31st Aug 2011 07:00
Chesnara plc - Interim Results for the six months ended 30 June 2011
2.6% increase continues dividend growth at Chesnara
31 August 2011
Chesnara today reported interim results for the half-year ended 30 June 2011.The Group remains committed to offering shareholders an attractive long-termincome stream arising from the profits of its life assurance businesses.
* Profit (on IFRS basis) before tax for the six months ended 30 June 2011 of
GBP3.8m, (2010: GBP12.0m) * Earnings per share (on IFRS basis) of 2.79p, (2010: 7.71p) * On EEV basis pre-tax loss for the half-year of GBP(4.9)m (2010: profit GBP6.3m) including modelling adjustments * Successful operational integration of Save and Prosper acquisition
* Continuing positive UK persistency experience and robust cash generation
* Equity market volatility and falling yield curve impacts results
* Shareholder equity on EEV basis (pre-proposed interim dividend payment) of
GBP340.1m - GBP2.96 per share (30 June 2010: GBP255.1m - GBP2.51 per share)
* Group solvency ratio remains, post dividend, above target at 198% (30 June
2010: 330%)
* In the UK, Countrywide Assured's solvency ratio remains well above target
at 254% (30 June 2010: 263%) whilst Save and Prosper's ratio at 269% (30
June 2010: 243%) was also very strong. Movestic's solvency ratio of 189%
(30 June 2010: 220%) also remains above target
* 5.95p interim dividend per share proposed (2009: 5.8p), an increase of
2.6%
* Board remains confident about future dividend flows
* Search for value adding acquisition opportunities continues
* Comparatives for 30 June 2010 exclude Save and Prosper which was acquired on 20 December 2010
Commenting on the results, Graham Kettleborough, Chief Executive said:
"Challenging equity and bond markets have given rise to mixed results. However the resilience of our underlying business has again enabled us to deliver a reliable and progressive dividend stream by proposing a 2.6% increase in the interim dividend to 5.95p per share."
The Board approved this statement on 30 August 2011.
Enquiries:Graham Kettleborough Chief Executive,Chesnara plc 07799 407519Michael Henman Cubitt Consulting 0207 367 5100Notes to editors:
Chesnara plc, which listed on the London Stock Exchange in May 2004, is theowner of Countrywide Assured plc ('CA'), Save & Prosper Insurance ('Save & Prosper') and Movestic Livf¶rs¤kringar AB ('Movestic'). CA is a UK life assurance subsidiary that is substantially closed to new business. In June 2005 Chesnara acquired a further closed life insurance company - City ofWestminster Assurance ('CWA') - for GBP47.8m. With effect from 30 June 2006,CWA's policies and assets were transferred into CA plc. Movestic, a Swedish life assurance company which originally focused on pensions and savings, was acquiredon 23 July 2009 for GBP20m. The company is open to new business and seeks to growits position in the Swedish unit-linked market. Its proposition was strengthenedin February 2010 with the acquisition of the operations of Aspis F¶rs¤kringarLiv AB which has a risk and health product bias. Save & Prosper Insurance Limited, and its subsidiary, Save & Prosper PensionsLimited were acquired on 20th December 2010 for GBP63.5m in cash. This was fundedby raising a new lending facility of GBP40m and the sale of new and treasuryshares which raised GBP26.7m. The companies are closed to new business andoperate an outsourced business model which is complementary to Chesnara'sexisting UK operations. Chesnara plc Condensed Consolidated Financial Statements for the Six Months Ended 30 June 2011 FINANCIAL CALENDAR
31 August 2011..........................Interim results for the six months
ended 30 June 2011 announced
7 September 2011........................Ex dividend date
9 September 2011........................Dividend record date
14 October 2011........................Dividend payment date
18 November 2011........................Interim Management Statement for the
quarter ending 30 September 2011
March 2012...........................Results for the year ending
December 2011 announced Forward-looking statements
This document may contain forward-looking statements with respect to certain of the plans and current expectations relating to future financial condition,
business performance and results of Chesnara plc. By their nature, all
forward-looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the control of Chesnara plc
including, amongst other things, UK domestic, Swedish domestic and global
economic and business conditions, market-related risks such as fluctuations in interest rates, inflation, deflation, the impact of competition, changes in
customer preferences, delays in implementing proposals, the timing, impact and other uncertainties of future acquisitions or other combinations within
relevant industries, the policies and actions of regulatory authorities, the impact of tax or other legislation and other regulations in the jurisdictions in which Chesnara plc and its subsidiaries operate. As a result, Chesnara plc'sactual future condition, business performance and results may differ materiallyfrom the plans, goals and expectations expressed or implied in these
forward-looking statements. Note on terminology
As explained in Note 4 to the unaudited IFRS Condensed Consolidated Financial Statements, the principal reporting segments of the Group are:
(1) Countrywide Assured Life Holdings Limited and its subsidiary companies (together 'CA');
(2) Save & Prosper Insurance Limited and its subsidiary company Save & Prosper
Pensions Limited (together 'S&P' or 'the S&P business', as the context requires); and
(3) Movestic Livf¶rs¤kring AB and its subsidiary and associated companies
(together 'Movestic'). In addition:
(i) The operating segments under (1) and (2) above may be referred to as the
'UK businesses' and the operating segment under (3) may be referred to as
the 'Swedish business' as the context requires; (ii) The principal operating subsidiary company within the CA segment is
Countrywide Assured plc, which is designated as 'CA plc'; and
(iii)Where it is necessary to distinguish Movestic Livf¶rs¤kring AB as a
separate entity from its subsidiary and associated companies it is designated as 'Movestic Liv'.
Change of name
Movestic Livf¶rs¤kring AB was formerly known as Moderna F¶rs¤kringar Liv AB. The change of name occurred in November 2010.
FINANCIAL HIGHLIGHTS Unaudited 6 months ended Year ended 30 June 31 December 2011 2010 2010IFRS basis Operating profit/(loss)  CA 8.0 16.8 25.7  S&P (1.2) - 0.2  Movestic 0.6 (4.3) (2.5) Other group activities (1.0) (0.8) (3.8)
Profit arising on business combinations - 1.0
15.9 -------- -------- -------- 6.4 12.7 35.5 Financing costs (2.6) (0.7) (1.3) Profit before tax GBP3.8m GBP12.0m GBP34.2m ======== ======== ======== Basic earnings per share 2.79p 7.71p 29.05p Dividend per share (including proposed dividend) 5.95p 5.80p 16.40p Shareholders' net equity GBP196.3m GBP156.8m GBP203.3m ======== ======== ========
European Embedded Value basis (EEV)
Operating profit/(loss) Covered business  CA 2.8 10.0 16.0  S&P 0.6 - 0.2  Movestic (2.6) (16.5) (9.8) Other group activities (0.6) (0.8) (6.1) ------- -------- -------- 0.2 (7.3) 0.3
Investment variances and economic assumption
changes  CA 0.2 (4.9) 7.6  S&P 3.4 - (1.5)  Movestic (3.4) 7.2 16.4 -------- -------- --------
Profit/(loss) before tax and before exceptional
items 0.4 (5.0) 22.8 Exceptional items
 Profit arising on business combinations - 0.9
41.0
 Effect of modelling adjustments (5.3) 10.4
13.2 -------- -------- -------- (Loss)/profit before tax (4.9) 6.3 77.0 Tax (1.9) (2.4) (4.0) -------- -------- -------- (Loss)/profit for the period GBP(6.8)m GBP3.9m GBP73.0m ======== ======== ========
Shareholders' equity on EEV basis
Embedded value  CA 126.4 132.1 149.7 S&P 106.8 - 103.2  Movestic 112.4 93.7 119.4 -------- -------- -------- Embedded value of covered business 345.6 225.8
372.3
Acquired embedded value financed by debt (39.3) -
(39.3)
Shareholders' equity in other group companies 33.8 29.3 21.6 -------- -------- -------- GBP340.1m GBP255.1m GBP354.6m ======== ======== ======== EEV per share 296.2p 251.3p 308.8p
In contrast with the IFRS basis of reporting, the EEV basis recognises thediscounted value of the expected future cash flows, arising from the long-termbusiness contracts in force at the period end, as a component of shareholders'equity. Accordingly, the EEV result recognises, within profit, the movement inthis component.S&P was acquired on 20 December 2010. Accordingly, the results of S&P set outabove in respect of the year ended 31 December 2010 are for the 11-daypost-acquisition period and the unaudited results for the six months ended
30June 2010 exclude S&P.CHAIRMAN'S STATEMENT
I am pleased to present the eighth interim financial statements of Chesnara plc, which are the first interim statements that incorporate the results of
S&P, which was acquired in late December 2010. The first half of the year hasbeen characterised by continuing economic uncertainty and this, together withthe associated impact on global investment markets, has had an overall adverseeffect on our reported results. It is, however, pleasing that CA's cashgeneration, on which the Group currently relies to support its dividend policy,has shown a measure of resilience in the face of these pressures.
Review of the Business
The dominating investment market influence in the UK over the period has beenthe downward drift in short-term interest rates combined with an easing up inlonger-term rates, while investment returns in Movestic, our Swedish-basedbusiness, have been negatively affected by poor equity and fixed-interestinvestment performance. These factors have had varying and contrasting impactson the businesses' IFRS and EEV earnings measures, such that the effects are byno means uniform. While CA's IFRS result has generally benefited from the fallin short-term fixed-interest yields, due to the impact on the capital value ofassets backing its insurance liabilities, the corresponding S&P result hasexperienced a loss of GBP4.2m arising from strain in its with profits portfolio.This has resulted from a slightly lower actuarial valuation interest rate,driven by general market movements, and the fact that the result is sensitiveto relatively minor movements in the rate: this is also true of any upsideimpact of prospective rate increases. Within these funds, there has also beenan increase in the proportion of cash-based investments compared with theposition at 31 December 2010. In contrast, S&P's EEV result, which reflects alonger-term view, has benefited from a GBP2.6m reduction in the estimated cost ofguarantees within its with profits portfolio, driven by the prospect ofimproved longer-term interest rates.Within Movestic, dull investment market performance has led to an adverse EEVimpact of GBP6.2m in the period, as the projected level of policyholder fundsunder management, on which its fee income is based, has fallen. In theshort-term, however, as reflected in Movestic's IFRS result, this impact ismuted.On an IFRS basis, at the consolidated Group level, we have posted a pre-taxprofit of GBP3.8m for the half year ended 30 June 2011, compared with GBP12.0m for the corresponding period in 2010. The result was adversely affected by the GBP4.2m with profits strain arising in S&P, while the 2010 half-year result wasenhanced by the release of GBP3.2m relating to a claims reserve within CA. CA'spre-tax result for the half year is robust at GBP8.0m, in spite of the impact ofa GBP2m increase in expense provisions. A further highlight of the overall IFRSresult is that Movestic's pre-tax loss at GBP1.2m is on a clearly improvingtrend, with its core risk insurance and savings operations now trading at, orjust above, break even.On the EEV basis of reporting, excluding modelling adjustments, we have posteda post-tax loss of GBP1.5m for the half year, compared with a loss of GBP6.4m forthe corresponding period in 2010. The dominating feature has been the adverseinvestment return variance of GBP6.2m arising within Movestic. Also withinMovestic the value added by new business and the unwind of the discount rate,together some GBP5m at the pre-tax level, has been offset by an adverse impact of£5m arising from policy discontinuance. Within the UK businesses the EEV resulthas been supported by the GBP2.6m reduction in the estimated cost of guaranteeswithin the S&P with profits funds, while continuing favourable lapse andmortality experience in CA, together GBP2m at the pre-tax level, has offset theimpact of the GBP2m increase in expense provisions.Other significant movements in Group embedded value are a GBP5.3m adverse effectin respect of modelling adjustments, offset by a foreign exchange translationgain of GBP4.5m following the appreciation by 4% of the Swedish Krona againststerling over the first half of the year. Cumulative modelling adjustments,principally arising from the introduction of a new model in Movestic in 2010,are, for the 18-month period ended 30 June 2011, GBP7.9m favourable, GBP13.2mhaving been reflected during the year ended 31 December 2010. The adjustmentsmade in the first half of 2011 are net of the correction of errors of GBP7.7m,unrelated to the adjustments made in 2010, detected in the operation of the newmodel. These factors, together with the core trading loss of GBP1.5m, have givenrise to a reduction in Group EEV of GBP2.3m.
Shareholder Value and Returns to Shareholders
Total shareholder equity on the EEV basis, pre appropriation of the proposedinterim dividend, is GBP340.1m (296.2p per share) compared with GBP354.6m (308.8pper share) as at 31 December 2010. The difference in total shareholder equityis the GBP2.3m net reduction referred to above together with the payment of thefinal 2010 dividend of GBP12.2m (10.6p per share).The capacity of the Group to pursue its dividend policy currently continues torely on the emergence of surplus within CA and, as indicated, this has provedto be resilient in the face of challenging economic and investment marketconditions. CA's solvency position stands at a healthy 254% (213% as at 31December 2010), while S&P's solvency position has improved slightly from 268%to 269% and Movestic's solvency ratio stands at 189% compared with a target ofat least 150%. The Group solvency position post the proposed interim dividendaccordingly remains healthy at 198% (31 December 2010: 200%).Based on the strength of our reserves and of our capital solvency ratios, theBoard has decided to declare an interim dividend of 5.95p per share (2010interim dividend: 5.80p per share), which represents a 2.6% increase andequates to a total dividend payable to shareholders of GBP6.8m. In arriving atthis decision the Board has taken careful consideration of the currentvolatility in global investment markets.
Outlook
Like many businesses, we have been affected by the ongoing turmoil in the equity and debt markets and we provide some guidance to the effect of market volatility in the EV Supplementary Information section of these statements.
Reassuringly, cash generation remains robust and, following the successfulintegration of S&P, our plans to merge it with CA are progressing well. Thismerger will result in further capital and operating synergies which willsupport our short to medium-term dividend capability. The strategic rationalefor the acquisition of S&P remains sound and we fully expect the generation ofsurplus from this business to further underpin future dividend capability.
We are making good progress on the implementation of Solvency II and are on target for the current implementation date of 1 January 2013.
As ever, we remain subject to challenges from regulatory or legislative change,the economic environment, low interest rates and volatility in the equitymarkets. However, we remain strong financially and believe we are well-placedto deliver good ongoing returns to shareholders. We also believe that thecurrent climate and the challenges of Solvency II will give rise to possibleacquisition opportunities and we remain keen to progress these.Peter MasonChairman30 August 2011DIRECTORS INFORMATIONPeter Mason was appointed as Chairman of Chesnara plc and Chairman of theNomination Committee on 1 January 2009. He was re-appointed as a member of theRemuneration and Audit & Risk Committees with effect from 22 December 2009 andwas appointed as Chairman of Movestic Livf¶rs¤kring AB with effect from 23 July2009. He was also appointed as Chairman of the Boards of the S&P companies witheffect from 20 December 2010. He is currently a Non-executive Director ofHomeowners Friendly Society and is the Investment Director and Actuary ofNeville James Group, an investment management company. He was admitted as aFellow of the Institute of Actuaries in 1979.Graham Kettleborough is the Chief Executive of Chesnara plc. He joinedCountrywide Assured plc in July 2000 with responsibility for marketing andbusiness development and was appointed as Managing Director and to the Board inJuly 2002. He was appointed as a Non-executive Director of MovesticLivf¶rs¤kring AB and as Chairman of Movestic Kapitalf¶rvaltning AB with effectfrom 23 July 2009. He was also appointed as Managing Director of the S&Pcompanies with effect from 20 December 2010. Prior to joining CountrywideAssured plc, he was Head of Servicing and a Director of the Pension TrusteeCompany at Scottish Provident. He has lifetime experience in the financialservices industry, primarily in customer service, marketing, product andbusiness development, gained with Scottish Provident, Prolific Life, City ofWestminster Assurance and Target Life.Ken Romney is the Finance Director of Chesnara plc. He joined CountrywideAssured plc in 1989 and became a member of the Board in 1997. He was alsoappointed as Finance Director of the S&P companies with effect from 20 December2010. He has worked in the life assurance industry for the last 27 years. Hewas Chief Accountant at Laurentian Life (formerly Imperial Trident) up to 1987and was Financial Controller at Sentinel Life between 1987 and 1989. He workedfor Price Waterhouse in their audit division until 1983 in both the UK andSouth Africa. He is a Fellow of the Institute of Chartered Accountants inEngland and Wales.
Frank Hughes is the Business Services Director of Chesnara plc. He joined Countrywide Assured plc in November 1992 as an IT Project Manager and was appointed to the Board as IT Director in May 2002. He has 26 years' experience in the life assurance industry gained with Royal Life, Norwich Union and CMG.
Mike Gordon is an Independent Non-executive Director of Chesnara plc and isChairman of the Remuneration Committee. He was appointed as Senior IndependentNon-executive Director of Chesnara plc on 1 January 2009. He also serves on theAudit & Risk Committee and the Nomination Committee and was appointed as aNon-executive Director of Movestic Livf¶rs¤kring AB with effect from 23 July2009. He spent 12 years as Group Sales Director of Skandia Life AssuranceHoldings.Terry Marris is an Independent Non-executive Director of Chesnara plc andserves on the Audit & Risk Committee, the Remuneration Committee and theNomination Committee. He was also appointed as a Non-executive Director of theS&P companies with effect from 21 January 2011. He joined Countrywide AssuredGroup plc in 1992 and was Managing Director of Countrywide Assured plc untilJuly 2002. Previous roles included senior management positions at Lloyds Bankand General Accident. Peter Wright is an Independent Non-Executive Director who was appointed to theChesnara plc Board on 1 January 2009. At the same date he was appointed asChairman of the Audit & Risk Committee and as a member of the RemunerationCommittee. He was appointed as a member of the Nomination Committee with effectfrom 9 July 2009.He was also appointed as a Non-executive Director of the S&Pcompanies with effect from 20 December 2010 and as Chairman of the RiskCommittees and With Profits Committees of those companies. He retired as aPrincipal of Towers Perrin on 1 January 2008 and is a former Vice President ofthe Institute of Actuaries, having been admitted as a Fellow in 1979.INTERIM MANAGEMENT REPORTBackground and StrategyOur History and Development
Chesnara was listed on the London Stock Exchange in 2004, when we acquired CAon its demerger from Countrywide plc ('Countrywide'). CA was established in1988 as the life assurance division of Countrywide and, predominantly, soldmortgage-related life assurance products through Countrywide's financialservices division. As a substantially closed life business it continues toadminister its in-force portfolio which mainly comprises endowment andprotection policies, this reflecting CA's history of providing mortgage-relatedpolicies to clients of an estate-agency based financial services group. In 2005we acquired City of Westminster Assurance Company Limited ('CWA') from IrishLife and Permanent plc for a total purchase consideration of GBP47.8m. CWA isalso substantially closed to new business. In common with the CA business, thepolicies comprising the CWA business include a mix of endowment, protection andpension policies. However, unlike CA, there is a relatively high proportion ofpension policies and this helped to improve the overall mix of Chesnara's UKbusiness by spreading the risk subsisting within the different policy types. On30 June 2006, the long-term business of CWA was transferred to CA under theprovisions of Part VII of the Financial Services and Markets Act 2000 (the'Part VII Transfer'). Besides reducing the reporting and regulatory burden,financial and operational synergies resulted.
Opportunities for further similar acquisitions then became limited as valuations increased to levels which would not provide attractive returns for shareholders. This was followed by uncertainty arising from disruption to financial markets and a recessionary environment which prevented any significant acquisition activity.
However, in July 2009 we acquired an open Swedish life assurance and pensionscompany - then named Moderna F¶rs¤kringar Liv AB ('Moderna') - for a cashconsideration of GBP20m. This represented a very attractive discount to itsembedded value. Moderna (now rebranded Movestic) is an open unit-linked lifeand pensions business based in Sweden. It started writing business in 2002 andhad achieved a market share of 14% of the company-paid pensions market by 2008.This market penetration fell as issues surrounding its then ownership, by anIcelandic financial services organisation, and its proposed sale became aconcern to its key distributors - Swedish Independent Financial Advisers - andtheir clients. Shortly after the acquisition, the Swedish regulator,Finansinspektionen ('FI'), approved the commencement of operation of asubsidiary company Moderna Fonder & Analys AB (now Movestic Kapitalf¶rvaltningAB) which was established to separate out the fund selection and managementactivities from the life company and to develop these activities in the widermarket. On acquisition, Movestic owned 49% of the share capital in twoassociated companies, AkademikerR¥dgivning I Sverige AB ('AR') and Modernac SA('Modernac'). The former is an Independent Financial Adviser which was jointlyowned by Akademikerj¤nst I.A.S. AB ('the Akademics') and a strategic review ledto Movestic acquiring a further 42% of the shares resulting in 91% ownership.We are currently in the process of liquidating this business due tounsatisfactory returns. Modernac is a reinsurer based in Luxembourg and wasestablished to reinsure business resulting from a group life cover arrangementwith the Akademics which was extended for five years at the time the increasedshareholding in AR was acquired.In February 2010, Movestic acquired the in-force business, personnel, expertiseand systems of Aspis F¶rs¤krings Liv AB ('Aspis'), a small Swedish life andhealth risk insurer, which complements Movestic's focus on pensions and savingscontracts. The acquisitions of Movestic and Aspis add a growth element toChesnara's proposition to shareholders. Whilst requiring additional capital inthe early years, the prospect for the creation of value for shareholders in themedium to longer term is significant. On 17 December 2010 we acquired thein-force claims portfolio of Aspis which we had administered since we acquiredthe in-force business.On 26 November 2010 we announced the proposed acquisition of Save & ProsperInsurance Limited and its subsidiary Save & Prosper Pensions Limited fromJPMorgan Asset Management Marketing Limited for a consideration of GBP63.5m. Theacquisition was financed through a new bank facility of GBP40m together with theproceeds of a placing of 10,458,877 new ordinary shares and the sale of2,897,183 shares held in treasury, which together raised gross proceeds of GBP26.7m. Following the issue of a Circular on 30 November 2010 shareholdersapproved the acquisition at a General Meeting on 16 December 2010 withcompletion taking place on 20 December 2010. S&P is a UK-based provider ofunit-linked, non-linked and with profits pension and life assurance productswhich is closed to new business. Like CWA, the company has a high proportion ofpension policies and this enhances the longevity of Chesnara's UK proposition.An opportunity is presented by the acquisition of S&P to achieve financial andoperational synergies from the merger of its life assurance and pensions bookswith those of Countrywide Assured. Merging them into one legal entity, by meansof a transfer under Part VII of the Financial Services and Markets Act 2000('FSMA'), also provides the opportunity for more efficient use, and potentialrelease, of capital from the combined businesses.As at 30 June 2011 CA managed a portfolio of some 157,000 life assurance andpensions policies, while S&P managed some 167,000 policies. In the UK,therefore, the total number of policies under management is some 324,000. CAsells a small amount of protection business to existing customers while both CAand S&P also benefit from additional inward flows on their existing life andpension contracts by way of inflation-linked increases and rebates receivedfrom the government in respect of contracted-out pension policies.The UK businesses are substantially closed to new business and their primaryfocus is the efficient run-off of their existing life and pensions portfolios.This gives rise to the emergence of surplus which supports our primary aim ofdelivering an attractive long-term dividend yield to our shareholders. By thevery nature of the life business assets, the surplus arising will deplete overtime as the policies mature, expire or are the subject of a claim.Chesnara Group and the UK business activities are based in Preston, Lancashirewith a small office in the City of London. Movestic is based in Stockholm inSweden and has an administration office in Norrk¶ping in southern Sweden.Chesnara has 22 FTE employees in its corporate governance team in the UK. InSweden, the headcount, across the two sites, is in the order of 130.The Swedish business is open to new business and its primary aim is to regainmarket share in the company-paid and individual pensions market, whilstdeveloping further profitable business in other areas, in particular in therisk and health market. Writing new business requires funding to support theinitial costs incurred: this is provided by way of financial reinsurance orcash contributions from Chesnara. As the in-force business portfolio grows inscale the income generated by it eventually allows the business to self fundand become a net generator of cash.
Acquisition Strategy
Chesnara continues to seek to participate in the consolidation of lifeassurance and pensions businesses in the UK and Western Europe. We primarilytarget acquisitions with a value of between GBP50m and GBP200m, although otheropportunities are considered. All opportunities are assessed against a numberof key criteria including size, risk (including actual or potential product andfinancial liabilities), discount to embedded value, capital requirements andthe pattern and quality of predicted profit emergence. Our strategic approach,however, remains that such potential acquisitions should contribute to theprimary aim of delivering a steady and attractive dividend yield, althoughopportunities which present a significant value uplift or growth opportunitywill also be evaluated.Developments During 2011
There have been three areas of operational focus in the UK during the first half of 2011.
Firstly, following the successful acquisition of Save & Prosper in late 2010 wehave integrated the small team we acquired, opened a small office in Londonwhere they are based and strengthened the team at our main office in Prestonwith two senior management appointments to assist with the incrementalgovernance requirements and improve cover for the existing team. Theintegration of the S&P operation and oversight has been completed successfullyand we have a sound structure and operating model to support the acquiredbusiness.The second area of focus has been progressing the transfer of the acquired Save& Prosper business into our existing company - Countrywide Assured plc -utilising the provisions of Part VII of the Financial Services and Market Act2000. Whilst the process is proving challenging we are currently on target withour plans to complete this by the end of the year. However, as the transferrequires the sanction of the Courts this cannot be guaranteed. The aim of thetransfer is to generate operational and financial synergies through operatingone company and regulated entity rather than the three - CA and the S&PInsurance and Pension companies - currently in place.The third area has been the implementation of the Solvency II regime which, atthe time of writing, is expected to be effective from 1 January 2013. Althoughsome extensions to the implementation date have been indicated we continue tofocus on this date. Current planning indicates that we are well placed to meetthe deadline and that there is not expected to be any increased capitalrequirements in the Group's UK businesses.In Sweden, one of the main areas of focus has been a significant systemsmigration which will provide a more robust and scalable platform for thefuture. The vast majority of this was successfully implemented in July with asmall follow up migration planned for October. In addition to scalability androbustness it also offers a platform on which the time to market for newproducts and funds is substantially reduced. In conjunction with this migrationfurther transfers of work to our lower operating cost centre in Norrk¶ping havebeen undertaken. Most of our servicing is now undertaken in this office withcorporate functions being focused in Stockholm. Whilst there has been somefocus on Solvency II in Movestic the pace of development is now planned toincrease following the necessary concentration on the systems migration.At the Group level we continue to search for value-adding acquisitions in theUK and Western Europe. From discussions with potential financiers and equityunderwriters we believe that, if the right opportunity presents itself, wewould have strong institutional support to finance a potential transaction.
Key Performance Indicators
Set out below are those indicators, categorised by principal operating segment,which we consider to be key in assessing the Group's performance. They areeither in the nature of lead operational indicators or are measurements whichreflect outcomes. We explain the significance of each indicator and also setout the way in which it has been formulated to the extent necessary toappreciate its characteristics.
CA
Policy attrition
Generally, the longer that life and pensions policies remain in force the moreprofit accrues to CA. Over time the value of the in-force policies is realisedinto surplus within CA and this is, in turn, distributable to Chesnara, subjectto regulatory constraints. It is important therefore that CA maximises policyretention through providing an advice service to customers. Different policyproduct types will naturally be subject to lapse, claim or surrender to varyingextents and it is a detailed review and analysis of the experience of each ofthese types which gives rise to the projected policy in-force assumptionsunderpinning the projected value of policies in force within the embeddedvalue. A statement of the annual rate of attrition of policies is provided as abroad indicator of the trend in longevity of the in-force base: Unaudited 6 months ended Year ended Number of in-force policies (000's) 30 June 31 December
2011 2010 2010 Beginning of period 162 176 176 End of period 157 169 162 Rate of attrition (annualised) 6.2% 8.0%
8.0%
Bearing in mind the current economic backdrop in the UK, this notableimprovement in the policy attrition rate is counter-intuitive. As theexpectation remains that household budgets will come under increasing pressureand unemployment, or moves to part-time working, will increase, we will retainour current assumptions in this area until more enduring experience isavailable.
Unit-linked funds under management
The continuing level of unit-linked funds under management is an indicator ofthe ongoing level of profitability of CA as fund-related charges are animportant component of CA's profit. Presented below, at each period end, is thelevel of policyholder unit-linked funds on which charges are based. Unaudited 30 June 31 December 2011 2010 2010 GBPm GBPm GBPm
Policyholder unit-linked funds 1,506.6 1,370.4 1,536.4
-------- -------- -------- The movement in the value of unit-linked funds under management is a functionof i) performance of the funds across UK equities, international equities,property and fixed interest securities, ii) received and invested premiums andiii) policies closed due to surrender, transfer or claim.
Unit-linked fund performance
Relative outperformance in the unit-linked funds helps promote policy retentionand, when positive, increases the embedded value of the Group as futuremanagement charges will be of a higher magnitude. The CA Pension Managed Fund,which represents a significant proportion of CA policyholder unit-linked fundsunder management, provided a return of 15.86% over the year ended 30 June 2011(year ended 30 June 2010: 19.74%) while the CWA Balanced Managed Pension Fund,which represents a significant proportion of CWA policyholder funds undermanagement, provided a return of 16.04% over the same period (year ended 30June 2010: 17.53%). These returns compare favourably with the ABI UK - MixedInvestment 40% to 85% - Pensions Fund average of 14.72% for the same period(30 June 2010: 17.77%).Mortgage endowments
We continue to carry potentially significant exposure to mortgage endowment misselling complaints, which may become subject to redress payments to policyholders. Three of the key statistics which define and limit the extent of this exposure are set out below:
Unaudited 6 months ended Year ended 30 June 31 December 2011 2010 2010 Number of complaints received 390 348 677 % of complaints assessed upheld 35% 26%
24%
% of complaints assessed time barred 46% 57%
54%
The percentage of in-force policies which are time-barred is now 86.1%. Time-barred policies are those mortgage endowment policies for which a misselling complaint is potentially not admissible through the application of rules and guidance issued by the FSA and the ABI. We do not expect the percentage of time-barred cases to increase significantly in future years.
A slight increase in the number of complaints received reflects a higher numberof policyholders mailed whilst the increase in uphold rate and reduced timebarred rate reflect the reduced number of complaints from policyholders whoaccept they are time-barred and therefore realise submitting a complaint wouldbe fruitless.S&PInformation below in respect of the half-year ended 30 June 2010 and the yearended 31 December 2010 includes performance prior to the acquisition of S&P on20 December 2010 and is presented for illustrative purposes.
Policy attrition
Generally, the longer that life and pensions policies remain in force the moreprofit accrues to S&P. Over time the value of the in-force policies is realisedinto surplus within S&P and this is, in turn, distributable to Chesnara,subject to regulatory constraints. Policy attrition is, therefore, an importantfactor underpinning S&P's ongoing level of profitability. Different policyproduct types will naturally be subject to lapse, claim, surrender, retirementor transfer to varying extents and it is a detailed review and analysis of theexperience of each of these types which gives rise to the projected policyin-force assumptions underpinning the projected value of policies in forcewithin the embedded value. A globalised statement of the annual rate ofattrition of policies is provided as a broad indicator of the trend inlongevity of the in-force base: Unaudited 6 months ended Year ended
Number of in-force policies (000's) 30 June 31 December
2011 2010 2010 Beginning of period 172 184 184 End of period 167 177 172 Rate of attrition (annualised) 5.8% 7.6%
6.5%
As with CA, the improvement in policy attrition is counter-intuitive. We wouldexpect lower policy attrition in the S&P business as it has been closed longerand is more biased to pensions business. As with CA we will maintain ourcurrent assumptions until more enduring experience is available.
Unit-linked funds under management
The continuing level of funds under management is an indicator of the ongoinglevel of profitability of S&P as fund-related charges are an importantcomponent of S&P's profit. Presented below, at each period end, is the level ofpolicyholder unit-linked funds on which charges are based. Unaudited 30 June 31 December 2011 2010 2010 GBPm GBPm GBPm
Policyholder unit-linked funds 899.3 844.2 933.6
-------- -------- -------- The movement in the value of unit-linked funds under management is a functionof i) performance of the funds across UK equities, international equities,property and fixed interest securities, ii) received and invested premiums andiii) policies closed due to surrender, transfer or claim.
Unit-linked fund performance
Relative outperformance in the unit-linked funds helps promote policy retentionand, when positive, increases the embedded value of the Group as futuremanagement charges will be of a higher magnitude. The S&P Managed Pension Fund,which represents a significant proportion of S&P policyholder unit-linked fundsunder management, provided a return of 17.21% over the year ended 30 June 2011(year ended 30 June 2010: 17.80%). These returns compare favourably with theABI UK - Mixed Investment 40% to 85% - Pensions Fund average of 14.72% for thesame period (30 June 2010: 17.77%).
Valuation interest rate
Due to the existence of guarantees within the with profits business theinterest rate used for determining the actuarial liabilities, as part of theperiod-end actuarial valuation process, has a material impact on the level ofsurplus arising within the with profits funds. As the valuation rate reducesthe surplus arising is expected to reduce. Presented below, at each period end,are the valuation interest rates for the material with-profits fund, thatrelated to the pensions business. Unaudited 30 June 31 December 2011 2010 2010 With profits valuation interest rate - pensions 3.00% 3.00% 3.10% business -------- -------- -------- The rate is based on a weighted average, risk adjusted, yield for the matchingassets held at the valuation date. Whilst yields on the longer-dated bonds haveincreased slightly over the six months to 30 June 2011, yields on shorter-datedbonds have fallen to a greater extent. In addition, an increase in cash withinthe fund, to further reduce investment risk, has reduced the yield beingearned. These impacts have been mitigated to some extent by reconsidering thelevels of margins within the final rate selected.
Movestic
Premium income
The writing of profitable new business and the continuing flow of premiumincome are key to the success of Movestic, which focuses primarily on thepensions and savings market, but which also writes risk and health businesswhere the opportunity exists. Unaudited 6 months ended Year ended 30 June 31 December 2011 2010 2010New business premium income* GBPm GBPm GBPm Pensions and savings 26.7 29.3 52.9 Risk Insurance 1.1 6.9 8.1 -------- -------- -------- Total 27.8 36.2 61.0 -------- -------- --------
*Basis: annualised premium plus 1/10 single premium denominated in SEK and translated into sterling at a constant rate of SEK10.3 = GBP1
Unaudited 6 months ended Year ended 30 June 31 December 2011 2010 2010Total premium income* GBPm GBPm GBPm Pensions and savings 122.7 136.1 263.1 Risk Insurance 19.9 19.4 38.4 -------- -------- -------- Total 142.6 155.5 301.5 -------- -------- --------
*Basis: total premiums paid denominated in SEK and translated into sterling at a constant rate of SEK10.3 = GBP1
The fall in new business risk insurance premiums, although apparentlysignificant, reflect the bulk transfer in of business following the acquisitionof the operations of Aspis Liv in the first half of 2010. The success inretaining this business is evidenced by the increase in total premium riskinsurance premiums. Unfortunately the same cannot be said for pensions andsavings where new business is slightly behind target and total premium incomehas reduced. This can largely be attributed to issues with lapses, transfersand surrenders and the actions we are taking in that respect are outlined inthe following section.Policy attritionThe longer that insurance and investment contracts remain in force, the moreprofit accrues to the business. Different policy product types will be subjectto surrender, transfer or lapse to varying extents. Unaudited 6 months ended Year ended Annualised rate of attrition 30 June 31 December 2011 2010 2010 Surrenders (endowments) 14.5% 10.7% 13.4% Transfers (pensions) 5.4% 4.3% 4.6%
Lapses (pensions and endowments) 16.8% 15.4% 19.8% Despite our initial actions, the rate of surrender and transfer has notimproved although the lapse rate has. Further actions are being taken toaddress this in the face of strong marketing from Swedish banks. These includethe imposition of a transfer fee from September 2011 (previously there wasnone), detailed analysis and follow up of IFAs with relatively high transferrates, asking potential transfer clients to complete a form confirming theirrequest (with 'reasons to stay' messages accompanying the form), andtelephoning all clients who request a surrender. Further consideration is beinggiven to loyalty measures for paid up clients. These initiatives are beingdeveloped by a unit specifically formed to analyse the reasons for businessloss and to develop measures to mitigate it.
Market share
Movestic's primary target market is that of unit-linked pension business and, within that, company-paid contributions business.
Share of unit-linked pensions market by quarter
Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Total business 3.9% 5.1% 3.1% 5.8% 4.7% 5.6%
Company-paid contributions business 12.3% 12.3% 10.1% 11.3% 12.5% 11.3%
Whilst market share of company-paid business has fallen back to Q4 2010 levelswe have made progress in the broader total business measure. This is to bewelcomed as it reflectsthe relative performance for all business lines comparedto the rest of the market.
Unit-linked funds under management
Unaudited 30 June 31 December 2011 2010 2010 GBPm GBPm GBPm Policyholder unit-linked funds 1,364.2 1,180.3 1,354.3 -------- -------- --------
* Translated into sterling at a constant rate of SEK10.1 = GNP1.
The value of assets under management is a key reference point for establishingthe ongoing profit-earning capacity of the business, as fees are received basedon these values. Asset growth enables management to negotiate improved rebatesfrom fund managers which drives improved profitability.
Fund performance
Relative fund performance, which is key to maintaining funds under management, obtaining new business and to supporting business retention, is as follows:
Unaudited 6 months ended Year ended Number of funds 30 June 31 December 2011 2010 2010
Outperformed against relevant index 14 9 18 Underperformed against relevant index 18 19 12
No relevant index 7 3 3
Slightly more funds underperformed than over performed in the first half of theyear as, generally, we are overweight in 'value' stocks and Swedish equities.Whilst this strategy produced good results in the first four months of the yearthe latter two months reversed the gains made.We have continued to review our fund range and have replaced someunderperforming funds with similar funds from new managers which have betterperformance records and improved rebate levels. We have also introduced anumber of new funds which will support the distribution and retention sides ofthe business which, we expect, will lead to increased new fund flows.
IFRS Result
The IFRS result for the six months ended 30 June 2011 comprises:
Unaudited six months ended 30 June 2011 Pre-tax Tax Post-tax GBP000 GBP000 GBP000 CA result 8,012 (1,131) 6,881 S&P result (1,247) 809 (438) Movestic result (1,219) (281) (1,500) Other group activities (1,736) - (1,736) -------- -------- -------- Total result 3,810 (603) 3,207 ======== ======== Non-controlling interest - -------- Total result attributable to shareholders 3,207 ======== Unaudited six months ended 30 June 2010 Pre-tax Tax Post-tax GBP000 GBP000 GBP000
Profit arising on business combination
- Aspis 989 - 989 CA result 16,795 (4,238) 12,557 S&P result - - - Movestic result (5,049) 44 (5,005) Other group activities (757) - (757) -------- -------- -------- Total result 11,978 (4,194) 7,784 ======== ======== Non-controlling interest 40 -------- Total result attributable to shareholders 7,824 ======== Year ended 31 December 2010 Pre-tax Tax Post-tax GBP000 GBP000 GBP000
Profit arising on business combinations
- Aspis 376 - 376 - S&P 15,488 - 15,488 CA result 25,692 (4,740) 20,952 S&P result 224 (63) 161 Movestic result (3,730) 176 (3,554) Other group activities (3,882) 160 (3,722) -------- -------- -------- Total result 34,168 (4,467) 29,701 ======== ======== Non-controlling interest 118 -------- Total result attributable to shareholders 29,819 ========
The CA pre-tax result, which is net of an amortisation charge of GBP1.8m inrespect of the acquired value of in-force business, continues to be dominatedby the strong emergence of surplus from its life and pensions run-offportfolio. A downward drift in short-term fixed-interest yields over the firsthalf of the year, giving rise to an increase in the capital value of assetsbacking its insurance liabilities, has offset the adverse impact of a GBP2.0mstrengthening of expense reserves, so that, overall, CA's result is in linewith expectations. In contrast to this, the S&P result has experienced apre-tax with profits strain of some GBP4.2m, principally in its pensionsportfolio: this has resulted from the impact of declining short-termfixed-interest yields on reserving for the cost of guarantees within the withprofits funds, together with relatively higher cash-based holdings within theinvestment funds in anticipation of rising interest rates.This outcome reflects the sensitivity of the S&P result to relatively smallmovements in yields and these adverse effects will reverse in a rising interestrate environment. A better guide to the underlying longer-term performance of S&P is given by the corresponding EEV result set out in the next section.As to the Movestic result, the tables above show a clearly improving trend onthe IFRS basis, such that the core insurance risk and savings operations arenow trading at break-even or slightly above, aided by the effect of theacquisition of the Aspis business in early 2010.
EEV Result
Supplementary information prepared in accordance with European Embedded Value('EEV') principles issued in May 2004 by the European Insurance CFO Forum ('CFOForum') supplemented by Additional Guidance on EEV Disclosures issued by thesame body in October 2005, and set out in the financial statements on pages 43to 59 is presented to provide alternative information to that presented underIFRS. EEV principles assist in identifying the value being generated by the UKand Swedish life and pensions businesses. The result determined under thismethod represents principally the movement in the UK and Swedish businesses'embedded value, before transfers made to the parent company and ignoring anycapital movements. Through including the in-force value of insurance andinvestment contracts, EEV recognises the discounted profit stream expected toarise from those contracts. The principal underlying components of the EEVresult are the expected return from existing business, in both the UK andSwedish businesses, being the unwind of the rate used to discount the relatedcash flows, and the value added by the writing of new business in the Swedishbusiness. Adjustments are made to the result for variations in actualexperience from that assumed for each component of policy cash flows arising inthe period and for the impact of restating assumptions for each component ofthe prospective cash flows.In June 2008, the CFO Forum issued the European Insurance CFO Forum MarketConsistent Embedded Value ('MCEV') Principles (Copywright © Stichting CFO ForumFoundation 2008). These principles, with which we had intended to comply witheffect from 2009, represent a development of the existing European EmbeddedValue principles, which form the current basis of preparation of ourSupplementary Information. However, on 22 May 2009, the CFO Forum announcedthat the mandatory MCEV reporting date for all its member firms would bedeferred until 2011, in light of developments arising from the recent financialcrisis. Further, in April 2011 the Forum withdrew the intention that the MCEVprinciples should be the only recognised format of embedded value reportingfrom 31 December 2011. We will continue to consider the appropriateness ofretaining our current basis of presentation but have no current plans to adoptMCEV principles.
The movement in Group European Embedded Value may be summarised as:
Unaudited Year ended 6 months ended 30 June 31 December 2011 2010 2010 GBP000 GBP000 GBP000 EEV at beginning of period 354,636 262,585 262,585 Effect of modelling adjustments (5,267) 10,363 13,239 -------- -------- --------
EEV at beginning of period restated 349,369 272,948 275,824
Profit arising on acquisition of
Aspis - 989 376 S&P - - 40,667
Result for the period net of tax
CA 1,578 2,675 18,891 S&P 3,836 - (924) Movestic (6,323) (9,318) 3,052 Other group activities (629) (762) (2,295)
Movement on non-controlling interest - -
118
Foreign exchange reserve movement 4,487 (947) 9,517 Dividends paid (12,174) (10,454) (16,340) Share capital issued - - 22,588 Disposal of Treasury shares - - 3,162 -------- -------- -------- EEV at end of period 340,144 255,131 354,636 ======== ======== ========
The dominant influences underlying the EEV outturn are:
(i) modelling adjustments, net GBP5.3m adverse, so that the cumulative effectsarising from this source over the 18-month period to 30 June 2011 are some GBP7.9m favourable. These effects arise principally within Movestic and generallyreflect the ability to project cash flows at a greater level of granularity:the adjustments in respect of the six months ended 30 June 2011 are net oferrors of some GBP7.7m adverse detected in the operation of Movestic's new model(further information is provided in Note 6 of the EEV SupplementaryInformation);(ii) an accretion of some GBP2.6m in the S&P result, in respect of a reduction in the prospective cost of guarantees within the with profits funds: while short-term fixed-interest yields are experiencing a short-term decline, a shiftin the yield curve points to an improved outlook for longer-term investmentreturns; accordingly the overall S&P EEV result at GBP3.8m net of tax has provedresilient;(iii) less favourable investment conditions for Movestic, so that GBP6.2m of its EEVloss of GBP6.3m has arisen from investment market performance in its policyholdersavings funds being significantly less than anticipated. While Movestic'sresult has benefited to the extent of GBP2.8m from the unwind of the discountrate and of GBP2.1m value added by new business in the period, these gains havebeen almost offset by an adverse impact of GBP5.0m arising from policydiscontinuance. The full impact of Movestic-related losses has, however, beenoffset by a gain of GBP4.5m arising from the translation of SwedishKrona-denominated assets into sterling. A 4% appreciation of the Swedish Kronaagainst sterling leads to an appreciation of some GBP5m in embedded value; and(iv) a relatively strong pre-tax CA performance, belied by its post-tax result, hassheltered the adverse impact of the GBP2.0m strengthening of expense reserves, referred to in 'IFRS Result' above. This additional reserve was entirely offsetby favourable mortality experience variances of GBP0.4m, together with favourablepolicy lapse experience variances of £1.6m. Non-recurring adverse tax impactshave, however led to a somewhat muted result at the post-tax level.
Shareholders' Equity and Embedded Value of Covered Business - EEV Basis
The consolidated balance sheet prepared in accordance with EEV principles maybe summarised as: Unaudited 30 June 2011 Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000Value of in-force business 74,109 43,981 147,405 - 265,495 Other net assets 52,274 23,426 (33,557) 32,506 74,649 -------- -------- -------- -------- -------- 126,383 67,407 113,848 32,506 340,144 ======== ======== ======== ======== ======== Represented by: Embedded value (`EV') of regulated entities 126,383 106,794 112,457 - 345,634 Less: amount financed by borrowings - (39,387) - - (39,387) -------- -------- -------- -------- -------- EV of regulated entitiesattributable to shareholders 126,383 67,407 112,457 - 306,247 Net equity of other Group companies - - 1,391 32,506 33,897 -------- -------- -------- -------- -------- Shareholders' equity 126,383 67,407 113,848 32,506 340,144 ======== ======== ======== ======== ======== Unaudited 30 June 2010 Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Value of in-force business 73,581 - 114,493 - 188,074 Other net assets 58,523 - (22,970) 31,504 67,057 -------- -------- -------- -------- -------- 132,104 - 91,523 31,504 255,131 ======== ======== ======== ======== ========Represented by: Embedded value (`EV') of regulated entities 132,104 - 93,717 - 225,821 Less: amount financedby borrowings - - - - - -------- -------- -------- -------- -------- EV of regulated entitiesattributable to shareholders 132,104 - 93,717 - 225,821 Net equity of otherGroup companies - - (2,194) 31,504 29,310 -------- -------- -------- -------- -------- Shareholders' equity 132,104 - 91,523 31,504 255,131 ======== ======== ======== ======== ======== 31 December 2010 Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Value of in-force business 79,360 41,307 144,748 - 265,415 Other net assets 70,348 22,673 (24,111) 20,311 89,221 -------- -------- -------- -------- -------- 149,708 63,980 120,637 20,311 354,636 ======== ======== ======== ======== ======== Represented by: Embedded value (`EV') of regulated entities 149,708 103,267 121,069 - 374,044 Less: amount financed by borrowings - (39,287) - - (39,287) -------- -------- -------- -------- -------- EV of regulated entities attributable to shareholders 149,708 63,980 121,069 - 334,757 Net equity of other Group companies - - (432) 20,311 19,879 -------- -------- -------- -------- -------- Shareholders' equity 149,708 63,980 120,637 20,311 354,636 ======== ======== ======== ======== ========
The tables below set out the components of the value of in-force business by major product line at each period end:
Unaudited 30 June 2011 Number of policies CA S&P Movestic Total GBP000 GBP000 GBP000 GBP000 Endowment 47 7 15 69 Protection 51 6 - 57 Annuities 6 1 - 7 Pensions 46 139 76 261 Other 7 14 - 21 -------- -------- -------- -------- Total 157 167 91 415 ======== ======== ======== ======== Unaudited 30 June 2010 Number of policies CA S&P Movestic Total GBP000 GBP000 GBP000 GBP000 Endowment 52 - 15 67 Protection 55 - - 55 Annuities 5 - - 5 Pensions 50 - 74 124 Other 7 - - 7 -------- -------- -------- -------- Total 169 - 89 258 ======== ======== ======== ======== 31 December 2010 Number of policies CA S&P Movestic Total GBP000 GBP000 GBP000 GBP000 Endowment 50 8 15 73 Protection 52 6 - 58 Annuities 5 1 - 6 Pensions 48 143 75 266 Other 7 14 - 21 -------- -------- -------- -------- Total 162 172 90 424 ======== ======== ======== ======== Unaudited 30 June 2011 CA S&P Movestic TotalValue in-force GBPm GBPm GBPm GBPm Endowment 31.8 7.9 12.8 52.5 Protection 46.9 2.0 - 48.9 Annuities (0.2) 1.4 - 1.2 Pensions 30.4 69.1 134.9 234.4 Other 2.1 0.4 - 2.5 -------- -------- -------- -------- Total at product level 111.0 80.8 147.7 339.5 Valuation adjustments  Holding company expenses (8.3) - - (8.3)  Other (24.1) (19.4) - (43.5) Cost of capital/frictional costs (1.0) (3.5) (0.2) (4.7) -------- -------- -------- -------- Value in-force pre-tax 77.6 57.9 147.5 283.0 Taxation (3.5) (14.0) - (17.5) -------- -------- -------- -------- Value in-force post-tax 74.1 43.9 147.5 265.5 ======== ======== ======== ======== Unaudited 30 June 2010 CA S&P Movestic TotalValue in-force GBPm GBPm GBPm GBPm Endowment 36.6 - 12.7 49.3 Protection 46.3 - - 46.3 Annuities (0.2) - - (0.2) Pensions 33.3 - 102.0 135.3 Other - - - - -------- -------- -------- -------- Total at product level 116.0 - 114.7 230.7 Valuation adjustments  Holding company expenses (10.1) - - (10.1)  Other (27.7) - - (27.7) Cost of capital/frictional costs (0.9) - (0.2) (1.1) -------- -------- -------- -------- Value in-force pre-tax 77.3 - 114.5 191.8 Taxation (3.7) - - (3.7) -------- -------- -------- -------- Value in-force post-tax 73.6 - 114.5 188.1 ======== ======== ======== ======== 31 December 2010 CA S&P Movestic TotalValue in-force GBPm GBPm GBPm GBPm Endowment 34.1 8.3 14.0 56.4 Protection 49.1 2.6 - 51.7 Annuities 0.5 1.5 - 2.0 Pensions 31.1 68.1 131.0 230.2 Other 1.7 0.7 - 2.4 -------- -------- -------- -------- Total at product level 116.5 81.2 145.0 342.7 Valuation adjustments  Holding company expenses (8.6) - - (8.6)  Other (23.4) (22.0) - (45.4) Cost of capital/frictional costs (1.0) (3.7) (0.3) (5.0) -------- -------- -------- -------- Value in-force pre-tax 83.5 55.5 144.7 283.7 Taxation (4.1) (14.2) - (18.3) -------- -------- -------- -------- Value in-force post-tax 79.4 41.3 144.7 265.4 ======== ======== ======== ========
The value-in-force represents the discounted value of the future surplusesarising from the insurance and investment contracts in force at each respectiveperiod end. The future surpluses are calculated by using realistic assumptionsfor each component of the cash flow.'Other' valuation adjustments in CA principally comprise expenses of managingpolicies which are not attributed at product level. In S&P they represent theestimated cost of guarantees to with profits policyholders.
Principal Risks and Uncertainties
Risk and uncertainties are assessed by reference to the extent to which theythreaten, or potentially threaten, the ability of the Group to meet its corestrategic objectives. These currently centre on the intention of the Group tomaintain a reliable and progressive dividend policy.
The specific principal risks and uncertainties subsisting within the Group are determined by the fact that:
(i) the Group's core operations centre on the run-off of closed life and pensions businesses in the UK;
(ii) notwithstanding this, the Group has a material segment, which comprises an open life and pensions business operating in a foreign jurisdiction; and
(iii) these businesses are subject to local regulation, which significantly influences the amount of capital which they are required to retain and which may otherwise constrain the conduct of business.
The following identifies the principal risks and uncertainties, together with adescription of their actual or potential impact and of the way in which theGroup seeks to control them. Insurance and financial risks relating to (i)insurance and investment contracts provided by the Group to policyholders andto investors and to (ii) Group-level investment activities are set out in Notes5 and 6 respectively of the Company's published consolidated IFRS financialstatements for the year ended 31 December 2010, where the information isprovided on a segmented basis. The analysis below includes a re-presentation ofthe more significant risks identified therein on a generic basis.Risk Impact Control Adverse The Group provides benefits to The Group uses underwriting mortality/ policyholders in the event of techniques, reinsurance morbidity/ death or illness and to programmes and limits on levels longevity annuitants for their lifetime. of accepted risk on individuals,experience Premiums are partly fixed by in order to control the overall reference to mortality/morbidity level of risk. The Group has tables. To the extent that actual also retained the right on mortality or morbidity rates vary certain contracts to vary from the assumptions underlying premium rates in the light of product pricing, so more or less actual experience. profit will accrue to the Group. Notwithstanding this, the Group is exposed to the possible effects of pandemics, such as AIDS and SARS. The impact of overall mortality risk is mitigated to the extent that the Group has a portfolio of annuity contracts where the benefits cease on death. Adverse Persistency risk is the risk that The Group's exposure to persistency insurance policyholders or persistency risk is naturally experience investors in investment limited to the extent that, in contracts either discontinue closed life and pensions books, paying new premiums or investing which currently continue to new sums, or otherwise exercise comprise the larger part of the their rights to discontinue the Group's business,
persistency
contracts. Persistency rates rates tend to improve over time significantly lower than those due to policyholder/investor assumed will lead to reduced inertia. In Movestic a business Group profitability in the medium unit has been established to to long term. specifically focus on policy discontinuance and to develop measures to improve retention rates. Significant A significant part of the Group's Notwithstanding that individual and income and, therefore, overall fund mandates may give rise to prolonged profitability derives from fees diversification of risk and equity and received in respect of the that, within those funds, property management of policyholder and hedging techniques are used market falls investor funds. Fee levels are where appropriate, there is
generally related to the value of clearly a significant residual funds under management and, as risk to adverse global equity the managed investment funds market conditions. The Group has overall comprise a significant taken the explicit decision not equity and property content, the to mitigate the residual risk, Group is particularly exposed to by way of hedging, because of the impact of significant and the significant cost
relative to
prolonged equity market falls. the risk: it does, however, Additionally, falls in equity and periodically review the
costs of
property values will increase the hedging. potential cost of investment guarantees in the S&P with profits funds.
Adverse The Group maintains portfolios of The Group maintains rigorous movements in fixed interest securities (i) in matching programmes to ensure yields on order to match its insurance that exposure to mismatch loss fixed contract liabilities, in terms of is minimised: there may be some interest yield and cash flow reversal of the extent of
loss securities characteristics, and (ii) as an through the natural effluxion of
integral part of the investment time as dated securities funds it manages on behalf of approach their redemption date. policyholders and investors. It The Group does not seek to hedge is exposed to mismatch losses against adverse movements in arising from a failure to match fixed interest securities, as its insurance contract the cost is prohibitive when liabilities or from the fact that compared with the residual risk. sharp and discrete fixed interest The proportion of fixed interest yield movements may not be securities in policyholder and associated fully and immediately investor managed funds is with corresponding changes in significantly less than the actuarial valuation interest proportion of equities. rates. Additionally, a fall in fixed interest yields will increase the potential cost of guarantees within the S&P with profits funds. Expense For the closed UK life and For the UK businesses, the Groupoverruns pensions businesses, the Group is pursues a strategy of exposed to the impact of fixed outsourcing functions, to the and semi-fixed expenses, in fullest extent possible, to conjunction with a diminishing specialist outsourced services policy base, on profitability. providers. It seeks to do this For the Swedish open life and on pricing terms which recognise pensions business, the Group is the diminishing policy base and exposed to the impact of expense which, in respect of contract levels varying adversely from renewal, seeks to maintain those assumed in product pricing. competitive tension between service providers. For the Swedish business, periodic reviews are conducted to ensure that overall expense levels are appropriate, based on activity analysis and on medium-term projections. In addition, for both the UK and Swedish businesses, the Group maintains a strict regime of budgetary control. Adverse The Swedish business, whose The Group actively monitors sterling: functional and reporting currency exchange rate movements and the Swedish is the Swedish Krona, is a cost of hedging the currency Krona material part of the Group. risk on cash flows when exchange Exposure to adverse sterling/ appropriate. The Group does not rate Swedish Krona exchange rate currently seek to hedge the riskmovements movements arises from actual of adverse currency movements on planned cash flows between the its reported results. Swedish subsidiary and its UK parent company and from the impact on reported IFRS and EEV results which are expressed in sterling. Counterparty The Group carries significant Risk to counterparty failure is failure inherent risk of counterparty mitigated generally by the failure in respect of; operation of guidelines which limit the level of exposure to - its fixed interest security any one counterparty and which portfolio; impose limits on exposure to credit ratings. In respect of - cash deposits; and exposure to one major reinsurer, Guardian Assurance plc - amounts due from reinsurers. ('Guardian'), the Group has a floating charge over the reinsurer's related investment assets, which ranks the Group equally with Guardian's policyholders. In addition, the Group reviews the regulatory returns filed by Guardian, in order to identify issues which may arise in connection with the financial viability of Guardian. Failure of The Group's UK life and pensions The Group specifies rigorous outsourced businesses are heavily dependent service level measures and service on outsourced service providers management information flows
providers to to fulfil a significant number of under its contractual fulfil their core functions. In the arrangements. Following from contractual event of failure by either or this, the Group maintains obligations both service providers to fulfil continuing and close oversight their contractual obligations, in of the performance of both whole or in part, to the service providers. Under the requisite standards specified in terms of the contractual the contracts, the Group may arrangements the Group may suffer loss as its functions impose penalties and/or exercise degrade. step-in rights in the event of specified adverse circumstances.
Key Man The nature of the Group is such The Group promotes the sharing dependency that, for both its Group-level of knowhow and expertise to the functions and for its UK life and fullest extent possible. It pensions operations, it relies on periodically reviews and a small, professional team. There assesses staffing levels, and, is, therefore, inevitably a where the circumstances of the concentration of experience and Group justify and permit, will knowhow within particular key enhance resource to ensure that individuals and the Group is, knowhow and expertise is more accordingly, exposed to the widely embedded. sudden loss of the services of these individuals. To minimise the risk of knowledge loss, the Group maintains succession plans and remuneration structures which comprise a retention element. Should a skills gap appear the Group seeks to utilise external resource until such time as a permanent solution can be identified. These processes are supplemented by the maintenance of procedures to assess the competence of, and training requirements for, all key individuals. Adverse The Group operates in The Group controls these risks
regulatory jurisdictions which are currently and addresses the related and legal subject to significant change uncertainties by assessing
changes arising from regulatory and legal potential outcomes and by taking
requirements. These may either be appropriate action to
minimise
of a local nature, or of a wider the impact of adverse nature, following from EU-based circumstances. It monitors regulation and law. Significant industry comment and takes issues which have arisen and specialist professional
advice,
where there is currently where necessary. uncertainty as to their full impact on the Group include: It is in the nature of these issues, however,
particularly in
review of the UK tax regime in those areas where specific respect of life assurance regulatory rules and/or law have business; not yet been framed and implemented, that there remains the implementation of Solvency II significant uncertainty as to requirements; their impact on the Group's longer-term profitability and on the implications of a ruling made the capacity and capability of by the ECJ, applicable to its life and pensions insurance companies, in subsidiaries to distribute connection with gender; and regulatory determined
surpluses.
the impact of IFRS Insurance Accounting Phase 2 developments. The outcomes of these issues may variously impact the level of reported profitability in the Group and the capacity and capability of its life and pensions subsidiaries to distribute regulatory-determined surpluses; and Review of With profits Governance arrangements, following the issue of Consultation Paper 11/5 by the FSA.
During the period, (i) the Swedish tax authorities withdrew their challenge to the tax treatment of fees rebated by investment fund managers and this area of uncertainty, which would have impacted Movestic, has now been satisfactorily resolved; and (ii) the UK Government has made statements regarding the ECJ
ruling regarding the use of gender in pricing insurance which indicate that the effect on our UK businesses will be limited.
In addition, insofar as the Group makes estimates and assumptions that affect the reported amounts of the following assets and liabilities, there is uncertainty as to the amounts at which they may eventually be settled or realised and as to the timing of settlement or realisation:
(i) estimates of future benefits payments arising from long-term insurance contracts;
(ii) fair value of investment contracts;
(iii) liability for redress in respect of mortgage endowment misselling complaints;
(iv) deferred acquisition costs and deferred income;
(v) amortisation of acquired value of in-force business;
(vi) insurance claim reserves; and
(vii) insurance claim reserves - reinsurance recoverable.
Detailed information on these items is provided in Note 3 of the Company's published consolidated financial statements for the year ended 31 December 2010.
There have been no changes in the nature and incidence of the principal risksand uncertainties, referred to above, during the six months ended 30 June 2011,except as otherwise discussed above.
Related Party Transactions
There have been no related party transactions that have occurred during the first six months of the financial year that have materially affected the financial position or performance of the Group during that period and there have been no changes in the related party transactions described in the last annual report that could do so.
Solvency and Regulatory Capital
Regulatory Capital Resources and Requirements
The regulatory capital of both the UK and Swedish businesses is calculated byreference to regulations established and amended from time to time by the FSAin the UK and by Finansinspektionen in Sweden. The rules are designed to ensurethat companies have sufficient assets to meet their liabilities in specifiedadverse circumstances. As such, there is, in the UK, a restriction on the fulltransfer of surplus from the long-term business funds to shareholder funds ofCA and S&P, and on the full distribution of reserves from CA and S&P toChesnara and, in Sweden, on distributions from shareholder funds.Within the UK, the regulations include minimum standards for assessing thevalue of liabilities, including making an appropriate allowance for defaultrisk on corporate bonds held to match liabilities when assessing the valuationdiscount rates used for valuing these liabilities. Market turmoil in 2008 ledto significant widening of spreads on corporate bonds above gilts, throughchanged assessment of default risk and liquidity issues, and therefore, withthe widening spreads, this issue was of concern to the industry. The Groupcontinues to maintain a prudent approach to setting the valuation interestrates whereby it allows for default risk on matching corporate bonds, andthereby limits the liquidity premium taken credit for when assessing bondyields. A conservative allowance is made for the risk of default by means of adeduction from the redemption yield far higher than historical experience andthen a cap on the resultant yield over the equivalent gilt is imposed. Toensure consistency of approach across the Group we have adopted an identicalapproach for CA and S&P which results in a less restrictive cap for CA than atprior reporting dates, but this has had no material impact because of the highcredit quality of the bonds backing the CA business. Additionally, the CA
Board continues to maintain their stance that permissive changes to regulationsintroduced in 2006, in FSA policy statement PS06/14, that would allow a reduction in liabilities are not appropriate for CA at this time.
The following summarises the capital resources and requirements of CA for UKregulatory purposes, after making provision for dividend payments from CA toChesnara, which were approved after the respective period ends: Unaudited 30 June 31 December 2011 2010 2010 GBPm GBPm GBPm
Available capital resources (`CR') 52.1 58.2
44.1 -------- -------- --------
Long-term insurance capital requirement (`LTICR') 18.2 19.2 19.1
Resilience capital requirement (`RCR') 2.3 2.9
1.6 -------- -------- --------
Total capital resources requirement (`CRR') 20.5 22.1
20.7 -------- -------- --------
Target capital requirement cover 29.7 31.7
30.2 -------- -------- -------- Ratio of available CR to CRR 254% 263% 213% -------- -------- -------- Excess of CR over target requirements GBP22.4m GBP26.5m GBP13.9m ======== ======== ========
The CA Board, as a matter of policy, continues to target CR cover for total CRRat a minimum level of 150% of the LTICR and 100% of the RCR. To the extent thatthe target capital requirement cover of GBP29.7m as at 30 June 2011 falls shortof the £40m share capital component of CR, so it follows that GBP10.3m of thereported excess of CR over target requirement is not available for distributionto shareholders except by way of a capital reduction.
It can be seen from this information that Chesnara, which relies on dividend distributions from CA, is currently in a favourable position to continue to pursue a progressive dividend policy.
The following summarises the capital resources and requirements of S&P for UKregulatory purposes. The Boards of the S&P companies have availed themselves ofcertain of the provisions of PS06/14 which has led to a reduction in certainliabilities: Unaudited 30 June 31 December 2011 2010 2010 GBPm GBPm GBPm
Available capital resources (`CR') 68.9 62.0
69.7 -------- -------- --------
Long-term insurance capital requirement (`LTICR') 23.9 23.6 24.3
Resilience capital requirement (`RCR') 1.7 1.9
1.7 -------- -------- --------
Total capital resources requirement (`CRR') 25.6 25.5
26.0 -------- -------- --------
Ratio of available CR to CRR 269% 243%
268% -------- -------- -------- Excess of CR over CRR GBP43.3m GBP36.5m GBP43.7m ======== ======== ======== The information as at 30 June 2010 relates to the period prior to theacquisition of S&P and is provided for illustrative purposes: it is presentedafter making adjustment for dividends totalling GBP91m, which were paid to S&P'sprevious shareholder prior to the acquisition date.The Boards of the S&P companies have not established formal targets for CRcover for total CRR. It is not intended to make dividend distributions from S&Pto Chesnara prior to transfer of the long-term insurance funds of S&P to CA:this process is planned to be completed towards the end of 2011.Movestic, in contrast to the UK businesses, and being open to new business, is,in the short to medium term, a net consumer of capital. The ratio of capitalresources to capital resource requirements is a key indicator of the capitalhealth of the business as it expands and provides the context in which furthercapital contributions are made by the parent company to finance that expansionin a predictable and orderly manner.The following summarises the capital resources and requirements of Movestic forSwedish regulatory purposes: Unaudited 30 June 31 December 2011 2010 2010 GBPm GBPm GBPm
Available capital resources (CR) represented
by: Share capital 1.3 1.1 1.2 Additional equity contributions 42.1 33.6 40.6 Accumulated deficit (19.6) (14.5) (18.5) -------- -------- -------- 23.8 20.2 23.3 -------- -------- -------- Regulatory capital resource requirement (CRR) 12.6 9.2 12.4 -------- -------- -------- Target requirement 18.9 13.8 18.6 -------- -------- -------- Ratio of CR to CRR 189% 220% 188% -------- -------- -------- Excess of CR over target requirements GBP4.9m GBP6.4m GBP4.7m ======== ======== ========
The Movestic Board, as a matter of policy, sets a minimum target of 150% of theregulatory capital requirement. Swedish solvency regulation requires that, tobe fully admissible, a certain proportion of assets are to be held in the formof cash. The operation of this requirement may, from time to time, act as theoperative constraint in determining the level of additional fundingrequirements, thereby causing the solvency ratio to rise above what it wouldotherwise have been, had the form of assets matching capital resources not beena constraint Movestic's solvency ratio declines as the increasing scale of itsbusiness requires a higher level of regulatory capital; as the ratio approaches150%, further planned capital contributions will be made by the Group.
Insurance Groups Directive
In accordance with the EU Insurance Groups Directive, the Group calculates theexcess of the aggregate of regulatory capital employed over the aggregateminimum solvency requirement imposed by local regulators for all of theconstituent members of the Group, all of which are based in Europe. Thefollowing sets out these calculations after the recognition of final dividendsfor the respective financial year, but approved by the Board and paid to Groupshareholders after the respective dates: Unaudited 30 June 31 December 2011 2010 2010 GBPm GBPm GBPm Available group capital resources 119.2 106.9
121.2
Group regulatory capital requirement (60.3) (32.4) (60.6) -------- -------- -------- Excess 58.9 74.5 60.6 -------- -------- -------- Cover 198% 330% 200% ======== ======== ========
The regulatory requirement is that available Group capital resources should be at least 100% of the capital requirement.
Individual Capital Assessments
The FSA Prudential Sourcebooks require UK insurance companies to make their ownassessment of their capital needs to a required standard (a 99.5% probabilityof being able to meet liabilities to policyholders after one year). In thelight of scrutiny of this assessment, the FSA may impose its own additionalindividual capital guidance. The Individual Capital Assessment is based on arealistic liability assessment, rather than on the statutory mathematicalreserves, and involves stress testing the resultant realistic balance sheet forthe impact of adverse events, including such market effects as significantfalls in equity values, interest rate increases and decreases, bond defaultsand further widening of bond spreads.
CA completed a further full annual assessment during 2010, based on the position as at 30 June 2010, as a result of which it was concluded that the effective current and medium-term capital requirement constraints on distributions to Chesnara will continue to be on the basis set out under `Regulatory capital resources and requirements' above. This assessment is subject to quarterly high-level updates until the next full annual assessment.
S&P completed during June 2011 a full annual assessment, based on the positionas at 31 December 2010, as a result of which it was concluded that theeffective current capital requirement constraint on distributions to Chesnarais on the basis set out under 'Regulatory capital resources and requirements'above. This is likely to remain the position going forward for at least theshort term.For the Group's Swedish business we have developed Movestic's ability toproduce similar assessments, so that its capital assessment is aligned with UKpractice. On this basis we conclude that the Group's capital requirements willcontinue to be driven by its regulatory capital resources. In the meantime,Movestic, in accordance with local regulatory requirements, continues to makequarterly assessments of the risk-based capital requirements of its business:these indicate that capital resources currently provide a comfortable marginover capital resource requirements.
EU Solvency II Framework
We have continued to monitor developments in the EU Solvency II framework whichwill impact the UK and Swedish businesses. A Steering Group continues tooversee our implementation of the regulations, which are due to becomeeffective on 1 January 2013: however, the exact date is currently beingreconsidered by the EU and may be deferred to 2014. Besides ensuring that thereare robust processes for the calculation of technical reserves and solvencycapital, the implementation will embrace wide-ranging changes in riskmanagement processes on a Group-wide basis. In the meantime, we have continuedinternal quantitative analysis and have formulated a detailed implementationplan.Going Concern StatementAfter making appropriate enquiries, the Directors confirm that they aresatisfied that the Company and the Group have adequate resources to continue inbusiness for the foreseeable future. In making these enquiries, the Directorshave taken account of the current economic environment, including globalinvestment market volatility, reflected by falling equity markets and fluctuatingyields on fixed-interest investments. The impact of these movements has beenassessed by sensitivity analysis on Group cash flow and on regulatory solvencymeasures at the subsidiary and Group level. As a result, we continue to adoptthe going concern basis in the preparation of the financial statements.
Outlook
These results highlight some of the effects that equity markets and interestrate movements can have on our performance. Whilst these effects have given riseto some volatility in the reported results, the underlying picture is one of arobust cash-generating business in CA, a strong and longer-term surplusgenerator in S&P and Movestic's core business entering into profit territory. Wewill remain focused on the efficient management of these businesses to ensurethat we can deliver on our dividend aims. We will also continue to seek toacquire further businesses which will prolong our ability to deliver a dividendstream and/or offer significant value uplift to shareholders.
Dividend
We have signalled that we aim to provide a reliable and progressive dividendpayment. With the underlying cash flow generated by the emergence of surplusfrom the UK business remaining healthy and our solvency position remainingstrong, the Board is pleased to be able to declare an interim dividend of 5.95pper share which represents an increase of 2.6% over the 2010 interim payment.Graham KettleboroughChief Executive Officer30 August 2011
DIRECTORS' RESPONSIBILITY STATEMENT IN RESPECT OF THE HALF YEARLY FINANCIAL REPORT
Responsibility statement
We confirm that to the best of our knowledge:
the condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting';
the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and
the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).
By order of the Board Peter Mason Graham KettleboroughChairman Chief Executive Officer30 August 2011 30 August 2011
INDEPENDENT AUDITOR'S REVIEW REPORT TO THE MEMBERS OF CHESNARA PLC IN RESPECT OF THE HALF YEARLY FINANCIAL REPORT
We have been engaged by the Company to review the condensed set of financialstatements in the half-yearly financial report for the six months ended 30 June2011 which comprises the condensed consolidated statement of comprehensiveincome, the condensed consolidated balance sheet, the condensed consolidatedstatement of cash flows, the condensed consolidated statement of changes inequity and related Notes 1 to 6. We have read the other information containedin the half-yearly financial report and considered whether it contains anyapparent misstatements or material inconsistencies with the information in thecondensed set of financial statements.This report is made solely to the Company in accordance with InternationalStandard on Review Engagements (UK and Ireland) 2410 "Review of InterimFinancial Information Performed by the Independent Auditor of the Entity"issued by the Auditing Practices Board. Our work has been undertaken so thatwe might state to the Company those matters we are required to state to them inan independent review report and for no other purpose. To the fullest extentpermitted by law, we do not accept or assume responsibility to anyone otherthan the Company, for our review work, for this report, or for the conclusionswe have formed.Directors' responsibilitiesThe half-yearly financial report is the responsibility of, and has beenapproved by, the directors. The directors are responsible for preparing thehalf-yearly financial report in accordance with the Disclosure and TransparencyRules of the United Kingdom's Financial Services Authority.As disclosed in note 1, the annual financial statements of the Group areprepared in accordance with IFRSs as adopted by the European Union. Thecondensed set of financial statements included in this half-yearly financialreport has been prepared in accordance with International Accounting Standard34, "Interim Financial Reporting," as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensedset of financial statements in the half-yearly financial report based on ourreview.Scope of Review
We conducted our review in accordance with International Standard on ReviewEngagements (UK and Ireland) 2410 "Review of Interim Financial InformationPerformed by the Independent Auditor of the Entity" issued by the AuditingPractices Board for use in the United Kingdom. A review of interim financialinformation consists of making inquiries, primarily of persons responsible forfinancial and accounting matters, and applying analytical and other reviewprocedures. A review is substantially less in scope than an audit conducted inaccordance with International Standards on Auditing (UK and Ireland) andconsequently does not enable us to obtain assurance that we would become awareof all significant matters that might be identified in an audit. Accordingly,we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us tobelieve that the condensed set of financial statements in the half-yearlyfinancial report for the six months ended 30 June 2011 is not prepared, in allmaterial respects, in accordance with International Accounting Standard 34 asadopted by the European Union and the Disclosure and Transparency Rules of theUnited Kingdom's Financial Services Authority. Deloitte LLPChartered Accountants and Statutory AuditorManchesterUnited Kingdom 30 August 2011
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE SIX MONTHS ENDED 30 JUNE 2011
Unaudited Year Six months ended ended 30 June 31 December 2011 2010 2010 Note GBP000 GBP000 GBP000 Insurance premium revenue 62,880 59,044 114,950 Insurance premium ceded to reinsurers (17,562) (18,999) (35,695) -------- -------- -------- Net insurance premium revenue 45,318 40,045 79,255 Fee and commission income 34,840 33,858 63,410 Net investment return 9,876 (150) 303,850 -------- -------- -------- Total revenue (net of reinsurance payable) 90,034 73,753 446,515 Other operating income 11,763 7,028 9,216 -------- -------- -------- Total income 101,797 80,781 455,731 -------- -------- --------
Insurance contract claims and benefits incurred
 Claims and benefits paid to insurancecontract holders (140,796) (64,345) (139,424)  Net decrease/(increase) in insurance contract provisions 56,452 14,006
(106,618)
 Reinsurers' share of claims and benefits 13,277 15,049 45,635 -------- -------- -------- Net insurance contract claims and (71,067) (35,290) (200,407) -------- -------- -------- Change in investment contract liabilities 13,584 (465)
(180,021)
Reinsurers' share of investment contract
liabilities 326 (303) 3,904 -------- -------- -------- Net change in investment contract liabilities 13,910 (768) (176,117) -------- -------- -------- Fees, commission and other acquisition costs (8,855) (7,630) (14,688) Administrative expenses (17,722) (13,272) (29,375) Other operating expenses
 Charge for amortisation of acquired value of
in-force business (4,554) (5,636)
(8,107)
 Charge for amortisation of acquired value of customer relationships (383) (442) (952)  Other (6,983) (6,003) (7,098) -------- -------- -------- Total expenses (95,654) (69,041) (436,744) -------- -------- -------- Total income less expenses 6,143 11,740 18,987
Share of profit/(loss) of associates 293 (101)
597
Profit recognised on business combinations - 989 15,864 -------- -------- -------- Operating profit 6,436 12,628 35,448 Financing costs (2,626) (650) (1,280) -------- -------- -------- Profit before income taxes 4 3,810 11,978 34,168 Income tax expense (603) (4,194) (4,467) -------- -------- -------- Profit for the period 3,207 7,784 29,701 -------- -------- -------- Attributable to:  Shareholders 2,4 3,207 7,824 29,819
 Non-controlling interest - (40)
(118) -------- -------- -------- 3,207 7,784 29,701 Foreign exchange translation differencesarising on the revaluation of foreign operations 1,972 (329) 4,285 -------- -------- -------- Total comprehensive income for the period 5,179 7,455 33,986 ======== ======== ======== Attributable to:  Shareholders 5,179 7,495 34,104  Non-controlling interest - (40) (118) -------- -------- -------- 5,179 7,455 33,986 ======== ======== ======== Basic earnings per share (based on profit for the period attributable to shareholders) 2 2.79p 7.71p 29.05p ======== ======== ======== Diluted earnings per share (based on profitfor the period attributable to shareholders) 2 2.79p 7.71p 29.05p ======== ======== ========
CONDENSED CONSOLIDATED BALANCE SHEET AT 30 JUNE 2011
Unaudited Year Ended 30 June 31 December 2011 2010 2010 Note GBP000 GBP000 GBP000Assets Intangible assets
 Deferred acquisition costs 17,651 10,914
14,659
 Acquired value of in-force business 90,892 80,348
93,046
 Acquired value of customer relationships 2,761 3,498
3,032  Software assets 7,405 5,456 6,829 Property and equipment 513 681 671 Investment in associates 2,150 943 1,783 Investment properties 125,684 3,355 120,820
Reinsurers' share of insurance contract
provisions 277,482 239,078 280,743
Amounts deposited with reinsurers 30,058 26,571
30,264 Financial assets
Equity securities at fair value through
income 460,834 397,509 492,321
Holdings in collective investment schemes at
fair value through income 3,153,838 1,537,247 3,177,265
Debt securities at fair value through income 319,406 380,057 319,516
Policyholders' funds held by the group 57,899 44,336
52,337
Insurance and other receivables 119,506 27,477
33,225 Prepayments 4,197 3,396 3,908
Derivative financial instruments 7,022 7,405
9,707 -------- -------- -------- Total financial assets 4,122,702 2,397,427 4,088,279 -------- -------- --------
Reinsurers' share of accrued policyholder
claims 4,685 3,996 3,678 Income taxes 5,096 941 5,486 Cash and cash equivalents 168,820 174,183 194,134 Assets held for sale - - 380 -------- -------- -------- Total assets 4 4,855,899 2,947,391 4,843,804 -------- -------- --------Liabilities Liabilities held for sale - - 380 Bank overdrafts 1,729 1,590 2,154 Insurance contract provisions 2,346,571 1,065,147 2,404,079 Unallocated divisible surplus - - 83 Financial liabilities
 Investment contracts at fair value through
income 2,055,139 1,564,816 2,002,712
 Liabilities relating to policyholders'
funds held by the group 57,899 44,336 52,337  Borrowings 5 61,293 22,452 62,694
 Derivative financial instruments 1,103 1,542
137 -------- -------- -------- Total financial liabilities 2,175,434 1,633,146 2,117,880 -------- -------- -------- Provisions 1,480 1,696 1,822 Deferred tax liabilities 17,994 9,558 20,526 Reinsurance payables 16,455 22,105 22,310
Payables related to direct insurance and
investment contracts 39,887 29,139 35,808 Deferred income 11,013 12,254 11,647 Income taxes 7,202 7,543 6,923 Other payables 41,860 8,417 16,923 -------- -------- -------- Total liabilities 4 4,659,625 2,790,595 4,640,535 -------- -------- --------Net assets 196,274 156,796 203,269 ======== ======== ======== Shareholders' equity Share capital 42,024 41,501 42,024 Share premium 42,523 20,458 42,523 Treasury shares (217) (3,379) (217) Other reserves 9,688 3,102 7,716 Retained earnings 3 102,256 95,114 111,223 -------- -------- -------- Total shareholders' equity 196,274 156,796 203,269 Non-controlling interest - - - -------- -------- -------- Total equity 196,274 156,796 203,269 ======== ======== ======== CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED 30 JUNE 2011 Unaudited Six months ended Year ended 30 June 31 December 2011 2010 2010 GBP000 GBP000 GBP000 Profit for the period 3,207 7,824 29,819 Adjustments for:
 Depreciation of property and equipment 110 148
294
 Amortisation of deferred acquisition costs 3,618 3,040 5,737
 Amortisation of acquired value of in-force
business 4,554 5,637 8,148
 Amortisation of acquired value of customer
relationships 383 442 1,182
 Amortisation of software assets 910 527
1,176  Tax expense 603 4,194 4,467  Interest receivable (14,378) (6,752) (16,913)  Dividends receivable (21,915) (13,749) (31,090) Interest expense 2,626 650 1,280
Change in fair value of investment properties (2,088) - (113)
Fair value losses/(gains) on financial assets 24,688 31,095 (252,456)
Loss/(profit) on sale of property and equipment 50 (2)
2
Profit arising on business combination - (989)
(15,864)
Share of (profit)/loss of associate net of
impairment (293) 101 (597) Interest received 13,837 6,363 16,370 Dividends received 12,832 13,064 30,792
Increase in intangible assets related to insurance and investment contracts (6,253) (4,479)
(10,343)
Changes in operating assets and liabilities Decrease/(increase) in financial assets 74,752 (44,764)
(78,785)
Decrease/(increase) in reinsurers share of insurance contract provisions 3,950 (1,859)
(31,471)
Decrease/(increase) in amounts deposited with
reinsurers 206 485 (3,208)
(Increase)/decrease in insurance and other
receivables (75,453) (6,983) 1,305
(Increase)/decrease in prepayments (198) 376
80
Decrease/(increase) in assets held for sale 388 -
(380)
(Decrease)/increase in liabilities held for sale (388) -
380
(Decrease)/increase in insurance contract
provisions (60,042) (14,575) 121,382
Increase in investment contract liabilities 7,415 50,682 270,801
(Decrease)/increase in provisions (342) 244
370
(Decrease)/increase in reinsurance payables (6,536) 7,422 5,677
Increase/(decrease) in payables related to direct insurance and investment contracts 3,844 (1,119)
(6,050)
Increase/(decrease) in other payables 24,392 4,564
(422) -------- -------- --------
Cash (utilised by)/generated from operating
activities (5,521) 41,587 51,570 Income tax paid (2,125) (4,694) (4,537) -------- -------- --------
Net cash (utilised by)/generated from operating
activities (7,646) 36,893 47,033 ======== ======== ========
Cash flows from investing activities Business combinations net of cash acquired - 1,830 (46,483) Investment in associates - - (38) Development of software (1,217) (1,079) (2,541)
Purchases of property and equipment 18 (193)
(296) -------- -------- --------
Net cash (utilised by)/generated from investing
activities (1,199) 558 (49,358) ======== ======== ========
Cash flows from financing activities Proceeds from the issue of share capital, net of
expenses - - 22,588 Sale of Treasury shares - - 3,162 Proceeds from borrowings - - 40,000 Repayment of borrowings (2,149) (6,177) (7,236) Dividends paid (12,174) (10,454) (16,340) Interest paid (2,648) (853) (2,365) -------- -------- --------
Net cash (utilised by)/generated from financing
activities (16,971) (17,484) 39,809 ======== ======== ========
Net (decrease)/increase in cash and cash
equivalents (25,816) 19,967 37,484
Cash and cash equivalents at beginning of the
year 191,980 152,929 152,929
Effect of exchange rate changes on cash and cash
equivalents 927 (303) 1,567 -------- -------- -------- Cash and cash equivalents at end of the period 167,091 172,593 191,980 ======== ======== ========
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE SIX MONTHS ENDED 30 JUNE 2011
Unaudited six months ended 30 June 2011 Share Share Other Treasury Retained capital premium reserves shares earnings Total GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 Equity shareholders' funds at 1 January 2011 42,024 42,523 7,716 (217) 111,223 203,269 Profit for the period attributable to shareholders - - - - 3,207 3,207 Dividends paid - - - - (12,174) (12,174) Foreign exchange translation reserve - - 1,972 - - 1,972 -------- -------- -------- -------- -------- -------- Equity shareholders' funds at 30 June 2011 42,024 42,523 9,688 (217) 102,256 196,274 ======== ======== ======== ======== ======== ======== Unaudited six months ended 30 June 2010 Share Share Other Treasury Retained capital premium reserves shares earnings Total GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Equity shareholders' funds at 1 January 2010 41,501 20,458 3,431 (3,379) 97,744 159,755 Profit for the period attributable to shareholders - - - - 7,824 7,824 Dividends paid - - - - (10,454) (10,454) Foreign exchange translation reserve - - (329) - - (329) -------- -------- -------- -------- -------- -------- Equity shareholders' funds at 30 June 2010 41,501 20,458 3,102 (3,379) 95,114 156,796 ======== ======== ======== ======== ======== ======== Year ended 31 December 2010 Share Share Other Treasury Retained capital premium reserves shares earnings Total GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Equity shareholders' funds at 1 January 2010 41,501 20,458 3,431 (3,379) 97,744 159,755 Profit for the year attributable to shareholders - - - - 29,819 29,819 Dividends paid - - - - (16,340) (16,340) Issue of new shares 523 22,065 - - - 22,588 Sale of Treasury shares - - - 3,162 - 3,162 Foreign exchange translation reserve - - 4,285 - - 4,285 -------- -------- -------- -------- -------- -------- Equity shareholders' funds at 31 December 2010 42,024 42,523 7,716 (217) 111,223 203,269 ======== ======== ======== ======== ======== ========
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1 Basis of preparation
This condensed set of consolidated financial statements has been prepared inaccordance with IAS 34 'Interim Financial Reporting' as adopted by the EU. Asrequired by the Disclosure and Transparency Rules of the Financial ServicesAuthority, the condensed set of consolidated financial statements has beenprepared applying the accounting policies and presentation that were applied inthe preparation of the Group's published consolidated financial statements forthe year ended 31 December 2010, which were prepared in accordance with IFRS asadopted by the EU. Any judgements and estimates applied in the condensed set offinancial statements are consistent with those applied in the preparation ofthe Group's published consolidated financial statements for the year ended 31December 2010.
The financial information shown in this half-year review is unaudited and does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006.
The comparative figures for the financial year ended 31 December 2010 are notthe Company's statutory accounts for that financial year. Those accounts havebeen reported on by the Company's auditors and delivered to the Registrar ofCompanies. The report of the auditors was (i) unqualified, (ii) did not includea reference to any matters to which the auditors drew attention by way ofemphasis without qualifying their report and (iii) did not contain a statementsunder section 498(2) or (3) of the Companies Act 2006.
2 Earnings per share
Earnings per share are based on the following:
Unaudited Year ended Six months ended 30 June 31 December 2011 2010 2010
Profit for the year attributable to
shareholders (GBP000) 3,207 7,824 29,819 -------- -------- -------- Weighted average number of ordinary shares 114,848,651 101,492,591 102,642,750 -------- -------- -------- Basic earnings per share 2.79p 7.71p 29.05p -------- -------- -------- Diluted earnings per share 2.79p 7.71p 29.05p ======== ======== ========
The weighted average number of ordinary shares in respect of the six monthsended 30 June 2011 is based on 115,047,662 shares in issue at the beginning andend of the period less 199,011 own shares held in treasury at the beginning andend of the period.The weighted average number of ordinary shares in respect of the six monthsended 30 June 2010 is based on 104,588,785 shares in issue at the beginning andend of the period less 3,096,194 own shares held in treasury at the beginningand end of the period.The weighted average number of ordinary shares in respect of the year ended 31December 2010 is based on 104,588,785 shares in issue at the beginning of theyear less 3,096,194 own shares held in treasury and on 115,047,662 shares inissue at the end of the period, less 199,011 own shares held in treasury,taking account of the timing of the issue of new shares and of the sale oftreasury shares.Earnings per share for the year ended 31 December 2010 includes the impact of GBP15,864,000 of profit recognised on the acquisition of S&P and of the Aspisbusiness. Excluding this item, both the basic and diluted earnings per sharefor the year ended 31 December 2010 would have been 13.60p.
There were no share options outstanding during the periods under review. Accordingly, there is no dilution of the average number of ordinary shares in issue in respect of these periods.
3 Retained earnings Unaudited Year Six months ended ended 30 June 31 December 2011 2010 2010 GBP000 GBP000 GBP000
Retained earnings attributable to equity holders of
the parent company comprise Balance at 1 January 111,223 97,744 97,744 Profit for the period 3,207 7,824 29,819 Dividends
 Final approved and paid for 2009 - (10,454)
(10,454)
 Interim approved and paid for 2010 - -
(5,886)
 Final approved and paid for 2010 (12,174) -
- -------- -------- -------- Balance at 30 June / 31 December 102,256 95,114 111,223 ======== ======== ========
The interim dividend in respect of 2010, approved and paid in 2010, was paid at the rate of 5.80p per share.
The final dividend in respect of 2010, approved and paid in 2011, was paid at the rate of 10.60p per share so that the total dividend paid to the equity shareholders of the parent company in respect of the year ended 31 December 2010 was made at the rate of 16.40p per share.
An interim dividend of 5.95p per share in respect of the year ending 31December 2011, payable on 14 October 2011 to equity shareholders of the parentcompany registered at the close of business on 9 September 2011, the dividendrecord date, was approved by the Directors after 30 June 2011. The resultinginterim dividend of GBP6.8m has not been provided in these financial statements.
The following summarises dividends per share in respect of the year ended 31 December 2010 and 31 December 2011:
2011 2010 p p Interim dividend 5.95 5.80 ======== Final dividend 10.60 --------Total 16.40 ======== 4 Operating segments
The Group considers that it has no product or distribution-based business segments. It reports segmental information on the same basis as reported internally to the Chief Operating Decision Maker, which is the Board of Directors of Chesnara plc.
The segments of the Group as at 30 June 2011 comprise:
CA
This segment comprises part of the Group's UK insurance and investmentoperation, being Countrywide Assured Life Holdings Limited ('CA'), which holdspart of the Group's UK insurance and investment assets and liabilities, and isresponsible for managing unit-linked and non-linked business. Up until 20December 2010 it was designated as the 'UK Business' segment.
S&P
This segment, which was acquired on 20 December 2010, comprises the balance of the Group's UK insurance and investment operation, Save & Prosper Insurance Limited ('S&P'), which holds the balance of the Group's UK insurance and investment assets, and is responsible for managing both unit-linked and non-linked business, including a significant with profits portfolio, which carries significant additional market risk.
Movestic
This segment comprises the Swedish insurance and investment operation, MovesticLivf¶rs¤kring AB (`Movestic'), formerly known as Moderna F¶rs¤kringar Liv AB('Moderna'), which holds the Group's Swedish insurance and investment assetsand liabilities, and is responsible for managing both unit-linked andnon-linked business. Up until 20 December 2010 it was designated as the'Swedish Business' segment.
Other Group Activities
The functions performed by the holding company, Chesnara plc, are defined underthe operating segment analysis as Other Group Activities. Also included thereinare consolidation and elimination adjustments.
There were no changes to the basis of segmentation during the six months ended 30 June 2011.
The accounting policies of the segments are the same as those for the Group asa whole. Any transactions between the business segments are on normalcommercial terms in normal market conditions. The Group evaluates performanceof operating segments on the basis of the profit before tax attributable toshareholders and on the total assets and liabilities of the reporting segmentsand the Group. There were no changes to the measurement basis for segmentprofit during the six months ended 30 June 2011 and the year ended 31 December2010.
(i) Segmental income statement for the year ended 30 June 2011
Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Insurance premium revenue 37,545 5,727 19,608 - 62,880 Insurance premium ceded to reinsurers (6,588) (130) (10,844) - (17,562) -------- -------- -------- -------- -------- Net insurance premium revenue 30,957 5,597 8,764 - 45,318 Fee and commission income 19,918 752 14,170 - 34,840 Net investment return 25,815 14,183 (30,233) 111 9,876 -------- -------- -------- -------- -------- Total revenue (net of reinsurance payable) 76,690 20,532 (7,299) 111 90,034 Other operating income 1,994 3,275 6,494 - 11,763 -------- -------- -------- -------- -------- Segmental income 78,684 23,807 (805) 111 101,797 -------- -------- -------- -------- -------- Insurance contract claims and benefits incurred Claims and benefits paid to insurance contract holders (78,007) (54,632) (8,157) - (140,796) Net decrease in insurance contract provisions 19,526 35,594 1,332 - 56,452 Reinsurers' share of claims and benefits 10,070 47 3,160 - 13,277 -------- -------- -------- -------- -------- Net insurance contract claims and benefits incurred (48,411) (18,991) (3,665) - (71,067) -------- -------- -------- -------- -------- Change in investment contract liabilities (15,093) (1,758) 30,435 - 13,584 Reinsurers' share of investment contract liabilities 326 - - - 326 -------- -------- -------- -------- -------- Net change in investment contract liabilities (14,767) (1,758) 30,435 - 13,910 -------- -------- -------- -------- -------- Fees, commission and other acquisition costs (577) (33) (8,245) - (8,855) Administrative expenses (4,574) (3,765) (8,211) (1,172) (17,722) Other operating expenses Charge for amortisation of acquired value of in-force business (1,835) (482) (2,237) - (4,554) Charge for amortisation of acquired value of customer relationships - - (383) - (383) Other (508) - (6,530) 55 (6,983) -------- -------- -------- -------- -------- Segmental expenses (70,672) (25,029) 1,164 (1,117) (95,654) -------- -------- -------- -------- -------- Segmental income less expenses 8,012 (1,222) 359 (1,006) 6,143 Share of profit from associates - - 293 - 293 Profit recognised on acquisition of subsidiary - - - - - -------- -------- -------- -------- -------- Segmental operating profit/(loss) 8,012 (1,222) 652 (1,006) 6,436 Financing costs - (25) (1,871) (730) (2,626) -------- -------- -------- -------- -------- Profit/(loss) before tax 8,012 (1,247) (1,219) (1,736) 3,810 Income tax (expense)/ credit (1,131) 809 (281) - (603) Non-controlling interest - - - - - -------- -------- -------- -------- -------- Profit/(loss) after tax attributable to shareholders 6,881 (438) (1,500) (1,736) 3,207 ======== ======== ======== ======== ========
(ii) Segmental income statement for the year ended 30 June 2010
Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Insurance premium - revenue 41,851 17,193 - 59,044 Insurance premium ceded - to reinsurers (7,391) (11,608) - (18,999) -------- -------- -------- -------- -------- Net insurance premium - revenue 34,460 5,585 - 40,045 Fee and commission - income 21,379 12,479 - 33,858 Net investment return (7,947) - 7,689 108 (150) -------- -------- -------- -------- -------- Total revenue (net of reinsurance payable) 47,892 - 25,753 108 73,753 Other operating income 1,560 - 5,468 - 7,028 -------- -------- -------- -------- -------- Segmental income 49,452 - 31,221 108 80,781 -------- -------- -------- -------- -------- Insurance contract claims and benefits incurred
Claims and benefits paid to insurance contract holders (58,361) - (5,984) - (64,345) Net (increase)/decrease in insurance contract provisions 18,318 - (4,312) - 14,006 Reinsurers' share of claims and benefits 7,888 - 7,161 - 15,049 -------- -------- -------- -------- -------- Net insurance contract claims and benefits incurred (32,155) - (3,135) - (35,290) -------- -------- -------- -------- -------- Change in investment contract liabilities 7,673 - (8,138) - (465) Reinsurers' share of investment contract liabilities (303) - - - (303) -------- -------- -------- -------- -------- Net change in investment contract liabilities 7,370 - (8,138) - (768) -------- -------- -------- -------- -------- Fees, commission and other acquisition costs (711) - (6,919) - (7,630) Administrative expenses (4,723) - (7,659) (890) (13,272) Other operating expenses Charge for amortisation of acquired value of in-force business (1,847) - (3,789) - (5,636) Charge for amortisation of acquired value of customer relationships - - (442) - (442) Other (591) - (5,466) 54 (6,003) -------- -------- -------- -------- -------- Segmental expenses (32,657) - (35,548) (836) (69,041) -------- -------- -------- -------- -------- Segmental income less expenses 16,795 - (4,327) (728) 11,740 Share of profit from associates - - (101) - (101) Profit recognised on acquisition of subsidiary - - 989 - 989 -------- -------- -------- -------- -------- Segmental operating profit/(loss) 16,795 - (3,439) (728) 12,628 Financing costs - - (621) (29) (650) -------- -------- -------- -------- -------- Profit/(loss) before tax 16,795 - (4,060) (757) 11,978 Income tax (expense)/ credit (4,238) - 44 - (4,194) Non-controlling interest - - 40 - 40 -------- -------- -------- -------- -------- Profit/(loss) after tax attributable to shareholders 12,557 - (3,976) (757) 7,824 ======== ======== ======== ======== ========
(iii) Segmental income statement for the year ended 31 December 2010
Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Insurance premium revenue 80,157 372 34,421 - 114,950 Insurance premium - ceded to reinsurers (14,563) (21,132) - (35,695) -------- -------- -------- -------- -------- Net insurance premium revenue 65,594 372 13,289 - 79,255 Fee and commission income 38,532 77 24,801 - 63,410 Net investment return 178,664 16,949 108,023 214 303,850 -------- -------- -------- -------- -------- Total revenue (net of reinsurance payable) 282,790 17,398 146,113 214 446,515 Other operating income 3,481 201 5,534 - 9,216 -------- -------- -------- -------- -------- Segmental income 286,271 17,599 151,647 214 455,731 -------- -------- -------- -------- -------- Insurance contract claims and benefits incurred
Claims and benefits
paid to insurance contract holders (124,449) (3,347) (11,628) - (139,424) Net (increase)/ decrease in insurance contract provisions (89,773) (13,820) (3,025) - (106,618) Reinsurers' share of claims and benefits 37,084 - 8,551 - 45,635 -------- -------- -------- -------- -------- Net insurance contract claims and benefits incurred (177,138) (17,167) (6,102) - (200,407) -------- -------- -------- -------- -------- Change in investment contract liabilities (71,672) - (108,349) - (180,021) Reinsurers' share of investment contract liabilities 3,904 - - - 3,904 -------- -------- -------- -------- -------- Net change in investment contract liabilities (67,768) - (108,349) - (176,117) -------- -------- -------- -------- -------- Fees, commission and other acquisition costs (1,252) - (13,436) - (14,688) Administrative expenses (9,524) (208) (15,407) (4,236) (29,375) Other operating expenses Charge for amortisation of acquired value of in-force business (3,661) - (4,446) - (8,107) Charge for amortisation of acquired value of customer relationships - - (952) - (952) Other (1,236) - (6,072) 210 (7,098) -------- -------- -------- -------- -------- Segmental expenses (260,579) (17,375) (154,764) (4,026) (436,744) -------- -------- -------- -------- -------- Segmental income less expenses 25,692 224 (3,117) (3,812) 18,987 Share of profit from associates - - 597 - 597 Profit recognised on acquisition of subsidiary - - 376 15,488 15,864 -------- -------- -------- -------- -------- Segmental operating profit/(loss) 25,692 224 (2,144) 11,676 35,448 Financing costs - - (1,210) (70) (1,280) -------- -------- -------- -------- -------- Profit/(loss) before tax 25,692 224 (3,354) 11,606 34,168 Income tax (expense)/ credit (4,740) (63) 176 160 (4,467) Non-controlling interest - - 118 - 118 -------- -------- -------- -------- -------- Profit/(loss) after tax attributable to shareholders 20,952 161 (3,060) 11,766 29,819 ======== ======== ======== ======== ========
(iv) Segmental balance sheet as at 30 June 2011
Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Intangible assets 25,645 8,573 84,491 - 118,709 Property and equipment 64 - 449 - 513 Investment in associates - - 2,150 - 2,150 Reinsurers' share ofinsurance contract provisions 226,047 7,410 44,025 - 277,482 Amounts deposited withreinsurers 30,058 - - - 30,058 Investment properties 648 125,036 - - 125,684 Financial assets 1,501,862 1,240,745 1,379,731 364 4,122,702 Reinsurers' share ofaccrued policyholder claims 4,599 86 - - 4,685 Income tax - 5,072 24 - 5,096 Cash and cash equivalents 106,468 4,690 24,493 33,169 168,820 Assets held for sale - - - - - -------- -------- -------- -------- -------- Total assets 1,895,391 1,391,612 1,535,363 33,533 4,855,899 -------- -------- -------- -------- -------- Liabilities held for sale - - - - - Bank overdrafts 1,474 255 - - 1,729 Insurance contractprovisions 1,106,865 1,174,704 65,002 - 2,346,571 Unallocated divisiblesurplus - - - - - Investment contractsat fair value throughincome 644,751 108,361 1,302,027 - 2,055,139 Liabilities relatingto policyholders'funds held by the group - - 57,899 - 57,899 Borrowings - - 21,906 39,387 61,293 Derivative financial instruments 8 1,095 - - 1,103
Provisions 1,480 - - - 1,480 Deferred tax liabilities 6,591 10,505 898 - 17,994 Reinsurance payables 1,802 20 14,633 - 16,455 Payables related todirect insurance and investment contracts 22,240 10,678 6,969 - 39,887 Deferred income 11,013 - - - 11,013 Income taxes 1,828 1,151 4,223 - 7,202 Other payables 25,828 6,136 8,535 1,361 41,860 -------- -------- -------- -------- -------- Total liabilities 1,823,880 1,312,905 1,482,092 40,748 4,659,625 -------- -------- -------- -------- -------- Net assets 71,511 78,707 53,271 (7,215) 196,274 Non-controlling interest - - - - - -------- -------- -------- -------- -------- Net assetsattributable toshareholders 71,511 78,707 53,271 (7,215) 196,274 ======== ======== ======== ======== ======== (v) Segmental balance sheet as at 30 June 2010 Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Intangible assets 30,093 - 70,123 - 100,216 Property and equipment - - 681 - 681 Investment in associates - - 943 - 943 Reinsurers' share ofinsurance contractprovisions 208,715 - 30,363 - 239,078 Amounts depositedwith reinsurers 26,571 - - - 26,571 Investment properties 3,355 - - - 3,355 Financial assets 1,350,351 - 1,046,773 303 2,397,427 Reinsurers' share ofaccrued policyholderclaims 3,996 - - - 3,996 Income tax 546 - - 395 941 Cash and cashequivalents 123,603 - 19,125 31,455 174,183 Assets held for sale - - - - - -------- -------- -------- -------- -------- Total assets 1,747,230 - 1,168,008 32,153 2,947,391 -------- -------- -------- -------- -------- Liabilities heldfor sale - - - - - Bank overdrafts 1,590 - - - 1,590 Insurance contractprovisions 1,023,893 - 41,254 - 1,065,147 Unallocated divisiblesurplus - - - - - Investment contracts atfair value throughincome 584,921 - 979,895 - 1,564,816 Liabilities relatingto policyholders'funds held by the group - - 44,336 - 44,336 Borrowings - - 22,452 - 22,452 Derivative financial
instruments 1,542 - - - 1,542 Provisions 1,696 - - - 1,696 Deferred taxliabilities 8,870 - 686 2 9,558 Reinsurance payables 2,476 - 19,629 - 22,105 Payables related to direct insurance and investment contracts 19,975 - 9,164 - 29,139 Deferred income 12,254 - - - 12,254 Income taxes 4,600 - 2,943 - 7,543 Other payables 3,178 - 4,261 978 8,417 -------- -------- -------- -------- -------- Total liabilities 1,664,995 - 1,124,620 980 2,790,595 -------- -------- -------- -------- -------- Net assets 82,235 - 43,388 31,173 156,796 Non-controlling interest - - - - - -------- -------- -------- -------- -------- Net assets attributableto shareholders 82,235 - 43,388 31,173 156,796 ======== ======== ======== ======== ========
(vi) Segmental balance sheet as at 31 December 2010
Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 Intangible assets 27,870 9,055 80,641 - 117,566 Property and equipment 67 - 604 - 671 Investment in associates - - 1,783 -
1,783 Reinsurers' share of insurance contractprovisions 228,276 7,692 44,775 - 280,743 Amounts depositedwith reinsurers 30,264 - - - 30,264 Investment properties 2,895 117,925 - - 120,820 Financial assets 1,491,088 1,276,303 1,320,645 243 4,088,279 Reinsurers' shareof accruedpolicyholder claims 3,422 256 - - 3,678 Income tax - 4,943 - 543 5,486 Cash and cashequivalents 133,716 14,972 24,248 21,198 194,134 Assets held for sale - - 380 - 380 -------- -------- -------- -------- -------- Total assets 1,917,598 1,431,146 1,473,076 21,984 4,843,804 -------- -------- -------- -------- -------- Liabilities heldfor sale - - 380 - 380 Bank overdrafts 2,125 29 - - 2,154 Insurance contractprovisions 1,129,558 1,210,810 63,711 - 2,404,079 Unallocated divisiblesurplus - 83 - - 83 Investment contractsat fair value through income 646,609 108,862 1,247,241 - 2,002,712 Liabilities relatingto policyholders'funds held by the group - - 52,337 - 52,337 Borrowings - - 23,407 39,287 62,694 Derivative financialinstruments 137 - - - 137
Provisions 1,822 - - - 1,822 Deferred taxliabilities 7,525 12,222 779 - 20,526 Reinsurancepayables 1,921 23 20,366 - 22,310 Payables related to direct insurance and investment contracts 19,338 10,919 5,551 - 35,808 Deferred income 11,647 - - - 11,647 Income taxes 3,188 3,280 455 - 6,923 Other payables 3,098 5,773 6,050 2,002 16,923 -------- -------- -------- -------- -------- Total liabilities 1,826,968 1,352,001 1,420,277 41,289 4,640,535 -------- -------- -------- -------- -------- Net assets 90,630 79,145 52,799 (19,305) 203,269 Non-controlling interest - - - - - -------- -------- -------- -------- -------- Net assets attributableto shareholders 90,630 79,145 52,799 (19,305) 203,269 ======== ======== ======== ======== ========5 Borrowings Unaudited 30 June 31 December 2011 2010 2010 GBP000 GBP000 GBP000 Bank loan 39,387 - 39,287 Amount due in relation to financial reinsurance 21,906 22,340 23,406 Other - 112 1 -------- -------- -------- Total 61,293 22,452 62,694 ======== ======== ======== The bank loan, which was drawn down on 20 December 2010 under a facility madeavailable on 17 November 2010, is unsecured and is repayable in five increasingannual instalments on the anniversary of the draw down date. The outstandingprincipal on the loan bears interest at a rate of 2.25 percentage points abovethe London Inter-Bank Offer Rate and is repayable over a period which variesbetween one and six months at the option of the borrower.
The fair value of the bank loan at 30 June 2011 was GBP40,000,000 (31 December 2010: GBP40,000,000).
The fair value of amounts due in relation to financial reinsurance as at 30 June 2011 was GBP22,314,675 (30 June 2010: GBP22,885,000 and 31 December 2010: GBP24,590,409).
The fair value of other borrowings was not materially different from its carrying value at any of the period ends under review.
6 Approval of consolidated report for the six months ended 30 June 2011
This condensed consolidated report was approved by the Board of Directors on 30August 2011. A copy of the report will be available to the public at theCompany's registered office, Harbour House, Portway, Preston, PR2 2PR, UK andat www.chesnara.co.uk.
STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION
The Directors have chosen to prepare Supplementary Information in accordance with the EEV Principles issued in May 2004 by the CFO Forum of European Insurance Companies and expanded by the Additional Guidance on European Embedded Value Disclosures issued in October 2005.
When compliance with the EEV Principles is stated, those principles require theDirectors to prepare supplementary information in accordance with the EmbeddedValue Methodology (`EVM') contained in the EEV Principles and to disclose andexplain any non-compliance with the EEV guidance included in the EEVPrinciples.
In preparing the EEV supplementary information, the Directors have:
â— Prepared the supplementary information in accordance with the EEV Principles;â— Identified and described the business covered by the EVM;â— Applied the EVM consistently to the covered business;â— Determined assumptions on a realistic basis, having regard to past,
current and expected future experience and to any relevant external
data, and then applied them consistently;â— Made estimates that are reasonable and consistent; and
â— Described the basis on which business that is not covered business has
been included in the supplementary information, including any material
departures from the accounting framework applicable to the Group's financial statements.
INDEPENDENT AUDITOR'S REVIEW REPORT TO THE DIRECTORS OF CHESNARA PLC ON THE EEV BASIS SUPPLEMENTARY INFORMATION
We have been engaged by the Company to review the Supplementary Information -European Embedded Value Basis in the half-yearly financial report for the sixmonths ended 30 June 2011 which comprises the summarised consolidatedincome statement, the summarised consolidated balance sheet and the relatednotes 1 to 9. We have read the other information contained in the half-yearlyfinancial report and considered whether it contains any apparent misstatementsor material inconsistencies with the information in the SupplementaryInformation - European Embedded Value Basis.We have reported separately on the condensed financial statements of Chesnaraplc for the six months ended 30 June 2011. The information contained in theSupplementary Information - European Embedded Value Basis should be read inconjunction with the condensed set of financial statements prepared on an IFRSbasis. This information is described within the Chesnara plc condensed set offinancial statements in the half-yearly financial report as having beenreviewed.This report is made solely to the Company's directors in accordance with ourengagement letter and solely for the purpose of expressing an opinion as towhether anything has come to our attention that causes us to believe that theSupplementary information - European Embedded Value Basis for the six monthsended 30 June 2011 is not prepared, in all material respects, in accordancewith the European Embedded Value ('EEV') principles issued in May 2004 by theEuropean CFO Forum and supplemented by Additional Guidance on EEV Disclosuresissued by the same body in October 2005. Our work has been undertaken so thatwe might state to the Company's directors those matters we are required tostate to them in an independent review report and for no other purpose. To thefullest extent permitted by law, we do not accept or assume responsibility toanyone other than the Company's directors, for our review work, for thisreport, or for the conclusions we have formed.
Directors' responsibilities
The Supplementary Information - European Embedded Value Basis is theresponsibility of, and has been approved by, the directors. The directors areresponsible for preparing the Supplementary Information - European EmbeddedValue Basis in accordance with the European Embedded Value ('EEV') principlesissued in May 2004 by the European CFO Forum and supplemented by AdditionalGuidance on EEV Disclosures issued by the same body in October 2005.
Our responsibility
Our responsibility in relation to the Supplementary Information - European Embedded Value Basis is to express to the Company a conclusion on the Supplementary Information - European Embedded Value Basis based on our review.
Scope of Review
We conducted our review in accordance with International Standard on ReviewEngagements (UK and Ireland) 2410 "Review of Interim Financial InformationPerformed by the Independent Auditor of the Entity" issued by the AuditingPractices Board for use in the United Kingdom. A review of interim financialinformation consists of making inquiries, primarily of persons responsible forfinancial and accounting matters, and applying analytical and other reviewprocedures. A review is substantially less in scope than an audit conducted inaccordance with International Standards on Auditing (UK and Ireland) andconsequently does not enable us to obtain assurance that we would become awareof all significant matters that might be identified in an audit. Accordingly,we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us tobelieve that the Supplementary information - European Embedded Value Basis forthe six months ended 30 June 2011 is not prepared, in all material respects, inaccordance with the European Embedded Value ('EEV') principles issued in May2004 by the European CFO Forum and supplemented by Additional Guidance on EEVDisclosures issued by the same body in October 2005. Deloitte LLPChartered Accountants and Statutory AuditorManchester, United Kingdom30 August 2011
SUPPLEMENTARY INFORMATION - EUROPEAN EMBEDDED VALUE BASIS
SUMMARISED CONSOLIDATED INTERIM INCOME STATEMENT FOR THE SIXMONTHS ENDED 30 JUNE 2011 Unaudited Year ended Six months ended 31 30 June December 2011 2010 2010 Note GBP000 GBP000 GBP000 Operating profit/(loss)of covered business 6 832 (4,679) 6,364 Other operational result (605) (2,662) (6,114) -------- -------- -------- Operating profit/(loss) 227 (7,341) 250 Variation from longer-term investment return 6 (4,698) 8,169 26,941 Effect of economic assumption changes 6 4,823 (5,834) (4,453) -------- -------- -------- Profit/(loss) beforetax and before exceptional item 352 (5,006) 22,738 Exceptional items Profit recognisedon businesscombinations 6 - 989 41,043 Effect of modellingadjustments 6 (5,267) 10,363 13,239 -------- -------- -------- (Loss)/profit before tax (4,915) 6,346 77,020 Tax 6 (1,890) (2,399) (4,014) -------- -------- -------- (Loss)/profitafter tax (6,805) 3,947 73,006 -------- -------- -------- Attributable to: Shareholders (6,805) 3,947 73,124 Non-controlling interest - - (118) -------- -------- -------- (6,805) 3,947 73,006 ======== ======== ======== (Loss)/earnings per share Based on (loss)/profitfor the period attributable toshareholders (5.93)p 3.89p 71.24p -------- -------- -------- Diluted (loss)/earnings per share Based on (loss)/profit for the period attributable to shareholders (5.93)p 3.89p 71.24p -------- -------- --------
SUPPLEMENTARY INFORMATION - EUROPEAN EMBEDDED VALUE BASIS
SUMMARISED CONSOLIDATED BALANCE SHEET AS AT 30 JUNE 2011
Unaudited 31 30 June December 2011 2010 2010 Note GBP000 GBP000 GBP000Assets Value of in force business 5,8 265,495 188,074 265,415
Deferred acquisition costs arising on
unmodelled business 734 640 616
Acquired value of customer relationships 876 1,416
983 Software assets - 5,456 6,829 Property and equipment 513 681 671 Investment in associate 2,150 943 1,783
Reinsurers' share of insurance contract
provisions 242,704 209,555 247,432 Amounts deposited with reinsurers 28,828 25,299 29,002 Investment properties 125,684 3,355 120,820 Deferred tax assets - 1,638 - Financial assets
 Equity securities at fair value through
income 460,834 397,509 492,321
 Holdings in collective schemes at fair
value through income 3,153,838 1,537,247 3,177,265
 Debt securities at fair value through
income 319,406 380,057 319,516  Insurance and other receivables 119,506 27,477 33,234  Prepayments 4,197 3,396 3,908  Policyholders' funds held by the group 57,899 44,336
52,337
 Derivative financial instruments 7,022 7,405
9,707 -------- -------- -------- Total financial assets 4,122,702 2,397,427 4,088,288 -------- -------- -------- Reinsurers' share of accrued policy claims 4,685 3,996 3,678 Income taxes 5,096 941 5,486 Cash and cash equivalents 168,820 174,183 194,134 Assets held for sale - - 380 -------- -------- -------- Total assets 4,968,287 3,013,604 4,965,517 -------- -------- -------- Liabilities Liabilities held for sale - - 380 Bank overdraft 1,729 1,590 2,154 Insurance contract provisions 2,309,733 1,035,702 2,370,948 Unallocated divisible surplus 13,349 - 14,930 Financial liabilities
 Investment contracts at fair value through
income 2,065,127 1,578,342 2,010,954  Borrowings 67,693 28,558 70,148
 Derivative financial instruments 1,103 1,542
137
 Liabilities relating to policyholders'
funds held by the group 57,899 44,336 52,337 -------- -------- -------- Total financial liabilities 2,191,822 1,652,778 2,133,576 -------- -------- -------- Provisions 1,480 1,696 1,822 Deferred tax liabilities 5,087 - 5,578 Reinsurance payables 15,994 21,608 21,830
Payables related to direct insurance and
investment contracts 39,887 29,139 35,808 Income taxes 7,202 7,543 6,923 Other payables 41,860 8,417 16,932 -------- -------- -------- Total liabilities 4,628,143 2,758,473 4,610,881 -------- -------- -------- Net assets 340,144 255,131 354,636 ======== ======== ======== Equity Share capital 42,024 41,501 42,024 Share premium 42,523 20,458 42,523 Treasury shares (217) (3,379) (217) Foreign exchange reserve 19,543 4,592 15,056 Other reserves 50 50 50 Retained earnings 236,221 191,909 255,200 -------- -------- -------- Total shareholders' equity 340,144 255,131 354,636 Non-controlling interest - - - -------- -------- -------- Total equity 340,144 255,131 354,636 ======== ======== ========
NOTES TO THE SUPPLEMENTARY INFORMATION (UNAUDITED)
1 Basis of preparation
This section sets out the detailed methodology followed for producing theseGroup financial statements which are supplementary to the Group's primaryfinancial statements which have been prepared in accordance with InternationalFinancial Reporting Standards ('IFRS'). These financial statements have beenprepared in accordance with the European Embedded Value ('EEV') principlesissued in May 2004 by the European CFO Forum and supplemented by AdditionalGuidance on EEV Disclosures issued by the same body in October 2005. Theprinciples provide a framework intended to improve comparability andtransparency in embedded value reporting across Europe.In order to improve understanding of the Group's financial position andperformance, certain of the information presented in these financial statementsis presented on a segmental basis: the business segments are the same as thosedescribed in Note 4 to the condensed consolidated interim financial statementsprepared on the IFRS basis. S&P was acquired on 20 December 2010: accordingly,the results relating thereto for the year ended 31 December 2010, as reflectedin segmental analysis are for a period of 11 days. Prior year information inrespect of the financial position as at 30 June 2010 and in respect of theresults for the six months then ended is designated as £nil in respect of S&P,while other prior year data relating to S&P are designated as not applicable('n/a').2 Covered business
The Group uses EEV methodology to value the bulk of its long-term business (the 'covered business'), which is written primarily in the UK and Sweden, as follows:
(i) for the UK businesses (comprising the CA and S&P segments), the covered business comprises the business's long-term business being those individual life insurance, pensions and annuity contracts falling under the definition of long-term insurance business for UK regulatory purposes. The operating expenses of the holding company, Chesnara plc, are treated as an integral part of the UK covered business.
(ii) for the Swedish business (comprising the Movestic segment), thecovered business comprises the business's long-term pensions and savingsunit-linked business. Group life and sickness business, including waiver ofpremium and non-linked individual life assurance policies are not included inthe covered business: the result relating to this business is established inaccordance with IFRS principles and is included within 'other operationalresult' within the consolidated summarised income statement.
Under EEV principles no distinction is made between insurance and investment contracts, as there is under IFRS, which accords these classes of contracts different accounting treatments.
3 Methodology(a) Embedded ValueOverview
Shareholders' equity comprises the embedded value of the covered business,together with the net equity of other Group companies, including that of theholding company which is stated after writing down fully the carrying value ofthe covered business.The embedded value of the covered business is the aggregate of the shareholdernet worth ('SNW') and the present value of future shareholder cash flows fromin-force covered business (value of in-force business) less any deduction for(i) the cost of guarantees within S&P, and (ii) the cost of required capital.It is stated after allowance has been made for aggregate risks in the business.SNW comprises those amounts in the long-term business, which are eitherregarded as required capital or which represent surplus assets within that
business.New businessCA and S&PMuch of the covered business is in run-off and is, accordingly, substantiallyclosed to new business. The UK businesses do still sell a small amount of newbusiness but, overall, the contribution from new business to the resultsestablished using EEV methodology is not material. Accordingly, not all ofthose items related to new business values, which are recommended by the EEVguidelines, are reported in this supplementary financial information.
Movestic
New business, in relation to the pensions and savings covered business is takenas all business where contracts are signed and new premiums paid during thereporting period, for both new policies and premium increases on existingbusiness, but excluding standard renewals. New business premium volumes asdisclosed in the KPIs section on page 12 are not consistent with thisdefinition, as they include non-covered business. New business premium volumefor the period which is consistent with the analysis of profit/(loss) in Note 6is as follows: Unaudited Six months ended Year ended
Pensions and savings covered business 30 June 31 December
2011 2010 2010 GBPm GBPm GBPm New business premium income 16.8 14.1 26.9 -------- -------- --------
* Basis: annualised premium plus 1/10 single premium translated into sterling at the 2011 average rate of SEK 10.3 = GBP1.
The new business contribution has been assessed as at the end of the period, using opening assumptions.
Value of in-force business
The cash flows attributable to shareholders arising from in-force business are projected using best estimate assumptions for each component of cash flow.
The present value of the projected cash flows is established by using adiscount rate which reflects the time value of money and the risks associatedwith the cash flows which are not otherwise allowed for. There is a deductionfor the cost of holding the required capital, as set out below.
Participating business
For participating business within the S&P business the Group maintains theassets and liabilities in a separate with-profits fund. In accordance with thePrinciples and Practices of Financial Management, in the first instance allbenefits, which in some cases include guaranteed minimum investment returns,are paid from policyholder assets within the fund. The participating businesseffectively operates as a smoothed unit linked contract subject to minimumbenefit guarantees. The with profits fund contains assets which areattributable to shareholders as well as those attributable to policyholders. Assets attributable to shareholders can only be released from the fund subjectto meeting prudent liabilities in respect of minimum benefits and thefrictional cost of this restriction has been allowed for in determining thevalue of the in-force business.
Fundamentally, the value of the with profits in-force business is driven by the fund management charges levied on the policyholder assets, subject to the effect of minimum benefit guarantees.
Taxation
The present value of the projected cash flows arising from in-force businesstakes into account all tax which is expected to be paid under currentlegislation, including tax which would arise if surplus assets within thecovered business were eventually to be distributed. For the UK businesses, thevalue reported as at 30 June 2011 makes allowance for planned reductions incorporation tax, as announced by the Chancellor in his budget speech on 23March 2011. Values as at 30 June 2010 and 31 December 2010 have not beenrestated to allow for this announcement.
The value of the in-force business has been calculated on an after-tax basis and is grossed up to the pre-tax level for presentation in the income statement. The amount used for the grossing up is the amount of shareholder tax, excluding those payments made on behalf of policyholders, being policyholder tax in the UK businesses and yield tax in Movestic.
Cost of capital
The valuation approach used, requires consideration of 'frictional' costs ofholding shareholder capital: in particular, the cost of tax on investmentreturns and the impact of investment management fees can reduce the face valueof shareholder funds. For CA, the expenses relating to corporate governancefunctions eliminate any taxable investment return in shareholder funds, whileinvestment management fees are not material. The cost of holding the requiredcapital to support the covered business (see 3(b) below) is reflected as adeduction from the value of in-force business.
Financial options and guarantees
CA
The principal financial options and guarantees in CA are (i) guaranteed annuityrates offered on some unit-linked pension contracts and (ii) a guaranteeoffered under Timed Investment Funds that the unit price available at theselected maturity date (or at death, if earlier) will be the highest priceattained over the policy's life. The cost of these options and guarantees hasbeen assessed, in principle, on a market-consistent basis, but, in practice,this has been carried out on approximate bases, which are appropriate to thelevel of materiality of the results.
S&P
The principal financial options and guarantees in S&P are (i) minimum benefitspayable on maturity or retirement for participating business; (ii) the optionto extend the term under the Personal Retirement Account contract on termspotentially beneficial to the policyholder; (iii) the option to increasepremiums under the Personal Retirement Account contract on terms potentiallybeneficial to the policyholder; and (iv) certain insurability options offered.The cost of guaranteeing a minimum investment return on participatingcontracts, being the only material guarantee, has been assessed on a marketconsistent basis. For the remaining options and guarantees the cost has beenassessed on an approximate basis, appropriate to the level of materiality ofthe results.MovesticIn respect of Movestic, some contracts provide policyholders with an investmentguarantee, whereby a minimum rate of return is guaranteed for the first 5 yearsof the policy, at a rate of 3% per annum. The value of the guarantee isignored as it is not material to the results.
Allowance for risk
Allowance for risk within the covered business is made by:
(i) setting required capital levels by reference to the assessment of capital needs made by the directors of the regulated entities within the respective businesses ( the 'Directors');
(ii) setting the risk discount rate, which is applied to the projected cash flowsarising on the in-force business, at a level which includes an appropriate riskmargin (see 3(c) below); and
(iii) explicit allowance for the cost of financial options and guarantees and, where appropriate, for reinsurer default.
Internal group company
EEV Guidance requires that actual and expected profit or loss incurred by aninternal group company on services provided to the covered business should beincluded in allowances for expenses. The covered business in Movestic ispartially managed by an internal group fund management company. Not allrelevant future income and expenses of that company have been included in thecalculation of embedded value. However, the effect is not considered to bematerial.
Consolidation adjustments
Consolidation adjustments have been made to:
(i) eliminate the investment in subsidiaries;
(ii) allocate Group debt finance against the segment to which it refers; and
(iii) allocate corporate expenses as explained in note 4(d) below.
(b) Level of Required Capital
The level of required capital of the covered business reflects the amount ofcapital that the Directors consider necessary and appropriate to manage therespective businesses. In forming their policy the Directors have regard to theminimum statutory requirements and an internal assessment of the market,insurance and operational risks inherent in the underlying products andbusiness operations. The capital requirement resulting from this assessmentrepresents:(i) for CA, 150% of the long-term insurance capital requirement ('LTICR') togetherwith 100% of the resilience capital requirement ('RCR'), as determined by theregulations of the Financial Services Authority in the UK;
(ii) for Movestic, 150% of the regulatory solvency requirement as determined by Finansinspektionen in Sweden.
The boards of the S&P companies have not established a formal internalassessment of the capital requirement for S&P. However, pending thisassessment, a provisional requirement has been set at 175% of the long-terminsurance capital requirement ('LTICR') together with 100% of the resiliencecapital requirement ('RCR') as determined by the regulations of the FinancialServices Authority in the UK.
The required level of regulatory capital is provided as follows:
(i) for the UK businesses, by the retained surplus within the long-term businessfund and by share capital and retained earnings within the shareholder funds ofthe regulated entities; and(ii) for Movestic, by share capital and additional equity contributions from theparent company, net of the accumulated deficit in the regulated entity, thesecomponents together comprising shareholder's equity.
Movestic is reliant, in the short to medium term, on further equity contributions from the parent company, Chesnara plc.
(c) Discount Rates
The discount rates are a combination of the reference rate and a risk margin.The reference rate reflects the time value of money and the risk marginreflects any residual risks inherent in the covered business and makesallowance for the risk that future experience will differ from that assumed. Inorder to reduce the subjectivity when setting the discount rates, the Group hasdecided to adopt a 'bottom up' market-consistent approach to allow explicitlyfor market risk.Using the market-consistent approach, each cash flow is valued at a discountrate consistent with that used in the capital markets: in accordance with this,equity-based cash flows are discounted at an equity discount rate andbond-based cash flows at a bond discount rate. In practice a short-cut methodknown as the 'certainty equivalent' approach has been adopted. This methodassumes that all cash flows earn the reference rate of return and arediscounted at the reference rate.In general, and consistent with the market's approach to valuing financialinstruments for hedging purposes, the reference rate is based on swap yields.These have been taken as mid swap yields available in the market at the end ofthe reporting period.Allowance also needs to be made for non-market risks. For some of these risks,such as mortality and expense risk, it is assumed that the shareholder candiversify away any uncertainty where the impact of variations in experience onfuture cash flows is symmetrical. For those risks that are assumed to bediversifiable, no adjustment has been made. For any remaining risks that areconsidered to be non-diversifiable risks, there is no risk premium observablein the market and, therefore, a constant margin has been added to the riskmargin. The margin added reflects the assumed risks within the businesses andis 50 basis points for CA and S&P (as at 30 June 2010 and as at 31 December2010: 50 basis points) and 70 basis points for Movestic (as at 30 June 2010 andas at 31 December 2010: 70 basis points). This margin is applied to the basicvalue of in-force business prior to the deductions for financial options andguarantees and the cost of required capital.
(d) Analysis of Profit
The contribution to operating profit, which is identified at a level which reflects an assumed longer-term level of investment return, arises from three sources:
(i) new business;
(ii) return from in-force business; and
(iii) return from shareholder net worth.
Additional contributions to profit arise from:
(i) variances between the actual investment return in the period and the assumed long-term investment return; and
(ii) the effect of economic assumption changes.
The contribution from new business represents the value recognised at the endof each period in respect of new business written in that period, afterallowing for the cost of acquiring the business, the cost of establishing therequired technical provisions and after making allowance for the cost ofcapital, calculated on opening assumptions.
The return from in-force business is calculated using closing assumptions and comprises:
(i) the expected return, being the unwind of the discount rates over the period applied to establish the value of in-force business at the beginning of the period;
(ii) variances between the actual experience over the period and the assumptions made to establish the value of business in force at the beginning of the period; and
(iii) the net effect of changes in future assumptions, made prospectively at the endof the period, from those used in establishing the value of business in forceat the beginning of the period, other than changes in economic assumptions.
The contribution from shareholder net worth comprises the actual investment return on residual assets in excess of the required capital.
(e) Assumption Setting
There is a requirement under EEV methodology to use best estimate demographicassumptions and to review these at least annually with the economic assumptionsbeing reviewed at each reporting date. The current practice is detailed below.
Each year the demographic assumptions are reviewed as part of year-end processes and hence were reviewed in December 2010.
The detailed projection assumptions, including mortality, morbidity,persistency and expenses reflect recent operating experience. Allowance is madefor future improvement in annuitant mortality based on experience andexternally published data. Favourable changes in operating experience,particularly in relation to expenses and persistency, are not anticipated untilthe improvement in experience has been observed. Holding company expenses (forthe Chesnara Group such expenses relate largely to listed company functions)are allocated to the CA covered business, except for a relatively small amountof expense, which is assumed to relate to business development functions, toreflect effort expended within the holding company relating to the transactionof life assurance business through the subsidiary companies. Hence the expenseassumptions used for the cash flow projections include the full cost ofservicing this business.The economic assumptions are reviewed and updated at each reporting date basedon underlying investment conditions at the reporting date. The assumed discountrates and inflation rates are consistent with the investment returnassumptions.In addition, the demographic assumptions used at 31 December 2010 areconsidered to be best estimate and, consequently, no further adjustments arerequired. In respect of CA, the assumptions required in the calculation of thevalue of the annuity rate guarantee on pension business have been set equal
tobest-estimate assumptions.(f) Pension Schemes
In Movestic, where the Group participates in a combined defined benefit and defined contribution scheme, future contributions to the scheme are reflected in the value of in-force business.
(g) Financial Reassurance
In respect of Movestic the Group uses financial reinsurance to manage the impact of its new business strain. Whilst this liability is valued at fair value within the IFRS statements, allowing for an option which provides the Group with the right to settle the liability early on beneficial terms, when valuing the shareholder net worth within the EEV it is considered more appropriate to assess this liability at a higher cost, reflecting the likelihood of the option not being utilised.
4 Assumptions(a) Investment ReturnsInvestment returns are assumed to be equal to the reference rate, as covered innote 3(c) above. For linked business, the aggregate return has been determinedby the reference rate less an appropriate allowance for tax. CA S&P Movestic Unaudited Unaudited Unaudited 30 Jun 31 Dec 30 Jun 31 Dec 30 Jun 31 Dec 2011 2010 2010 2011 2010 2010 2011 2010 2010 Investment Return % 3.10 2.90 3.10 5 year 2.55 n/a 2.69 3.26 2.39 3.18 10 year 3.71 n/a 3.70 3.52 2.97 3.61 15 year 4.19 n/a 4.09 3.64 3.23 3.80 20 year 4.29 n/a 4.15 3.67 3.41 3.94 25 year 4.30 n/a 4.12 3.67 3.41 3.94 30 year 4.25 n/a 4.04 3.67 3.41 3.94 Inflation- RPI % 3.00 2.70 2.95 3.50 n/a 3.50 2.00 2.00 2.30
For S&P and Movestic, a full swap curve is used: the rates quoted are presented as indicative spot rates.
For CA business, a single rate is applied for all durations.
(b) Actuarial Assumptions
The demographic assumptions used to determine the value of the in-force business have been set at levels commensurate with the underlying operating experience identified in the periodic actuarial investigations.
(c) Taxation
Projected tax has been determined assuming current tax legislation and ratescontinue unaltered, except where future tax rates or practices have beenannounced. The tax rates for CA and S&P allow for changes in Corporation Tax asannounced by the Chancellor in his budget speech of 23 March 2011, so reflect areduction from the current rate of 26% to 23% in steps of 1%. Values at 30June 2010 and 31 December 2010 have not been restated to allow for thisannouncement.
(d) Expenses
The expense levels are based on internal expense analysis investigations and are appropriately allocated to the new business and policy maintenance functions.
For CA and S&P, these have been determined by reference to:
(i) the outsourcing agreements in place with our third-party business process administrators;
(ii) anticipated revisions to the terms of such agreements as they fall due for renewal; and
(iii) corporate governancecosts relating to the covered business.
For Movestic, these have been determined by reference to:
(i) an expense analysis in which all expenses were allocated to covered and uncovered business, with expenses for the covered business being allocated to acquisition and maintenance activities; and
(ii) expense drivers, being, in relation to acquisition costs, the number ofpolicies sold during the period and, in relation to maintenance expenses, theaverage number of policies in force during the period.
The expense assumptions for CA also include the expected future holding company expenses which will be recharged to the worldwide covered business.
No allowance has been made for future productivity improvements in the expense assumptions.
(e) Discount RateAn explicit constant margin is added to the reference rate shown in (a) aboveto cover any remaining risks that are considered to be non-market,non-diversifiable risks, as there is no risk premium observable in the market.This margin, which is 50 basis points for CA and S&P (CA as at 30 June 2010 and31 December 2010: 50 basis points and S&P as at 31 December 2010: 50 basispoints) and 70 basis points for Movestic (as at 30 June 2010 and 31 December2010: 70 basis points), gives due recognition to the relative sensitivity ofthe value of in-force business to the discount rate for the differentbusinesses, and to the fact that:
a) For CA:
(i) the covered business is substantially closed to new business;
(ii) there is no significant exposure in the with profits business, which is wholly reinsured;
(iii) expense risk is limited as a result of the outsourcing of substantially all policy administration and related functions to third-party business process administrators; and
(iv) for much of the life business the Group has the ability to vary risk charges made to policyholders.
b) For S&P:
(i) the covered business is substantially closed to new business; and
(ii) expense risk is limited as a result of the outsourcing of substantially all policy administration and related functions to third-party business process administrators.
c) For Movestic:
(i) the covered business remains open;
(ii) the in-force business is relatively small;
(iii) reinsurance is used to significantly reduce insurance risks; and
(iv) a number of the risks provide diversification benefits within the Chesnara Group, in relation to reinsurance counterparties, market exposures and policyholder populations.
5 Analysis of shareholders' equity
30 June 2011 (unaudited) Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000Regulated entities Capital 29,651 25,561 12,630 - 67,842required Free 22,623 43,344 11,200 - 77,167surplus -------- -------- -------- -------- -------- Shareholders' net worth of regulated entities 52,274 68,905 23,830 - 145,009 Adjustments to shareholder net worth Deferred - - (54,490) - (54,490)acquisition costs Financial - - (5,229) - (5,229)reinsurance liability Adjustment to provisions on - 2,876 - - 2,876insurance contracts - (13,349) - - (13,349)Unallocated divisible surplus Deferred - (619) - - (619)tax - 5,000 - - 5,000Ineligible surplus Other - - 941 - 941asset / liability adjustments -------- -------- -------- -------- -------- Adjusted 52,274 62,813 (34,948) - 80,139shareholder net worth In-force 74,109 43,981 147,405 - 265,495value of covered business -------- -------- -------- -------- -------- Embedded 126,383 106,794 112,457 - 345,634value of regulated entities Less: amount - (39,387) - - (39,387)financed by borrowings -------- -------- -------- -------- -------- Embedded value of regulated 126,383 67,407 112,457 - 306,247entities attributable to shareholders Net equity of - - 1,391 32,506 33,897other group companies -------- -------- -------- -------- -------- Total 126,383 67,407 113,848 32,506 340,144shareholders' equity During the six months ended 30 June 2011, adjustments to shareholder net worthhave been amended in respect of the treatment of software assets. Whereas, forall reporting periods up to 31 December 2010, software assets were reflectedwithin shareholder net worth at their net written down value on an IFRS basis,subsequent to that date such assets are reflected on a fully amortised basiswithin shareholder net worth and there is a corresponding reduction in theassumption regarding future maintenance expenses in the calculation of thevalue in force. There has been an associated net reduction of GBP0.9m in netembedded value during the six months ended 30 June 2011 as the two adjustmentsdo not fully offset. Prior periods have not been re-stated to reflect this
change. 30 June 2010 (unaudited) Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000Regulated entities Capital 31,712 - 10,608 - 42,320required Free 26,811 - 11,552 - 38,363surplus -------- -------- -------- -------- -------- Shareholders' net worth of regulated entities 58,523 - 22,160 - 80,683 Adjustments to shareholder net worth Deferred - - (44,576) - (44,576)acquisition costs Financial - - (5,232) - (5,232)reinsurance liability Adjustment to provisions on - - - - -insurance contracts Unallocated divisible surplus - - - - - Deferred - - - - -tax Ineligible surplus - - - - -Other - - 6,872 - 6,872asset / liability adjustments -------- -------- -------- -------- -------- Adjusted 58,523 - (20,776) - 37,747shareholder net worth In-force 73,581 - 114,493 - 188,074value of covered business -------- -------- -------- -------- -------- Embedded 132,104 - 93,717 - 225,821value of regulated entities Less: amount - - - - -financed by borrowings -------- -------- -------- -------- -------- Embedded value of regulated 132,104 - 93,717 - 225,821entities attributable to shareholders Net equity of - - (2,194) 31,504 29,310other group companies -------- -------- -------- -------- -------- Total 132,104 - 91,523 31,504 255,131shareholders' equity ======== ======== ======== ======== ======== 31 December 2010 Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000Regulated entities Capital 30,172 26,056 12,390 - 68,618required Free 40,176 43,691 10,931 - 94,798surplus -------- -------- -------- -------- -------- Shareholders' net worth of regulated entities 70,348 69,747 23,321 - 163,416 Adjustments to shareholder net worth Deferred - - (51,243) - (51,243)acquisition costs Financial - - (6,145) - (6,145)reinsurance liability Adjustment to provisions on - 2,773 - - 2,773insurance contracts - (14,930) - - (14,930)Unallocated divisible surplus Deferred - (630) - - (630)tax - 5,000 - - 5,000Ineligible surplus Other - - 8,649 - 8,649asset / liability adjustments -------- -------- -------- -------- -------- Adjusted 70,348 61,960 (25,418) - 106,890shareholder net worth In-force 79,360 41,307 144,748 - 265,415value of covered business -------- -------- -------- -------- -------- Embedded 149,708 103,267 119,330 - 372,305value of regulated entities Less: amount - (39,287) - - (39,287)financed by borrowings -------- -------- -------- -------- -------- Embedded value of regulated 149,708 63,980 119,330 - 333,018entities attributable to shareholders Net equity of - - 1,307 20,311 21,618other group companies -------- -------- -------- -------- -------- Total 149,708 63,980 120,637 20,311 354,636shareholders' equity ======== ======== ======== ======== ========
The movement in the in-force value of covered business comprises:
Six months ended 30 June 2011 CA S&P Movestic Total (unaudited) GBP000 GBP000 GBP000 GBP000 Value at beginning of period 79,360 41,307 144,748 265,415 Amount credited to foreign exchange - - 5,569 5,569 reserve Amount credited/charged to operating (5,251) 2,674 (2,912) (5,489) profit -------- -------- -------- -------- Value at end of period 74,109 43,981 147,405 265,495 ======== ======== ======== ======== Six months ended 30 June 2010 CA S&P Movestic Total (unaudited) GBP000 GBP000 GBP000 GBP000 Value at beginning of period 85,559 - 112,753 198,312 Amount charged to foreign exchange - - (1,193) (1,193) reserve Amount credited/charged to operating (11,978) - 2,933 (9,045) profit -------- -------- -------- -------- Value at end of period 73,581 - 114,493 188,074 ======== ======== ======== ======== Year ended 31 December 2010 CA S&P Movestic Total GBP000 GBP000 GBP000 GBP000 Value at beginning of period 85,559 - 112,753 198,312 Amount arising on acquisition - 42,391 - 42,391 Amount credited to foreign exchange - - 11,913 11,913 reserve Amount credited/charged to operating (6,199) (1,084) 20,082 12,799 profit -------- -------- -------- -------- Value at end of period 79,360 41,307 144,748 265,415 ======== ======== ======== ======== S&P
On 20 December 2010, the Group drew down GBP40m on a bank loan facility, in orderto part fund the acquisition of Save & Prosper Insurance Limited and itssubsidiary, Save & Prosper Pensions Limited (together 'S&P'). This effectivelyrepresented a purchase of part of the underlying value in force of S&P by wayof debt finance and it follows that the embedded value of the UK regulatedentity is not attributable to equity shareholders of the Group to the extent ofthe outstanding balance on the loan account at each balance sheet date. Theloan is repayable in five annual installments on the anniversary of the drawdown date, the funds for the repayment effectively being provided, in part, byway of the realisation of the underlying value of in-force business of thecovered business. There was principal outstanding at the balance sheet date
ofGBP40m.MovesticThe adjusted shareholder net worth of Movestic is that of the regulated entity,which includes also the net worth attributable to the non-covered businesswithin the regulated entity. Accordingly, for Movestic, the embedded value ofregulated entities comprises the embedded value of covered business and thevalue of the non-covered business of the regulated entity, the latter componentbeing valued on an IFRS basis.
6 Summarised statement of changes in equity and analysis of profit/(loss)
(a) Changes in equity may be summarised as:
Six months ended Year ended Statement of changes in equity 30 June 31 December 2011 2010 2010 GBP000 GBP000 GBP000 Shareholders' equity at beginning of period 354,636 262,585 262,585 Effect of modeling adjustments (5,267) 10,363 13,239 -------- -------- --------
Shareholders' equity at beginning of period restated 349,369 272,948
275,824
(Loss)/profit for the period attributable to
shareholders (1,538) (6,416) 59,885 Issue of new shares Share capital - - 523 Share premium - - 22,065 Sale of treasury shares - - 3,162 Foreign exchange reserve movement 4,487 (947) 9,517 Dividends paid (12,174) (10,454) (16,340) -------- -------- -------- Shareholders' equity at end of period 340,144 255,131 354,636 -------- -------- --------
During 2010, Movestic introduced a new system for modelling value-in-force,which provided the capability for (i) more accurately modelling the impact oncommission paid of policies becoming paid-up and (ii) for determining futurefee income on a case-by-case investment mix basis, whereas previously it hadbeen necessary to adopt high-level estimates.
During the six months ended 30 June 2011:
(i) a further improvement was introduced into the Movestic modelling system in respect of projected fee income from investment contracts where the fee is premium based, such contracts hitherto not being differentiated; and
(ii) errors were detected relating to certain parameters and discounting periodsspecified at inception of the new model and the correction of these has givenrise to a reduction in embedded value of GBP7.7m. The amount of GBP(5.3)m reflectedabove is stated net of this amount and prior periods have not been re-stated.The European Embedded value principles issued by the European CFO Forum in May2004, together with supplemental guidance, do not provide specific guidance onhow such errors should be treated and presented.
The effect of the modelling adjustments is classified as an exceptional item in the consolidated income statement and is presented after operating profit.
(b) The profit for the period is analysed as:
Six months ended 30 Other June 2011 (unaudited) Group Activities CA S&P Movestic Total GBP000 GBP000 GBP000 GBP000 GBP000Covered business New business 353 11 2,004 - 2,368contribution Return from in-force business Expected return 2,089 133 2,905 - 5,127 Experience 2,088 (854) (6,703) - (5,469)variances Operating (2,145) - (797) - (2,942)assumption changes Return on shareholder 434 1,314 - - 1,748net worth -------- -------- -------- -------- -------- Operating profit/ (loss) of covered business 2,819 604 (2,591) - 832 Variation from longer-term investment return 947 515 (6,160) - (4,698) Effect of economic (746) 2,887 2,682 - 4,823assumption changes -------- -------- -------- -------- -------- Profit/(loss) on covered business before tax 3,020 4,006 (6,069) - 957 Tax thereon (1,442) (170) - - (1,612) -------- -------- -------- -------- -------- Profit/(loss) on covered business after tax 1,578 3,836 (6,069) - (655) Results of
non-covered business
and of other group companies
Profit/(loss) before tax, and exceptional items - - 24 (629) (605) Tax - - (278) - (278) -------- -------- -------- -------- -------- Profit/(loss) after 1,578 3,836 (6,323) (629) (1,538)tax Non-controlling - - - - -interest -------- -------- -------- -------- -------- Profit/(loss) for the period attributable to shareholders 1,578 3,836 (6,323) (629) (1,538) ======== ======== ======== ======== ======== Six months ended 30 Other June 2010 (unaudited) Group Activities CA S&P Movestic Total GBP000 GBP000 GBP000 GBP000 GBP000Covered business New business 383 - 288 - 671contribution Return from in-force business Expected return 2,688 - 1,529 - 4,217 Experience 7,204 - (5,374) - 1,830variances Operating (853) - (11,074) - (11,927)assumption changes Return on shareholder 530 - - - 530net worth -------- -------- -------- -------- -------- Operating profit/ (loss) of covered business 9,952 - (14,631) - (4,679) Variation from longer-term investment return 4,069 - 4,100 - 8,169 Effect of economic (8,918) - 3,084 - (5,834)assumption changes -------- -------- -------- -------- -------- Profit/(loss) on covered business before tax 5,103 - (7,447) - (2,344) Tax thereon (2,428) - - - (2,428) -------- -------- -------- -------- -------- Profit/(loss) on covered business after tax 2,675 - (7,447) - (4,772) Results of
non-covered business
and of other group companies Loss before tax, and - - (1,900) (762) (2,662)exceptional item Exceptional profit recognised on - business - - 989 - 989
combination of Aspis Tax - - 29 - 29 -------- -------- -------- -------- -------- Profit/(loss) after 2,675 - (8,329) (762) (6,416)tax Non-controlling - - - - -interest -------- -------- -------- -------- -------- Profit/(loss) for the period attributable to shareholders 2,675 - (8,329) (762) (6,416) ======== ======== ======== ======== ======== Year ended 31 Other December 2010 Group Activities CA S&P Movestic Total GBP000 GBP000 GBP000 GBP000 GBP000 Covered business New business 685 - 2,057 - 2,742contribution Return from in-force business Expected return 5,203 6 6,207 - 11,416 Experience 11,315 101 (7,942) - 3,474variances Operating (1,985) - (10,142) - (12,127)assumption changes Return on shareholder 736 123 - - 859net worth -------- -------- -------- -------- -------- Operating profit/ (loss) of covered business 15,954 230 (9,820) - 6,364 Variation from longer-term investment return 14,880 - 12,061 - 26,941 Effect of economic (7,248) (1,513) 4,308 - (4,453)assumption changes -------- -------- -------- -------- -------- Profit/(loss) on covered business before tax 23,586 (1,283) 6,549 - 28,852 Tax thereon (4,695) 359 - - (4,336) -------- -------- -------- -------- -------- Profit/(loss) on covered business after tax 18,891 (924) 6,549 - 24,516 Results of
non-covered business
and of other group companies Loss before tax, and - - (3,674) (2,440) (6,114)exceptional items Exceptional profit recognised on - business - - 376 - 376
combination of Aspis
- business - - - 40,667 40,667
combination of S&P Tax - - 177 145 322 -------- -------- -------- -------- -------- Profit/(loss) after 18,891 (924) 3,428 38,372 59,767tax Non-controlling - - 118 - 118interest -------- -------- -------- -------- -------- Profit/(loss) for the period attributable to shareholders 18,891 (924) 3,546 38,372 59,885 ======== ======== ======== ======== ======== The exceptional profit recognised on business combinations relates to theacquisition by Movestic of the business of Aspis Forsakringar Liv AB ('Aspis')and the acquisition by Chesnara plc of Save & Prosper Insurance Limited and itssubsidiary company Save & Prosper Pensions Limited (together 'S&P').The results of the non-covered business and of other group companies before taxand before exceptional item are presented as 'other operational result' in theconsolidated income statement. For CA, the result of the covered businessincludes the expenses of the holding company, with an equal and oppositeadjustment to the result of the non-covered business and of other groupcompanies.
7 Sensitivities to alternative assumptions
The following tables show the sensitivity of the embedded value as reported at30 June 2011, and of the new business contribution of Movestic for the sixmonths then ended, to variations in the assumptions adopted in the calculationof the embedded value. Sensitivity analysis is not provided in respect of thenew business contribution of CA and S&P for the six months ended 30 June 2011as the reported level of new business contribution is not considered to bematerial (see Note 3(a) above). New Business Embedded Value Contribution CA S&P Movestic Movestic GBPm GBPm GBPm GBPm Published value as at 30 June 2011 126.4 67.4 113.8 2.0 -------- -------- -------- --------
Changes in embedded value/new
business contribution arising from:
Economic sensitivities 100 basis point increase in yield (4.5) 10.8 (0.6) (0.1)curve 100 basis point reduction in yield 2.4 (16.6) 0.6 0.1curve
10% decrease in equity and property (3.3) (8.5) (9.7)
-values Operating sensitivities 10% decrease in maintenance expenses 2.5 4.7 5.9 0.3 10% decrease in lapse rates 2.3 (1.5) 9.7 0.7
5% decrease in mortality/morbidity
rates Assurances 1.5 0.6 0.4 - Annuities (1.7) (0.3) - -
Reduction in the required capital to 0.6 1.5 0.1
-statutory minimum
The key assumption changes represented by each of these sensitivities are as follows:
Economic sensitivities
(i) 100 basis point increase in the yield curve: The reference rate is increased by 1% and the rate of future inflation has also been increased by 1% so that real yields remain constant;
(ii) 100 basis point reduction in the yield curve: The reference rate is reduced by 1% and the rate of future inflation has also been reduced by 1% so that real yields remain constant; and
(iii) 10% decrease in the equity and property values. This gives rise to a situation where, for example, a Managed Fund unit liability with a 60% equity holding would reduce by 6% in value.
Operating sensitivities
(i) 10% decrease in maintenance expenses, giving rise to, for example, a base assumption of £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 baseassumption of 95% of the parameters in a selected mortality/morbidity tablereducing to 90.25% of the parameters in the same table, assuming no changes aremade to policyholder charges or any other management actions;(iv) the sensitivity to the reduction in the required capital to the statutoryminimum shows the effect of reducing the required capital from that defined inNote 3(b) above to the minimum requirement prescribed by regulation; and
(v) in each sensitivity calculation all other assumptions remain unchanged except where they are directly affected by the revised economic conditions: for example, as stated, changes in interest rates will directly affect the reference rate.
8 Reconciliation of shareholders' equity on the IFRS basis to shareholders'equity on the EEV basis Other Group Unaudited 30 June CA S&P Movestic Activities Total 2011 GBP000 GBP000 GBP000 GBP000 GBP000 Shareholders' equity 71,177 39,320 53,271 32,506 196,274 on the IFRS basis Adjustments Deferred acquisition costs Investment contracts (5,894) - (10,562) - (16,456) Deferred income 10,282 - - - 10,282 Adjustment to provisions on investment contracts, net of amounts deposited with reinsurers (10,521) - - - (10,521) Adjustments to provisions on insurance contracts, (93) 2,118 - - 2,025 net of reinsurers' share Adjustments to provisions on unallocated - (13,349) - - (13,349) divisible surplus Acquired in-force (14,559) (6,344) (63,029) - (83,932) value Acquired value of - - (1,885) - (1,885) customer relationships Amortisation of - - (7,405) - (7,405) software asset Adjustment to - - (6,400) - (6,400) borrowings Deferred tax 1,882 1,681 2,453 - 6,016 -------- -------- -------- -------- -------- Shareholder net 52,274 23,426 (33,557) 32,506 74,649 Value of in-force 74,109 43,981 147,405 - 265,495 -------- -------- -------- -------- -------- Shareholders' equity 126,383 67,407 113,848 32,506 340,144 on the EEV basis ======== ======== ======== ======== ======== Shareholder net worth comprises: Shareholder net 52,274 62,813 (34,948) - 80,139 worth in regulated entities Shareholders' net equity in other group companies - - 1,391 32,506 33,897 Debt finance - (39,387) - - (39,387) -------- -------- -------- -------- -------- Total 52,274 23,426 (33,557) 32,506 74,649 ======== ======== ======== ======== ======== Other Group Unaudited 30 June CA S&P Movestic Activities Total 2010 GBP000 GBP000 GBP000 GBP000 GBP000 Shareholders' equity 81,904 - 43,388 31,504 156,796 on the IFRS basis Adjustments Deferred acquisition costs Investment contracts (6,656) - (3,121) - (9,777) Deferred income 11,465 - - - 11,465 Adjustment to provisions on investment contracts, net of amounts deposited with reinsurers (14,009) - - - (14,009) Adjustments to provisions on insurance contracts, (78) - - - (78) net of reinsurers' share Adjustments to provisions on unallocated divisible surplus - - - - - Acquired in-force (16,909) - (57,408) - (74,317) value Acquired value of - - (2,082) - (2,082) customer relationships Amortisation of - - - - - software asset Adjustment to - - (6,106) - (6,106) borrowings Deferred tax 2,806 - 2,359 - 5,165 -------- -------- -------- -------- -------- Shareholder net 58,523 - (22,970) 31,504 67,057 worth Value of in-force 73,581 - 114,493 - 188,074 business -------- -------- -------- -------- -------- Shareholders' equity 132,104 - 91,523 31,504 255,131 on the EEV basis ======== ======== ======== ======== ======== Shareholder net worth comprises: Shareholder net 58,523 - (20,776) - 37,747 worth in regulated entities Shareholders' net equity in other group companies - - (2,194) 31,504 29,310 Debt finance - - - - - Total 58,523 - (22,970) 31,504 67,057 ======== ======== ======== ======== ======== Other Group CA S&P Movestic Activities Total GBP000 GBP000 GBP000 GBP000 GBP000 31 December 2010 Shareholders' equity 90,301 39,858 52,799 20,311 203,269 on the IFRS basis Adjustments Deferred acquisition costs Investment contracts (6,265) - (7,298) - (13,563) Deferred income 10,885 - - - 10,885 Adjustment to provisions on investment contracts, net of amounts deposited with reinsurers (10,739) 1,997 - - (8,742) Adjustments to provisions on insurance contracts, (180) - - - (180) net of reinsurers' share Adjustments to provisions on unallocated - (14,847) - - (14,847) divisible surplus Acquired in-force (15,563) (6,610) (62,866) - (85,039) value Acquired value of - - (2,049) - (2,049) customer relationships Amortisation of - - - - - software asset Adjustment to - - (7,454) - (7,454) borrowings Deferred tax 1,909 2,275 2,757 - 6,941 -------- -------- -------- -------- -------- Shareholder net 70,348 22,673 (24,111) 20,311 89,221 worth Value of in-force 79,360 41,307 144,748 - 265,415 business -------- -------- -------- -------- -------- Shareholders' equity 149,708 63,980 120,637 20,311 354,636 on the EEV basis ======== ======== ======== ======== ======== Shareholder net worth comprises: Shareholder net 70,348 61,960 (25,418) - 106,890 worth in regulated entities Shareholders' net equity in other group companies - - 1,307 20,311 21,618 Debt finance - (39,287) - - (39,287) -------- -------- -------- -------- -------- Total 70,348 22,673 (24,111) 20,311 89,221 ======== ======== ======== ======== ========
9 Foreign exchange translation reserve
A foreign exchange translation reserve arises on the translation of thefinancial statements of Movestic, the functional currency of which is theSwedish Krona, into pounds sterling, which is the presentational currency ofthe Group financial statements. Items in the consolidated income statement aretranslated at the average exchange rate of SEK10.3046= GBP1 ruling in the sixmonths ended 30 June 2011(six months ended 30 June 2010 SEK11.2608 = GBP1 andyear ended 31 December 2010: SEK11.1249 = GBP1), while all items in the balancesheet are stated at the closing rates ruling at the reported balance sheetdate, being SEK10.1320 = £1 at 30 June 2011 (SEK11.6438 = GBP1 at 30 June 2010and SEK10.5250 = GBP1 at 31 December 2010). The differences arising ontranslation using this methodology are recognised directly in shareholders'equity within the foreign exchange translation reserve.The reported embedded value is sensitive to movements in the SEK:£ exchangerate. Had the exchange rate as at 30 June 2011 been 10% higher at SEK11.1452 =GBP1, then the reported embedded value of GBP340.1m as at 30 June 2011 would havebeen reported as GBP329.8m.
XLONRelated Shares:
Chesnara