The headline EEV result for the year has improved significantly over 2011. The majority of the improvement relates directly to investment market conditions. In 2011 investment markets generally performed worse than assumed, resulting in a significant EEV loss, whereas in 2012, a recovery in equity markets and a modest reduction in bond yields have resulted in a significant corresponding profit.

The operating result, upon which management has the most direct and immediate influence, represents a significant proportion of the total earnings during 2012. Total operating profit has improved by £3.8m from £15.3m in 2011 to £19.1m. A significant proportion of this is the return on shareholder net worth, which at £7.9m has also benefited from favourable investment market conditions.

The following tables analyse the Group EEV earnings after-tax by source and by business segment:

Profit after tax movement. 2011 to 2012 (£m)

Actual 2011								(29.8)
CA								6.3
S&P								39.0
Movestic								30.3
Chesnara								(2.6)
Tax								(12.0)
Actual 2012								31.2

Analysis of the EEV result in the year by business segment

	2012 £m	2011 £m
CA	13.1	6.8
S&P	15.7	(23.3)
Movestic	13.0	(17.3)
Chesnara	(5.7)	(3.1)
Total pre-tax profit/(loss)	36.1	(36.9)
Tax	(4.9)	7.1
Profit/(loss) after tax	31.2	(29.8)

Analysis of the EEV result in the year by earnings source

	2012 £m	2011 £m
New business contribution	2.9	4.4
Return from in-force business
Expected return	5.8	10.2
Experience variances	0.4	(0.8)
Operating assumption changes	2.0	(2.6)
Return on shareholder net worth	7.9	4.1
Operating profit of covered business	19.0	15.3
Variation from longer term investment return	28.0	(16.9)
Effect of economic assumption changes	(6.5)	(32.5)
Profit/(loss) on covered business before tax	40.5	(34.1)
Tax	(6.0)	5.6
Profit/(loss) on covered business after tax	34.5	(28.5)
Uncovered business and other
Group activities	(4.4)	(2.8)
Tax on uncovered business	1.1	1.5
Profit/(loss) after tax	31.2	(29.8)

Economic conditions

As indicated above, the EEV result is sensitive to economic conditions. Economic experience and assumption changes contributed a profit of £21.5m in 2012 compared with a loss of £49.4m in 2011. During 2011 there was a general decline in equity markets and bond yields and the result is sensitive to both these factors. Although bond yields continued to decline during 2012, the level of reduction was significantly less than in 2011 and this was more than offset by a relatively strong recovery in equity markets. The impact of these effects on each operating segment is illustrated below:

Economic expense and assumption changes	2012 £m	2011 £m
CA	4.7	(5.7)
S&P	8.3	(25.5)
Movestic	8.5	(18.2)
Total	21.5	(49.4)

The S&P profit in 2012 includes an experience profit of £11m offset in part by a £2.7m assumption loss. The experience profit largely arises from equity and bond capital growth of £7.2m and £3.3m respectively. The assumption loss is primarily due to the £3.3m impact of a reduction in our assumed level of the risk-free rate of return.

The Movestic business is sensitive to movements in equity markets (predominantly Swedish) due to its core income stream being dependent upon management charges levied on funds under management, which are primarily equity-based. The S&P result is sensitive to equity and bond market movements, principally through the impact on the cost of guarantees. Whereas in 2011 there was a significant decline in both equity values and fixed-interest investment returns, there has been a modest equity market recovery in 2012, offset by a continuing downward drift in bond yields. The CA result is relatively less sensitive to investment market movements.

New business contribution

The new business contribution relates primarily to the Movestic Pensions and Savings business. Movestic also writes Risk and Health policies but due to its more short-term nature the Risk and Health business is reported as uncovered business and hence does not contribute to the new business result. The Movestic contribution is £2.6m, of which £2.4m relates to the value of premium increments received on existing policies. Profits on "new contract" business of £0.2m, has declined significantly compared with the 2011 equivalent of £3.1m. The reduction is due to a 20% reduction in new business volumes following from the servicing issues arising during a 2011 systems migration (see Swedish Business Review).

Experience variances	2012 £m	2011 £m
CA	5.2	5.2
S&P	3.1	(0.2)
Movestic	(7.9)	(5.8)
Total	0.4	(0.8)

The CA favourable variances relate to policy persistency and mortality experience being better than assumed. The S&P favourable variances in 2012 relate principally to policyholder tax deductions of £1.9m and better than assumed expense and lapse experience of £1m and £1.1m respectively.

The Movestic loss of £7.9m is primarily due to adverse lapse experience during the year, as was the case in 2011. In recognition of the level of continuing level of adverse experience, lapse assumptions have been strengthened, the impact of which is included in the operating assumption changes in the analysis below:

Operating assumption changes	2012 £m	2011 £m
CA	(0.3)	1.7
S&P	(2.9)	(0.9)
Movestic	5.2	(3.4)
Total	2.0	(2.6)

The S&P result reflects a loss of £3.7m following a change in lapse assumptions. Policies are expected to run-off at a slower rate than previously assumed and for a book carrying guarantees this has a negative impact as more policies are anticipated to rank for guarantee payments. This is partially offset by a profit resulting from a reduction in future expenses assumptions.

Adverse Movestic lapse experience has continued through 2012 and the long-term assumptions have been strengthened accordingly, with a total adverse impact of £7.9m. This is more than offset by positive assumption changes relating to broker and fund manager rebates totalling some £13m. In 2011 no corresponding lapse assumption changes were considered appropriate at that time due to the introduction of new retention initiatives.

Tax

During 2012 the EEV tax model has been updated to fully reflect proposed changes in the UK Life and Pension tax regime.

The 2011 tax credit of £7.1m includes the positive impact of tax synergies arising on the Part VII transfer of S&P into CA.

Uncovered business and other group activities.

	2012 £m	2011 £m
Chesnara	(5.7)	(3.1)
Movestic	1.3	0.3
Total	(4.4)	(2.8)

The result includes Chesnara parent company costs relating to corporate governance and business development, not attributable to the covered business. The year-on-year increase is primarily due to a £2.5m increase in a provision to cover future contractual property costs associated with the Group Head Office.

The Movestic result is impacted by:

(i) Risk and Health results: This business is less long term in nature and hence is not modelled as covered business. Profit has reduced by £1.3m compared with 2011, primarily due to a 15% (£0.8m) increase in claims net of reinsurance and a 11% (£0.6m) increase in brokerage costs.

(ii) Profit from the Modernac associate, which has increased by £1.4m compared with 2011.

(iii) Valuation adjustments for the Movestic financial reinsurance arrangements. The 2012 adjustment is £0.3m compared with a negative adjustment of £1.9m in 2011, largely reflecting investment market movements.

European Embedded Value (EEV) £311.1m (2011: £294.5m)

EEV movement 2011 to 2012 (£m)
EEV actual 2011							294.5
Net of tax profit arising in the year							31.2
Effect of modelling adjustments							3.6
Foreign exchange reserve movement							1.3
Dividend paid							(19.5)
EEV Actual 2012							311.1

EEV movement 2010 to 2011 (£m)
EEV actual 2010							354.6
Net of tax loss arising in the year							(29.8)
Effect of modelling adjustments							(10.3)
Foreign exchange reserve movement							(1.0)
Dividend paid							(19.0)
EEV actual 2011							294.5

Net of tax profit

The EEV profit arising during the year is analysed in more detail within the preceding section.

Effect of modelling adjustments

Modelling adjustments during the year ended 31 December 2012 give rise to a net increase in EEV of £3.6m, comprising:

Movestic

During 2012, there has been a continued focus on ensuring that the Movestic EEV model is robust. The process, which has included independent review, has identified the following:

(i) Levels of commission claw-back within the future cash flow projections were overstated by £7.9m; and

(ii) Several enhancements to policy fee cash flow estimates and data input routines have been identified with a total net adverse impact of £1.1m.

The CA and CWA EEV models previously assumed a single average rate of investment return for all durations as opposed to the use of a full yield curve. This approximation was reported in the EEV assumptions section of the Supplementary Information within the 2011 Report and Accounts. As at 31 December 2012 the models have been enhanced to recognise differing rates of return across the different durations of the yield curve resulting in a net of tax increase of £12.6m.

Modelling adjustment during the year ended 31 December 2011 gave rise to a reduction of EEV of £(10.3)m comprising:

Movestic

(i) An 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; and

(ii) Modelling errors were detected relating to certain parameters and discounting periods specified at inception of a new model and the correction of these gave rise to a reduction in embedded value of £12.4m.

S&P model enhancements gave rise to a further £0.6m reduction in EEV.

Foreign exchange reserve movements

The £1.3m foreign exchange reserve movement in 2012 is the impact of a 1% strengthening of the Swedish Krona against Sterling during the year, following its depreciation of 1% during 2011.

EEV - Value in force (VIF) and adjusted shareholder net worth (SNW)

(£m at year end)

	2010	2011	2012
VIF	265.4	199.6	210.0
SNW	89.2	94.9	101.1
Total EEV	354.6	294.5	311.1

Analysis of 2012 VIF - £210.0m
Movestic								124.5
CA								67.0
S&P								18.5
Total								210.1

Highlights

· There is a good balance in EEV across the core business segments although the UK businesses represent the majority (59%) of the total EEV. Conversely the value in-force component is dominated by the Swedish business which represents 59% of the total Group VIF.

· There is a significant level of product diversification within the VIF. When adjusted to recognise the impact of the S&P cost of guarantees which are predominantly pension contract related, 60% of the total product level value in-force relates to pension contracts, 19% to protection business and 17% to endowments.

The tables below set out the value of in-force business by major product line at each period end. Analysis of the composition of the VIF by business and major product category provides a useful insight into the commercial dynamics underpinning the value of Chesnara.

	31 December 2012				31 December 2011
	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	39	5	12	56	44	6	14	64
Protection	43	5	-	48	48	6	-	54
Annuities	6	-	-	6	6	-	-	6
Pensions	46	128	78	252	49	136	77	262
Other	3	12	-	15	4	14	-	18
Total	137	150	90	377	151	162	91	404

	31 December 2012				31 December 2011
	CA	S&P	Movestic	Total	CA	S&P	Movestic	Total
Value of in-force business	£m	£m	£m	£m	£m	£m	£m	£m
Endowment	27.7	3.8	8.1	39.6	29.7	4.3	9.7	43.7
Protection	49.2	3.7	-	52.9	46.2	3.9	-	50.1
Annuities	7.8	0.9	-	8.7	(0.8)	1.0	-	0.2
Pensions	33.6	55.0	124.2	212.8	30.7	52.4	118.2	201.3
Other	3.2	3.3	-	6.5	2.2	4.1	-	6.3
Total at product level	121.5	66.7	132.3	320.5	108.0	65.7	127.9	301.6
Holding company expenses	(7.0)	(3.9)	(7.7)	(18.6)	(5.4)	(3.3)	(6.4)	(15.1)
Other	(28.6)	(41.8)	-	(70.4)	(27.8)	(41.7)	-	(69.5)
Cost of capital/frictional costs	(1.1)	(2.4)	(0.1)	(3.6)	(1.2)	(3.2)	(0.1)	(4.5)
Value in-force pre-tax	84.8	18.6	124.5	227.9	73.6	17.5	121.4	212.5
Taxation	(17.8)	-	-	(17.8)	(12.9)	-	-	(12.9)
Value in force post-tax	67.0	18.6	124.5	210.1	60.7	17.5	121.4	199.6

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.

Holding company expenses are apportioned across the segments pro-rata to the total product-based VIF. The total holding company expense adjustment was, prior to 2012, allocated to the CA segment. The 2011 comparatives have been re-presented in accordance with the new allocation methodology. The total increase in the value of holding company expenses reflects an enhancement to the profile assumed for how the costs run-off into the future.

'Other' valuation adjustments in CA principally comprise expenses for managing policies which are not attributed at product level. In S&P they represent the estimated cost of guarantees to with-profits policyholders.

From 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

Financial Management

Objectives

The Group's financial management framework is designed to provide security for all stakeholders, 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 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 developments 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;

(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. These are centred on:

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

(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 operation of the UK, Swedish and EU regulatory regimes with respect to solvency capital requirements at the individual regulated company and Group level together with details of minimum target solvency ratios are set out in the IFRS financial statements ('Capital Management'). Targets are 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 monitored continuously.

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 movements in:

(i) 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:

· 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.

· Reverse stress testing techniques are employed which assess events and circumstances which would cause the combined CA and S&P business to become unviable. In this context, unviable is defined as the point at which the market loses confidence in the firm being able to carry out its normal business activities.

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 Asset Management (UK) Ltd.

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 Practices 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 under performance 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 gave rise to the lower measure of excess capital. The statutory solvency position of the individual businesses may accordingly be summarised as:

	31 Dec 2012		31 Dec 2011
	Solvency	Excess	Solvency	Excess
	ratio %	capital £m	ratio %	capital £m
CA
- Pre proposed dividend to Chesnara	279	64.6	259	67.0
- Post proposed dividend to Chesnara	199	24.6	183	23.0
S&P	n/a	n/a	115	0.9
Movestic	280	15.1	245	11.4
Group (Consolidated EU Insurance Groups Directive basis post proposed dividend)	244	90.4	198	75.4

(i) The positions as at 31 December 2011 and 31 December 2012 reflect 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 shareholder funds of S&P.

(ii) The amounts reported as S&P as at 31 December 2011 accordingly represent residual S&P shareholder funds which were retained to cover the minimum EU regulatory capital resource requirements for regulated entities. The S&P companies were de-authorised during 2012 thereby removing the need for them to maintain regulatory capital resources.

(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 Movestic Board has set a minimum target of 150% of the regulatory capital requirement. Swedish solvency regulation requires that a certain proportion of assets, to be fully admissible, is to be held in the form of cash. The operation of this requirement may, from time to time, act as the operative constraint in determining the level of additional funding requirements, thereby causing Movestic's solvency ratio to rise above what it would otherwise have been, had the form of assets matching capital resources not been a constraint.

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

· robust protection for policyholders; and

· a favourable position from which Chesnara, which relies on dividend distributions from CA, continues to service its loan commitments and to pursue an attractive dividend policy.

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 an attractive 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.

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 from mid-November 2011 to mid-March 2012, fluctuated within a range of 165p to 186p and did not reflect the upturn in the sector as a whole. Based on total proposed dividends for 2011 of 16.85p per share this implied 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.

Over the period from mid-March to mid-July 2012 the share price showed no consistent sustained movement although it did dip to a 2 year low of 155p in April. From mid-July 2012 to late-March 2013 the share price has steadily strengthened reaching a high of 233p. From mid-February through to late-March 2013 the price has stabilised within a range of 217p to 233p per share. Based on the total proposed dividends for 2012 of 17.35p per share this implies a yield of between 8.0% and 7.5% with the shares trading at a discount of between 19.8% and 13.9% to EEV as at 31 December 2012.

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 and cash deposits 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 business 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 2012 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 the UK business, the financial condition report and reverse stress testing assessments indicate that it is 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 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 an attractive dividend policy and to meet the short-term financing requirements of Movestic.

Consolidated Financial Statements - IFRS basis

Consolidated Statement of Comprehensive Income for the year ended

31 December 2012

Year ended 31 December	2012	2011
	£000	£000
Insurance premium revenue	115,520	121,976
Insurance premium ceded to reinsurers	(35,336)	(34,970)
Net insurance premium revenue	80,184	87,006
Fee and commission income	66,658	67,863
Net investment return	332,053	(192,402)
Total revenue net of reinsurance payable	478,895	(37,533)
Other operating income	19,645	21,782
Total income net of investment return	498,540	(15,751)

Insurance contract claims and benefits incurred
Claims and benefits paid to insurance contract holders	(272,479)	(267,691)
Net (increase)/decrease in insurance contract provisions	(20,732)	204,864
Reinsurers' share of claims and benefits	47,865	17,401
Net insurance contract claims and benefits	(245,346)	(45,426)
Change in investment contract liabilities	(156,663)	164,166
Reinsurers' share of investment contract liabilities	2,810	(1,500)
Net change in investment contract liabilities	(153,853)	162,666
Fees, commission and other acquisition costs	(17,967)	(17,276)
Administrative expenses	(37,029)	(38,798)
Other operating expenses
Charge for amortisation of acquired value of in-force business	(7,863)	(9,032)
Charge for amortisation of acquired value of customer relationships	(391)	(758)
Other	(9,205)	(9,664)
Total expenses net of change in insurance contract provisions and investment contract liabilities	(471,654)	41,712

Total income less expenses	26,886	25,961
Share of profit/(loss) of associate	1,244	(152)
Exceptional item	(4,778)	-
Operating profit	23,352	25,809
Financing costs	(3,670)	(3,388)
Profit before income taxes	19,682	22,421
Income tax credit
Before exceptional item	3,481	3,244
Exceptional item	4,778	-
After exceptional item	8,259	3,244
Profit for the year attributable to the equity holders of the parent company	27,941	25,665
Foreign exchange translation differences arising on the revaluation of foreign operations	741	(738)
Total comprehensive income for the year	28,682	24,927

Basic earnings per share from continuing operations (based on profit for the year)	24.33p	22.35p
Diluted earnings per share from continuing operations (based on profit for the year)	24.33p	22.35p

Consolidated Balance Sheet at 31 December 2012

31 December

	2012	2011 (restated - note 2)
	£000	£000
Assets
Intangible assets
Deferred acquisition costs	22,555	19,720
Acquired value of in-force business	76,118	83,346
Acquired value of customer relationships	1,884	2,255
Software assets	5,712	6,744
Property and equipment	369	385
Investment in associates	2,902	1,613
Investment properties	100,167	132,128
Deferred tax assets	2,295	-
Reinsurers' share of insurance contract provisions	278,692	263,792
Amounts deposited with reinsurers	30,245	28,031
Financial assets
Equity securities at fair value through income	427,303	404,431
Holdings in collective investment schemes at fair value through income	3,009,799	2,917,935
Debt securities at fair value through income	363,377	330,610
Policyholders' funds held by the Group	61,171	49,080
Insurance and other receivables	24,313	30,799
Prepayments	3,160	3,234
Derivative financial instruments	3,095	10,308
Total financial assets	3,892,218	3,746,397
Reinsurers' share of accrued policyholder claims	4,489	4,667
Income taxes	4,299	6,956
Cash and cash equivalents	228,676	195,920
Total assets	4,650,621	4,491,954

Liabilities
Insurance contract provisions	2,207,078	2,190,939
Other provisions	5,161	2,811
Financial liabilities
Investment contracts at fair value through income	2,022,314	1,876,463
Liabilities relating to policyholders' funds held by the Group	61,171	49,080
Borrowings	48,324	54,753
Derivative financial instruments	286	144
Total financial liabilities	2,132,095	1,980,440
Deferred tax liabilities	5,894	15,390
Reinsurance payables	16,610	16,336
Payables related to direct Insurance and investment contracts	38,894	40,651
Deferred income	8,884	10,000
Income taxes	-	947
Other payables	17,057	24,417
Bank overdrafts	602	834
Total liabilities	4,432,275	4,282,765

Net assets	218,346	209,189

Shareholders' equity
Share capital	42,024	42,024
Share premium	42,523	42,523
Treasury shares	(217)	(217)
Other reserves	7,719	6,978
Retained earnings	126,297	117,881
Total shareholders' equity	218,346	209,189

Consolidated Statement of Cash Flows for the year ended 31 December 2012

Year ended 31 December	2012	2011
	£000	£000

Profit for the year	27,941	25,665
Adjustments for:
Depreciation of property and equipment	128	219
Amortisation of deferred acquisition costs	7,657	7,339
Amortisation of acquired value of in-force business	7,864	9,032
Amortisation of acquired value of customer relationships	391	758
Amortisation of software assets	2,188	1,968
Tax recovery	(8,259)	(3,244)
Interest receivable	(25,961)	(28,632)
Dividends receivable	(46,774)	(40,261)
Interest expense	3,670	3,388
Change in fair value of investment properties	5,650	(4,233)
Fair value (gains)/losses on financial assets	(254,457)	272,517
Gain on sale of property and equipment	(2)	-
Share of (profit)/loss of associate net of impairment	(1,244)	152
Interest received	26,357	27,874
Dividends received	46,738	40,350
Increase in intangible assets related to insurance and investment contracts	(10,255)	(12,642)
Changes in operating assets and liabilities
Decrease in financial assets	145,971	44,697
(Increase)/decrease in reinsurers share of insurance contract provisions	(14,138)	15,442
(Increase)/decrease in amounts deposited with reinsurers	(2,214)	2,233
Decrease in insurance and other receivables	402	2,967
Decrease in prepayments	96	659
Decrease in assets held for sale	-	380
Decrease in liabilities held for sale	-	(380)
Increase/(decrease) in insurance contract provisions	15,271	(212,424)
Increase/(decrease) in investment contract liabilities	140,360	(115,100)
Increase in provisions	2,336	989
Increase/(decrease) in reinsurance payables	88	(5,859)
(Decrease)/increase in payables related to direct insurance and investment contracts	(1,795)	4,981
(Decrease)/increase in other payables	(3,251)	5,719
Cash generated from operations	64,758	44,554
Income tax paid	(1,152)	(9,119)
Net cash generated from operating activities	63,606	35,435

Cash flows from investing activities
Development of software	(1,094)	(1,968)
(Purchases)/disposals of property and equipment	(109)	63
Net cash utilised by investing activities	(1,203)	(1,905)

Cash flows from financing activities
Repayment of borrowings	(6,406)	(7,510)
Dividends paid	(19,525)	(19,007)
Interest paid	(3,949)	(3,625)
Net cash utilised by financing activities	(29,880)	(30,142)

Net increase in cash and cash equivalents	32,523	3,388
Cash and cash equivalents at beginning of period	195,086	191,980
Effect of exchange rate changes on cash and cash equivalents	465	(282)
Cash and cash equivalents at end of the year	228,074	195,086

Consolidated Statement of Changes in Equity for the year ended 31 December 2012

Year ended 31 December 2012
	Share capital	Share premium	Other reserves	Treasury shares	Retained earnings	Total
	£000	£000	£000	£000	£000	£000
Equity shareholders' funds at 1 January 2012	42,024	42,523	6,978	(217)	117,881	209,189
Profit for the period	-	-	-	-	27,941	27,941
Dividends paid	-	-	-	-	(19,525)	(19,525)
Foreign exchange translation reserve	-	-	741	-	-	741
Equity shareholders' funds at 31 December 2012	42,024	42,523	7,719	(217)	126,297	218,346

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	-	-	-	-	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

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 2012, 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 2012 or 2011, but is derived from those financial statements. Financial Statements for the year ended 31 December 2011 have been delivered to the Registrar of Companies and those for the year ended 31 December 2012 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 2011, with the exception of the treatment of any excess of policyholder assets over policyholder liabilities within the S&P with-profits funds. Up to 31 December 2011 the Group had opted, as permitted under IFRS 4, to record such unallocated surplus as a liability within a separate unallocated divisible surplus account. However, in recognition of the fact that such surplus has been determined not to be capable of allocation to shareholders at any time, the Group has opted to classify such surplus as an insurance contract provision at 31 December 2012. Accordingly, the Consolidated Balance Sheet as at 31 December 2011 has been re-stated to reflect the re-classification of the previously-reported unallocated divisible surplus of £6,254,000 within insurance contract provisions. The corresponding re-classification being £83,000 as at 31 December 2010 is not material, and therefore further comparatives are not presented. No associated re-classifications or adjustments are required in the Consolidated Statement of Comprehensive Income, the consolidated statement of cash flows or the consolidated statement of changes in equity.

The following table highlights the impact of this change in accounting policy on the 2011 comparative information:

	As previously presented £000	Adjustment £000	As restated £000
Insurance contract provisions	(2,184,685)	(6,254)	(2,190,939)
Unallocated divisible surplus	(6,254)	6,254	-
Total liabilities	(4,282,765)	-	(4,282,765)
Net assets	209,189	-	209,189

3. Exceptional item

Following the transfer, on 31 December 2011, of the whole of the business of the S&P operating segment to Countrywide Assured plc under the provisions of Part VII of the Financial Services and Markets Act 2000, S&P policyholder liabilities to taxation have, with effect from 1 January 2012, been re-classified within the Consolidated Balance Sheet from deferred tax liabilities to insurance contract provisions. The purpose of this is to align the classification with that adopted by the CA operating segment. As a consequence there is:

(i) as at 1 January 2012 a reduction of £4.8m in deferred tax liabilities and an equal and opposite increase of £4.8m in insurance contract provisions; and

(ii) in the Condensed Consolidated Statement of Comprehensive Income a pre-tax charge of £4.8m and a deferred tax release to income tax of £4.8m, both of these amounts being presented as exceptional items, by virtue of their size and incidence. The net-of-tax result in the Condensed Consolidated Statement of Comprehensive Income attributable to these exceptional items is, accordingly, £nil.

4. Operating segments

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

The segments of the Group as at 31 December 2012 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.

There were no changes to the basis of segmentation during the year ended 31 December 2012.

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 2012.

(i) Segmental income statement for the year ended 31 December 2012

Year ended 31 December
					Other Group
	CA	S&P	UK Total	Movestic	Activities	Total
	£000	£000	£000	£000	£000	£000
Net Insurance premium revenue	54,785	8,987	63,772	16,412	-	80,184
Fee and commission income	35,191	2,776	37,967	28,691	-	66,658
Net investment return	128,009	105,936	233,945	97,846	262	332,053
Total revenue (net of reinsurance payable)	217,985	117,699	335,684	142,949	262	478,895
Other operating income	3,484	11,114	14,598	5,047	-	19,645
Segmental income	221,469	128,813	350,282	147,996	262	498,540

Net insurance contract claims and benefits incurred	(140,502)	(97,787)	(238,289)	(7,057)	-	(245,346)
Net change in investment contract liabilities	(52,679)	(4,134)	(56,813)	(97,040)	-	(153,853)
Fees, commission and other acquisition costs	(947)	(62)	(1,009)	(16,958)	-	(17,967)
Administrative expenses
Amortisation charge on software assets	-	-	-	(2,188)	-	(2,188)
Depreciation charge on property and equipment	(22)	-	(22)	(187)	-	(209)
Other	(8,105)	(11,000)	(19,105)	(13,053)	(2,474)	(34,632)
Other operating expenses
Charge for amortisation of acquired value of
in-force business	(2,892)	(852)	(3,744)	(4,119)	-	(7,863)
Charge for amortisation of acquired value of
customer relationships	-	-	-	(391)	-	(391)
Other	(625)	(1,212)	(1,837)	(5,046)	(2,322)	(9,205)
Segmental expenses	(205,772)	(115,047)	(320,819)	(146,039)	(4,796)	(471,654)

Segmental income less expenses	15,697	13,766	29,463	1,957	(4,534)	26,886
Share of profit of associate	-	-	-	1,244	-	1,244
Exceptional item	-	(4,778)	(4,778)	-	-	(4,778)
Segmental operating profit/(loss)	15,697	8,988	24,685	3,201	(4,534)	23,352
Financing costs	-	(1)	(1)	(2,451)	(1,218)	(3,670)
Profit/(loss) before income taxes	15,697	8,987	24,684	750	(5,752)	19,682
Income tax credit/(expense)
Income tax credit/(expense) - before exceptional item			2,384	(323)	1,420	3,481
Exceptional item			4,778	-	-	4,778
After exceptional item			7,162	(323)	1,420	8,259
Profit/(loss) for the year attributable to the equity holders of the parent company			31,846	427	(4,332)	27,941

(ii) Segmental balance sheet as at 31 December 2012

31 December				Other Group
	CA	S&P	Movestic	Activities	Total
	£000	£000	£000	£000	£000
Total assets	1,815,021	1,266,946	1,534,263	34,391	4,650,621
Total liabilities	1,728,523	1,191,376	1,476,185	36,191	4,432,275
Net assets/(liabilities)	86,498	75,570	58,078	(1,800)	218,346
Investments in associates	-	-	2,902	-	2,902
Additions to segment non-current assets	230	-	11,353	-	11,583

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

Year ended 31 December
					Other Group
	CA	S&P	UK Total	Movestic	Activities	Total
	£000	£000	£000	£000	£000	£000
Net Insurance premium revenue	59,561	10,440	70,001	17,005	-	87,006
Fee and commission income	37,675	2,768	40,443	27,420	-	67,863
Net investment return	(19,009)	(21,685)	(40,694)	(151,938)	230	(192,402)
Total revenue (net of reinsurance payable)	78,227	(8,477)	69,750	(107,513)	230	(37,533)
Other operating income	3,584	11,702	15,286	6,446	50	21,782
Segmental income	81,811	3,225	85,036	(101,067)	280	(15,751)

Net insurance contract claims and benefits incurred	(56,981)	18,063	(38,918)	(6,508)	-	(45,426)
Net change in investment contract liabilities	11,731	(963)	10,768	151,898	-	162,666
Fees, commission and other acquisition costs	(1,293)	(63)	(1,356)	(15,920)	-	(17,276)
Administrative expenses
Amortisation charge on software assets	-	-	-	(1,979)	-	(1,979)
Depreciation charge on property and equipment	(18)	-	(18)	(278)	-	(296)
Other	(8,716)	(11,687)	(20,403)	(13,085)	(3,035)	(36,523)
Other operating expenses
Charge for amortisation of acquired value of
in-force business	(3,640)	(964)	(4,604)	(4,428)	-	(9,032)
Charge for amortisation of acquired value of
customer relationships	-	-	-	(758)	-	(758)
Other	(729)	(1,087)	(1,816)	(6,457)	(1,391)	(9,664)
Segmental expenses	(59,646)	3,299	(56,347)	102,485	(4,426)	41,712

Segmental income less expenses	22,165	6,524	28,689	1,418	(4,146)	25,961
Share of profit of associate	-	-	-	(152)	-	(152)
Segmental operating profit/(loss)	22,165	6,524	28,689	1,266	(4,146)	25,809
Financing costs	-	(12)	(12)	(1,957)	(1,419)	(3,388)
Profit/(loss) before income taxes	22,165	6,512	28,677	(691)	(5,565)	22,421
Income tax credit/(expense)			1,772	275	1,197	3,244
Profit/(loss) for the year attributable to the equity holders of the parent company			30,449	(416)	(4,368)	25,665

(iv) Segmental balance sheet as at 31 December 2011

31 December				Other Group
	CA	S&P	Movestic	Activities	Total
	£000	£000	£000	£000	£000
Total assets	1,774,864	1,304,209	1,395,751	17,130	4,491,954
Total liabilities	1,689,378	1,215,473	1,338,841	39,073	4,282,765
Net assets/(liabilities)	85,486	88,736	56,910	(21,943)	209,189
Investments in associates	-	-	1,613	-	1,613
Additions to segment non-current assets	6	-	14,653	-	14,659

5. Borrowings

31 December
	2012	2011
	£000	£000
Bank loan	29,662	35,486
Amount due in relation to financial reinsurance	18,662	19,267
Total	48,324	54,753

Current	12,218	12,472
Non-current	36,106	42,281
Total	48,324	54,753

The bank loan subsisting at 31 December 2012, 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 2012 was £30,000,000 (31 December 2011: £36,000,000).

The fair value of amounts due in relation to financial reinsurance was £20,197,549 (31 December 2011: £20,672,526).

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

6. Earnings per share

Year ended 31 December
	2012	2011
Profit for the year attributable to shareholders (£000)	27,941	25,665
Weighted average number of ordinary shares	114,848,651	114,848,651
Basic earnings per share	24.33p	22.35p
Diluted earnings per share	24.33p	22.35p

The weighted average number of ordinary shares in respect of the years ended 31 December 2012 and 31 December 2011 is based upon 115,047,662 shares in issue less 199,011 own shares held in treasury.

There were no share options outstanding during the year ended 31 December 2011 or during the year ended 31 December 2012. Accordingly, there is no dilution of the average number of ordinary shares in issue in respect of these periods.

7. Retained earnings

Year ended 31 December
	2012	2011
	£000	£000
Retained earnings attributable to equity holders of the parent company comprise
Balance at 1 January	117,881	111,223
Profit for the year	27,941	25,665
Dividends
Final approved and paid for 2010	-	(12,174)
Interim approved and paid for 2011	-	(6,833)
Final approved and paid for 2011	(12,519)	-
Interim approved and paid for 2012	(7,006)	-
Balance at 31 December	126,297	117,881

The interim dividend in respect of 2011, approved and paid in 2011 was paid at the rate of 5.95p per share. The final dividend in respect of 2011, approved and paid in 2012, was paid at the rate of 10.90p per share so that the total dividend paid to the equity shareholders of the Parent Company in respect of the year ended 31 December 2011 was made at the rate of 16.85p per share.

The interim dividend in respect of 2012, approved and paid in 2012, was paid at the rate of 6.10p per share to equity shareholders of the Parent Company registered at the close of business on 14 September 2012, the dividend record date.

A final dividend of 11.25p per share in respect of the year ended 31 December 2012 payable on 22 May 2012 to equity shareholders of the Parent Company registered at the close of business on 12 April 2012, the dividend record date, was approved by the Directors after the balance sheet date. The resulting total final dividend of £12.9m 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 2012 and 31 December 2011:

	2012	2011
	p	p
Interim - approved and paid	6.10	5.95
Final - proposed	11.25	10.90
Total	17.35	16.85

Supplementary Information - European Embedded Value Basis

Summarised EEV consolidated income statement for the year ended 31 December 2012

Year ended 31 December
	2012	2011
	£000	£000
Operating profit of covered business	19,032	15,314
Other operational result	(4,446)	(2,811)
Operating profit	14,586	12,503
Variation from longer-term investment return	28,035	(16,929)
Effect of economic assumption changes	(6,504)	(32,479)
Profit/(loss) before tax and before exceptional item	36,117	(36,905)
Exceptional item
Effect of modelling adjustments	3,574	(10,328)
Profit/(loss) before tax	39,691	(47,233)
Tax	(4,862)	7,123
Profit/(loss) for the year attributable to the equity holders of the parent company	34,829	(40,110)

Earnings per share
Based on profit/(loss) for the period	30.33p	(34.92)p

Diluted earnings per share
Based on profit/(loss) for the period	30.33p	(34.92)p

Summarised EEV consolidated balance sheet as at 31 December 2012

31 December
	2012	2011
Assets	£000	£000
Value of in-force business	210,080	199,560
Deferred acquisition costs arising on unmodelled business	497	834
Acquired value of customer relationships	562	694
Property and equipment	369	385
Investment in associate	2,902	1,613
Deferred tax asset	1,280	-
Reinsurers' share of insurance contract provisions	235,782	230,891
Amounts deposited with reinsurers	28,941	26,637
Investment properties	100,167	132,128
Financial assets
Equity securities at fair value through income	427,303	404,431
Holdings in collective investment schemes at fair value through income	3,009,799	2,917,935
Debt securities at fair value through income	363,377	330,610
Insurance and other receivables	24,313	30,799
Prepayments	3,160	3,234
Policyholders' funds held by the Group	61,171	49,080
Derivative financial instruments	3,095	10,308
Total financial assets	3,892,218	3,746,397
Reinsurers' share of accrued policy claims	4,489	4,667
Income taxes	8,649	6,932
Cash and cash equivalents	228,676	195,920
Total assets	4,714,612	4,546,658

Liabilities
Insurance contract provisions	2,171,259	2,165,320
Other provisions	5,161	2,811
Deferred tax liabilities	-	3,080
Financial liabilities
Investment contracts at fair value through income	2,033,131	1,887,261
Borrowings	55,373	61,765
Derivative financial instruments	286	144
Liabilities relating to policyholders' funds held by the Group	61,171	49,080
Total financial liabilities	2,149,961	1,998,250
Reinsurance payables	16,183	15,883
Payables related to direct insurance and investment contracts	38,894	40,651
Income taxes	4,350	923
Other payables	17,057	24,417
Bank overdraft	602	834
Total liabilities	4,403,467	4,252,169

Net assets	311,145	294,489

Equity
Share capital	42,024	42,024
Share premium	42,523	42,523
Treasury shares	(217)	(217)
Foreign exchange reserve	15,378	14,026
Other reserves	50	50
Retained earnings	211,387	196,083
Total shareholders' equity	311,145	294,489

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 business segments are the same as those described in the primary financial statements prepared on the IFRS basis.

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

	2012	2012	2011	2011
	£000	£000	£000	£000
Shareholders' equity at beginning of the year		294,489		354,636
Profit/(loss) for the period attributable to shareholders before modelling adjustments	31,255		(29,782)
Effect of modelling adjustments	3,574		(10,328)
Profit/(loss) for the year		34,829		(40,110)
Foreign exchange reserve movement		1,352		(1,030)
Dividends paid		(19,525)		(19,007)
Shareholders' equity at end of the year		311,145		294,489

Effect of modelling adjustments

Modelling adjustments during the year ended 31 December 2012 give rise to a net increase in EEV of £3.6m, comprising:

Movestic

During 2012, there has been a continued focus on ensuring that the Movestic EEV model is robust. The process, which has included independent review, has identified the following:

(i) Levels of commission claw-back within the future cash flow projections were overstated by £7.9m; and

(ii) Several enhancements to policy fee cash flow estimates and data input routines have been identified with a total net adverse impact of £1.1m.

The CA and CWA EEV models previously assumed a single average rate of investment return for all durations as opposed the use of a full yield curve. This approximation was reported in the EEV assumptions section of the Supplementary Information within the 2011 Report and Accounts. As at 31 December 2012 the models have been enhanced to recognise differing rates of return across the different durations of the yield curve resulting in a net of tax increase of £12.6m

Modelling adjustments during the year ended 31 December 2011 gave rise to a net reduction in EEV of £(10.3)m comprising:

Movestic

(ii) 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. 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 these errors should be treated and presented.

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 effect of 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 2012
					Other Group
	CA	S&P	UK Total	Movestic	Activities	Total
	£000	£000	£000	£000	£000	£000
Covered business
New business contribution	339	(33)	306	2,596	-	2,902
Return from in-force business
Expected return	2,308	274	2,582	3,290	-	5,872
Experience variances	5,194	3,029	8,223	(7,855)	-	368
Operating assumption changes	(335)	(2,858)	(3,193)	5,176	-	1,983
Return on shareholder net worth	859	7,048	7,907	-	-	7,907
Operating profit of covered business	8,365	7,460	15,825	3,207	-	19,032
Variation from longer-term investment return	8,864	10,967	19,831	8,204	-	28,035
Effect of economic assumption changes	(4,106)	(2,713)	(6,819)	315	-	(6,504)
Profit of covered business before tax	13,123	15,714	28,837	11,726	-	40,563
Tax thereon			(5,990)	-	-	(5,990)
Profit of covered business after tax			22,847	11,726	-	34,573
Results of non-covered business and of other group companies
Profit/(loss) before tax			-	1,299	(5,745)	(4,446)
Tax			-	(295)	1,423	1,128
Profit/(loss) after tax			22,847	12,730	(4,322)	31,255

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 2011 (restated)

					Other Group
	CA	S&P	UK Total	Movestic	Activities	Total
	£000	£000	£000	£000	£000	£000
Covered business
New business contribution	398	42	440	3,074	-	3,514
Return from in-force business
Expected return	4,072	257	4,329	5,902	-	10,231
Experience variances	5,203	(157)	5,046	(4,922)	-	124
Operating assumption changes	1,641	(887)	754	(3,371)	-	(2,617)
Return on shareholder net worth	1,126	2,936	4,062	-	-	4,062
Operating profit of covered business	12,440	2,191	14,631	683	-	15,314
Variation from longer-term investment return	3,066	(1,762)	1,304	(18,233)	-	(16,929)
Effect of economic assumption changes	(8,754)	(23,706)	(32,460)	(19)	-	(32,479)
Profit/(loss) of covered business before tax	6,752	(23,277)	(16,525)	(17,569)	-	(34,094)
Tax thereon			5,651	-	-	5,651
Loss of covered business after tax			(10,874)	(17,569)	-	(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			(10,874)	(16,981)	(1,927)	(29,782)

The analysis of profit/(loss) of covered business before tax for the year ended 31 December 2011 has been restated to reflect the change in methodology for the allocation of holding company expenses to the segments.

3 Sensitivities to alternative assumptions

The following tables show the sensitivity of the embedded value as reported at 31 December 2012, 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 2012 as the reported level of new business contribution is not considered to be material.

	Embedded Value					New Business Contribution
	UK business				Movestic	Movestic
	CA Pre-tax	S&P Pre-tax	Tax	Total UK Post-tax	Post-tax
	£m	£m	£m	£m	£m	£m
Published value as at 31 December 2012	149.3	81.5	(17.8)	213.0	98.1	2.6

Changes in embedded value/new business contribution arising from:

Economic sensitivities
100 basis point increase in yield curve	(2.5)	18.0	(1.7)	13.8	(0.6)	(0.1)
100 basis point reduction in yield curve	3.1	(17.8)	(1.3)	(16.0)	0.6	0.1
10% decrease in equity and property values	(2.2)	(10.9)	1.5	(11.6)	(10.2)	-

Operating sensitivities
10% decrease in maintenance expenses	3.1	4.5	(0.2)	7.4	6.1	0.4
10% decrease in lapse rates	2.7	(1.9)	0.2	1.0	8.9	0.8
5% decrease in mortality/morbidity rates
Assurances	1.0	0.9	-	1.9	0.2	-
Annuities	(1.8)	(0.7)	0.2	(2.3)	n/a	n/a
Reduction in the required capital to statutory minimum	0.4	0.8	-	1.2	-	-

The key assumption changes represented by each of these sensitivities are as follows:

Economic sensitivities

(i) 100 basis point increase in the yield curve: The reference rate is increased by 1% and the rate of future inflation has also been increased by 1% so that real yields remain constant;

(ii) 100 basis point reduction in the yield curve: The reference rate is reduced by 1% (with a minimum of zero to avoid negative yields where relevant) 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
	2012	2011
	p	p
Basic earnings per share
Based on profit/(loss) for the period	30.33	(34.92)
Based on (loss)/profit for the period attributable to shareholders before exceptional item	27.21	(25.93)
Diluted earnings per share
Based on profit for the period attributable to shareholders	30.33	(34.92)
Based on profit for the period attributable to shareholders before exceptional item	27.21	(25.93)

This information is provided by RNS

The company news service from the London Stock Exchange

END

FR DDLFLXXFXBBB

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