Annual Financial Report

Chesnaraplc (the 'Company')

 

ANNUAL FINANCIAL REPORT

*   Financial Statements for the year ended 31 December 2010

*   Notice of Annual General Meeting

*   Form of Proxy for the Annual General Meeting

Copies of the above documents which were issued to shareholders on 11 April
2011 have been submitted to the National Storage Mechanism and are available
for inspection at: www.Hemscott.com/nsm.do. The Company's Financial Statements
and Notice of Annual General Meeting may also be found on its website at
www.chesnara.co.uk.

 

The Company announced its preliminary results for the year ended 31 December
2010 on 31 March 2011 which included audited financial statements and a fair
review of the business. The Company today provides the following additional
regulated information, included within its Financial Statements, in full
unedited text as required to be made public under the disclosure and
transparency rules.

 

1   DIRECTORS' RESPONSIBILITY STATEMENT IN RESPECT OF THE FINANCIAL STATEMENTS.

The directors are responsible for preparing the Annual Report and the financial
statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each
financial year.  Under that law the directors are required to prepare the group
financial statements in accordance with International Financial Reporting
Standards (IFRSs) as adopted by the European Union and Article 4 of the IAS
Regulation and have also chosen to prepare the parent company financial
statements under IFRSs as adopted by the EU.  Under company law the directors
must not approve the accounts unless they are satisfied that they give a true
and fair view of the state of affairs of the company and of the profit or loss
of the company for that period.  In preparing these financial statements,
International Accounting Standard 1 requires that directors:

-  properly select and apply accounting policies;

-  present information, including accounting policies, in a manner that provides
   relevant, reliable, comparable and understandable information;

-  provide additional disclosures when compliance with the specific requirements
   in IFRSs are insufficient to enable users to understand the impact of
   particular transactions, other events and conditions on the entity's financial
   position and financial performance; and

-  make an assessment of the company's ability to continue as a going concern.

The directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the company's transactions and disclose with
reasonable accuracy at any time the financial position of the company and
enable them to ensure that the financial statements comply with the Companies
Act 2006.  They are also responsible for safeguarding the assets of the company
and hence for taking reasonable steps for the prevention and detection of fraud
and other irregularities.

The directors are responsible for the maintenance and integrity of the
corporate and financial information included on the company's website. 
Legislation in the United Kingdom governing the preparation and dissemination
of financial statements may differ from legislation in other jurisdictions.

Responsibility statement

We confirm that to the best of our knowledge:

-  the financial statements, prepared in accordance with International Financial
   Reporting Standards, give a true and fair view of the assets, liabilities,
   financial position and profit or loss of the company and the undertakings
   included in the consolidation taken as a whole; and

-  the management report, which is incorporated into the directors' report,
   includes a fair review of the development and performance of the business and
   the position of the company and the undertakings included in the consolidation
   taken as a whole, together with a description of the principal risks and
   uncertainties that they face.

By order of the Board

Chairman                                               Chief Executive Officer         
Peter Mason                                               Graham Kettleborough          
30 March 2011                                                    30 March 2011

2          PRINCIPAL RISKS AND UNCERTAINTIES

Risk and uncertainties are assessed by reference to the extent to which they
threaten, or potentially threaten, the ability of the Group to meet its core
strategic objectives. These currently centre on the intention of the Group to
maintain a reliable and progressive dividend policy. 

The specific principal risks and uncertainties subsisting within the Group are
determined by the fact that:

 

(i)  the Group's core operations centre on the run-off of closed life and pensions
     businesses in the UK;

(ii) notwithstanding this, the Group has a material segment, which comprises an open
     life and pensions business operating in a foreign jurisdiction; and

(iii)these businesses are subject to local regulation, which significantly
     influences the amount of capital which they are required to retain and which
     may otherwise constrain the conduct of business.

The following identifies the principal risks and uncertainties, together with a
description of their actual or potential impact and of the way in which the
Group seeks to control them. Insurance and financial risks relating to (i)
insurance and investment contracts provided by the Group to policyholders and
to investors and to (ii) Group-level investment activities are set out in Notes
5 and 6 to the IFRS financial statements, where the information is provided on
a segmented basis. The analysis below includes a re-presentation of the more
significant risks identified therein on a generic basis.
 
 Risk                   Impact                        Control               
                                                                        
                                                                               
Adverse        The Group provides benefits to  The Group uses underwriting     
mortality/     policyholders in the event of   techniques, reinsurance         
morbidity/     death or illness and to         programmes and limits on levels 
longevity      annuitants for their lifetime.  of accepted risk on individuals,
experience     Premiums are partly fixed by    in order to control the overall 
               reference to mortality/         level of risk. The Group has    
               morbidity tables. To the extent also retained the right on      
               that actual mortality or        certain contracts to vary       
               morbidity rates vary from the   premium rates in the light of   
               assumptions underlying product  actual experience.              
               pricing, so more or less profit Notwithstanding this, the Group 
               will accrue to 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    The Group's exposure to         
persistency    that 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          which currently continue to     
               investing new sums, or          comprise the larger part of the 
               otherwise exercise their rights Group's business, persistency   
               to discontinue the contracts.   rates tend to improve over time 
               Persistency rates significantly due to policyholder/investor    
               lower than those assumed will   inertia. The Group otherwise    
               lead to reduced Group           promotes retention through (i)  
               profitability in the medium to  active review of the management 
               long term.                      of, and returns arising on,     
                                               policyholder investment funds   
                                               and (ii) maintaining customer   
                                               retention units.                

                                                                               
Expense        For the closed UK life and      For the UK businesses, the Group
overruns       pensions businesses, the Group  pursues a strategy of           
               is exposed to the impact of     outsourcing  functions, to the  
               fixed and semi-fixed expenses,  fullest extent possible, to     
               in conjunction with a           specialist outsourced services  
               diminishing policy base, on     providers. It seeks to do this  
               profitability. For the Swedish  on pricing terms which recognise
               open life and pensions          the diminishing policy base and 
               business, the Group is exposed  which, in respect of contract   
               to the impact of expense levels renewal, seeks to maintain      
               varying adversely from those    competitive tension between     
               assumed in product pricing.     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.              
                                                                               
                                                                               
                                                                               
Significant    A significant part of the       Notwithstanding that individual 
and prolonged  Group's income and, therefore,  fund mandates may give rise to  
equity and     overall profitability derives   diversification of risk and     
property       from fees received in respect   that, within those funds,       
market falls   of the management of            hedging techniques are used     
               policyholder and investor       where appropriate, there is     
               funds. Fee levels are generally clearly a significant residual  
               related to the value of funds   risk to adverse global equity   
               under management and, as the    market conditions. The Group has
               managed investment funds        taken the explicit decision not 
               overall comprise a significant  to mitigate the residual risk,  
               equity and property content,    by way of hedging, because of   
               the Group is particularly       the significant cost relative to
               exposed to the impact of        the risk: it does, however,     
               significant and prolonged       periodically review the costs of
               equity market falls.            hedging.                        
 
                                                                               
Adverse        The Group maintains portfolios  The Group maintains rigorous    
movements in   of fixed interest securities    matching programmes to ensure   
yields on      (i) in order to match its       that exposure to mismatch loss  
fixed interest insurance contract liabilities, is minimised: there may be some 
securities     in terms of yield and cash flow reversal of the extent of loss  
               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    compared with the residual risk.
               that sharp and discrete fixed   The proportion of fixed interest
               interest yield movements may    securities in policyholder and  
               not be associated fully and     investor managed funds is       
               immediately with corresponding  significantly less than the     
               changes in actuarial valuation  proportion of equities.         
               interest rates.                                                 
          
                                                                               
Adverse        The Swedish business, whose     The Group actively monitors     
sterling:      functional and reporting        exchange rate movements and the 
Swedish Krona  currency is the Swedish Krona,  cost of hedging the currency    
exchange rate  is a material part of the       risk on cash flows when         
movements      Group. Exposure to adverse      appropriate. The Group does not 
               sterling/Swedish Krona exchange seek to hedge the risk of       
               rate movements arises from      adverse currency movements on   
               actual planned cash flows       its reported results.           
               between the 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         The Group specifies rigorous    
outsourced     pensions businesses are heavily service level measures and      
service        dependent on outsourced service management information flows    
providers to   providers to fulfill a          under its contractual           
fulfil         significant number of their     arrangements. Following from    
contractual    core functions. In the event of this, the Group maintains       
obligations    failure by either or both       continuing and close oversight  
               service providers to fulfill    of the performance of both      
               their contractual obligations,  service providers. Under the    
               in whole or in part, to the     terms of the contractual        
               requisite standards specified   arrangements the Group may      
               in the contracts, the Group may impose penalties and/ or        
               suffer loss as its functions    exercise step-in rights in the  
               degrade.                        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   fullest extent possible. It     
               and pensions operations, it     periodically reviews and        
               relies on a small, professional assesses staffing levels, and,  
               team. There is, therefore,      where the circumstances of the  
               inevitably a concentration of   Group justify and permit, will  
               experience and knowhow within   enhance resource to ensure that 
               particular key individuals and  knowhow and expertise is more   
               the Group is, accordingly,      widely embedded.                
               exposed to the sudden loss of                                   
               the services of these           To minimise the risk of         
               individuals.                    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 and jurisdictions which are         and addresses the related       
legal changes  currently subject to            uncertainties by assessing      
               significant change arising from potential outcomes and by taking
               regulatory and legal            appropriate action to minimise  
               requirements. These may either  the impact of adverse           
               be of a local nature, or of a   circumstances. It monitors      
               wider nature, following from    industry comment and takes      
               EU-based regulation and law.    specialist professional advice, 
               Significant issues which have   where necessary.                
               arisen and where there is                                       
               currently uncertainty as to     It is in the nature of these    
               their full impact on the Group  issues, however, particularly in
               include:                        those areas where specific      
                                               regulatory rules and/or law have
               (i) review of the UK tax regime not yet been framed and         
               in respect of life assurance    implemented, that there remains 
               business;                       significant uncertainty as to   
                                               their impact on the Group's     
               (ii)review of the tax treatment longer-term profitability and on
               of  fees rebated by investment  the capacity and capability of  
               fund managers to Movestic;      its life and pensions           
                                               subsidiaries to distribute      
               (iii) the implementation of     regulatory determined surpluses.
               Solvency II requirements;                                                
                                                                               
               (iv)the implications of a ruling                                    
               made by the ECJ, applicable to                                  
               insurance companies, in                                         
               connection with gender; and                                     
                                                                               
               (v) 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.  
                                                                   
                                                                               
Further information in connection with item (iv) is provided in the Post
Balance Sheet Event section below.                                    
                                                                               

Significant changes in the nature and incidence of risks and uncertainties
arising during the twelve months ended 31 December 2010 related to:

(i)  review by HMRC of the UK tax regime in respect of life assurance business;

and

(ii) the implications of a ruling made by the ECJ, applicable to insurance companies
     in connection with gender

as set out under "adverse regulatory and legal changes" above.

Further, in view of continuing economic uncertainty there is continuing
uncertainty as to the future direction of investment markets and attention is
drawn particularly to the sensitivity of the reported embedded value of the
Group to the economic sensitivities set out in Note 7 to the European Embedded
Value Basis Supplementary Information in the Financial Statements.
 

 3    ACCOUNTING ESTIMATES AND JUDGEMENTS

The Group makes estimates and assumptions that affect the reported amounts of
assets and liabilities and also makes critical accounting judgements in
applying the Group's accounting policies. Such estimates and judgements are
continually evaluated and are based on historical experience and other factors,
including expectations of future events that are believed to be reasonable. The
more critical areas, where accounting estimates and judgements are made, are
set out below. Each item identifies whether it relates to the UK or Swedish
businesses or both, and where necessary it identifies the UK operating segments
(jointly "UK business"), being Countrywide Assured Life Holdings Limited
('CA') and Save & Prosper Insurance Limited ('S&P'). 

(a) Classification of long-term contracts (UK and Swedish businesses)

The Group has exercised judgement in its classification of long-term business
as between insurance and investment contracts, which fall to be accounted for
differently in accordance with the policies set out in Note 2 to the IFRS
Financial Statements, "Significant Accounting Policies". Insurance contracts
are those where significant risk is transferred to the Group under the contract
and judgement is applied in assessing whether the risk so transferred is
significant, especially with regard to pensions contracts, which are
predominantly, but not exclusively, created for investment purposes.
 

(b) Acquired value of in-force business (UK and Swedish businesses)

The Group applies accounting estimates and judgements in determining the fair
value, amortisation and recoverability of acquired in-force business relating
to insurance and investment contracts.  In the initial determination of the
acquired value of in-force business, the Group uses actuarial models to
determine the expected net cash flows (on a discounted basis) of the policies
acquired.  The key assumptions applied in the models are driven by the expected
behaviour of policyholders on termination rates, expenses of management and age
of individual contract holders as well as global estimates of investment
growth, based on recent experience at the date of acquisition. The
assumptions applied within the models are considered against historical
experience of each of the relevant factors.  No amendments are made for any
changes that may arise as a result of changes in operational procedures or
customer interaction as a result of ownership by Chesnara.

The acquired value of in-force business has been amortised on a basis that
reflects the expected profit stream arising from the business acquired at the
date of acquisition.  Acquired value of in-force business is tested for
recoverability by reference to expected future income and expense levels.

During the year ended 31 December 2010 the amortisation profile of the acquired
value of in-force business associated with the acquisition of Movestic, the
Swedish business, as referred to in Note 7(iii) to the IFRS Financial
Statements, was refined to better reflect the matching of the consumption of
this asset with the expected emergence of profit. The impact of this refinement
is to reduce the amortisation charge in the Group financial statements by £2.7m
during the year ended 31 December 2010.

As at 31 December 2010, the carrying value of acquired in-force business, net
of amortisation, was £21.1m in respect of CA (as at 31 December 2009: £24.8m),
£9.1m in respect of S&P (as at 31 December 2009: £nil) and £62.9m in respect of
Movestic (as at 31 December 2009: £61.7m).

(c) Deferred acquisition costs and deferred income - investment contracts (CA
and Swedish business)

The Group applies judgement in deciding the amount of direct costs that are
incurred in acquiring the rights to provide investment management services in
connection with the issue of investment contracts. Judgement is also applied in
establishing the amortisation of the assets representing these contractual
rights and the recognition of initial fees received in respect of these
contracts. The assets are amortised over the expected lifetime of the
investment management service contracts and deferred income, where applicable,
is amortised over the expected period over which it is earned. Estimates are
applied in determining the lifetime of the investment management service
contracts and in determining the recoverability of the contractual rights
assets by reference to expected future income and expense levels. This test for
recoverability is performed using best estimates of future cash flows, using a
market consistent estimate of future investment returns.

As at 31 December 2010, the carrying values of deferred acquisition costs, net
of amortisation, and of deferred income, in respect of CA, were £6.7m and £
11.6m respectively (as at 31 December 2009: £7.7m and £13.1m respectively). An
increase in the estimate of the lifetime of the investment management service
contract by one year in respect of deferred acquisition costs would have
increased profit before tax for the year ended 31 December 2010 by £0.1m and
shareholders' equity as at 31 December 2010 by £0.1m and an increase of one
year in the length of the amortisation period in respect of deferred income
would have reduced profit before tax for the year ended 31 December 2010 by £
0.1m and shareholders' equity as at 31 December 2010 by £0.1m.

As at 31 December 2010, the carrying values of deferred acquisition costs, net
of amortisation, in respect of the Swedish business, was £7.9m (as at 31
December 2009: £1.6m). An increase in the length of the amortisation period by
one year would have increased profit before tax for the year ended 31 December
2010 by £2.4m and shareholders' equity as at 31 December 2010 by £2.4m.

(d) Fair value of financial assets and unit-linked investments (UK and Swedish
businesses)

Fair value measurement has been adopted to reduce volatility in reported
earnings in the income statement as the liabilities so determined are measured
in a way which is consistent with the fair value of the underlying invested
financial assets.

Fair value is the amount for which an asset could be exchanged, or a liability
settled, between willing, knowledgeable parties in an arm's length transaction.
Fair values are determined by reference to observable market prices where
available and reliable.

 (e) Estimates of future benefits payments arising from long-term insurance
contracts (UK business)

The Group makes estimates of the expected number of deaths for each of the
years that it is exposed to risk. These estimates are based on either standard
mortality tables or reinsurers' rate tables as appropriate, adjusted to reflect
the Group's own experience. For contracts without fixed terms the Group has
assumed that it will be able to increase charges to policyholders in future
years, in line with emerging mortality experience.

The Group has offered guaranteed annuity options within certain contracts.
Estimates have been made of the number of contract holders who will exercise
these options, in order to measure their value. Changes in investment
conditions could result in significantly more contract holders exercising their
options than the Group has assumed in determining the liabilities arising from
these contracts.

The Group makes estimates of future deaths, voluntary contract terminations,
investment returns and administration expenses at the inception of long-term
insurance contracts with fixed and guaranteed terms. These estimates, which are
reconsidered annually, form the assumptions used to calculate the liabilities
arising from these contracts.

The assumptions used to establish insurance contract liabilities and
appropriate sensitivities relating to variations in critical assumptions are
disclosed in Note 33 to the IFRS Financial Statements.

(f)    Liability for future redress in respect of mortgage endowment misselling
complaints (UK business)

Included within insurance contract liabilities is a liability in respect of
amounts anticipated to be payable as redress for upheld mortgage endowment
misselling complaints. In establishing this liability the Group makes estimates
about the number of future upheld complaints (taking into account the number of
complaints received, the number of complaints time-barred and the number of
complaints which are admitted) and about the average cost of redress per upheld
complaint. These estimates are determined, taking into account historical
experience and investment return projections. Variations in these estimates
could result in higher or lower than expected numbers of upheld complaints and
higher or lower than expected amounts of redress per upheld complaint. The
impact of variations in these assumptions is disclosed in Note 33 to the IFRS
Financial Statements.

As at 31 December 2010, the liability for future redress in respect of mortgage
endowment misselling complaints was £2.4m (as at 31 December 2009: £2.9m) for
CA and as at 31 December 2010 £0.1m (as at 31 December 2009: £nil) for S&P.

(g)   Fair value of investment contracts - guaranteed income and guaranteed
growth bonds (CA)

The fair value of investment contract liabilities, in respect of guaranteed
income and guaranteed growth bonds, (which are fully described in Note 34 to
the IFRS Financial Statements) is established using a valuation technique,
which approximates the following methodology:

(i)   The fair value of the contract, measured at inception, is the purchase price
      paid for it. This price implies a retail market rate of interest prevailing at
      the inception of the contract, which is used to equate the contractual cash
      flows payable under the bond to the purchase price, including an allowance for
      expenses incurred in managing the contract; and

(ii)  Subsequent measurement of the liability at fair value reflects the impact of
      changes in retail market interest rates for these products: this is
      accomplished in practice by tracking movements in the less-than- 5-year gilt
      index as the bonds are predominantly less than 5 years in term.

Fair value measurement has been adopted to reduce volatility in reported
earnings in the income statement as the liabilities so determined are measured
in a way which is consistent with the fair value of the underlying invested
financial assets.

As at 31 December 2010, the carrying value of investment contract liabilities
in respect of guaranteed income and guaranteed growth bonds was £9.3m (as at 31
December 2009: £22.9m).

(h)   Contracts which contain discretionary participation features (S&P)

All S&P with-profits contracts contain a discretionary participation feature
which entitles the holder to receive, as a supplement to guaranteed
benefits, additional benefits or bonuses:

-  that may be a significant portion of the total contractual benefits;

-  whose amount or timing is contractually at the discretion of the Group; and

-  that are contractually based on realised and/or unrealised investment returns
   on a specified pool of assets held by the Group.

The terms and conditions of these contracts, together with UK regulations, set
out the bases for the determination of the amounts on which the additional
discretionary benefits are based and within which the Group may exercise its
discretion as to the quantum and timing of their payment to contract holders.

As at 31 December 2010, the carrying value of insurance contract liabilities
which contain discretionary participation features was £359.2m (31 December
2009: £nil)

(i)    Insurance claim reserves (Swedish business)

Provisions are determined by management based on experience of claims settled
and on statistical models which require certain assumptions to be made
regarding the timing, incidence and amount of claims. In order to calculate the
total provision required, the historical development of claims is analysed
using statistical methodology to extrapolate, within acceptable parameters, the
value of outstanding claims.

For more recent underwriting years the provisions will make more use of
techniques that incorporate expected loss ratios. As underwriting years mature,
the reserves are increasingly driven by methods based on actual claims
experience. The data used for statistical modelling is internally generated.
Actual claims experience may differ from the historical pattern on which the
estimate is based and the cost of individual claims may exceed that assumed.

Liabilities carried in respect of waiver of premium and income protection
policies are sensitive to the Group's assessment of the length of period in
which benefits will be paid to policyholders (which can be significant).
Estimates are made based on the sex, age and occupation of the claimant as well
as the length of time the claimant has been claiming on the policy.

As at 31 December 2010, the carrying value of the insurance claim reserves,
gross of reinsurance, was £63.7m (as at 31 December 2009: £32.4m).The key
sensitivities in respect of insurance claim reserves are considered in Note 5
to the IFRS Financial Statements.

(j)    Insurance claim reserves - reinsurance recoverable (Swedish business)

A significant proportion of the insurance claims arising within the Swedish
business are ceded to reinsurers. In preparing the financial statements the
Directors have made an assessment as to whether claims ceded to reinsurers are
recoverable. As at 31 December 2010, such claims ceded to reinsurers and
reflected on the balance sheet were £41.8m (31 December 2009: £27.3m). The
application of a 10 per cent bad debt provision on the reinsurance balance
would reduce 2010 profit before tax by £4.5m and shareholders' equity by £3.3m.

(k)   Accounting for pension plans (Swedish business)

The Group participates in a defined benefit pension scheme on behalf of its
Swedish employees. The scheme is a multi-employer plan to which a number of
third party employers also contribute. The underlying assets and liabilities of
the scheme are pooled and are not allocated between the contributing employers.
As a result, information is not available to account for the scheme as a
defined benefit scheme and the Group has accounted for the scheme as a defined
contribution scheme.

(l)    Income tax expense (Swedish business)

Commissions payable and receivable from fund managers in respect of the Swedish
business's unit-linked business have been included as part of the unit-linked
funds and subject to fund yield tax.

Management is aware that the Swedish tax authority has questioned, in respect
of other unit-linked businesses, whether such commissions receivable from fund
managers should be part of the Group's income and be subject to corporation tax
of 26.3 per cent (being the Swedish corporation tax for the year 2010).
Management consider that the current accounting treatment remains appropriate.

4    POST BALANCE SHEET EVENT

 ECJ ruling

It has been historical practice for insurance companies to consider the gender
of the policyholder when pricing contracts as evidence has suggested that
gender is a key determinant of insurance risk.

On 1 March 2011 the ECJ ruled that a EU directive (which had been subsequently
enacted into EU law), which allowed for gender to be a factor when pricing
insurance risk, was invalid and contravened other EU law.

The ruling means that from 21 December 2012 it will not be possible to continue
using gender as a basis of pricing.  However, it is not clear from the ruling
whether this will apply only to new contracts written at that date or to all
contracts in-force at that date.  This will not be known with certainty until
the judgement is enacted into UK and Swedish law.

On initial assessment, the Group has assessed that the most likely impact will
be in respect of new business to be written from a future date, not yet known,
but no later than 21 December 2012. For the UK business this will primarily
impact annuity contracts written for vesting pensions, whilst for the Swedish
business it will impact all new business. The exact date from which new
business will be affected will depend on the legislation enacted within the UK
and Sweden respectively. 

There is uncertainty as to how, if at all, the ruling impacts existing
business. In respect of the UK business with reviewable mortality or morbidity
rates, primarily certain protection policies, the potential impact (if the
ruling is deemed to apply to current in-force contracts) will be on the charges
suffered by the policyholder from a date to be specified by UK legislation, but
no later than 21 December 2012.  For the Swedish business, it is expected that
those products written on an annually renewable basis, will be repriced to
apply gender neutral rates from a date to be specified by Swedish legislation,
but no later than 21 December 2012.