Final Results

Chesnara plc Successful year for Chesnara underpins continued dividend growth. 31 March 2010 Chesnara today reported final results for the year ended 31 December 2009. These are the first set of results which include the effect of the acquisition, and financial performance, of Moderna FÃ¶rsÃ¤kringar Liv AB ('Moderna') which was acquired on 23rd July 2009. The Group remains committed to offering shareholders an attractive long-term income stream arising from the profits of its life assurance businesses. * Profit (on IFRS basis) before tax for the year ended 31 December up 97% to Â£44.7m (including profit of Â£25.1m arising on the acquisition of Moderna) and up 4.8% to Â£23.8m (excluding the profit arising on acquisition and operational result of the Swedish Business) (2008: Â£22.7m) * Earnings per share (on IFRS basis) of 45.26p (2008: 19.24p) * On EEV basis pre-tax profit for the year of Â£78.2m (including the exceptional profit of Â£54.2m arising on the acquisition of Moderna) and Â£24.0m (excluding the exceptional profit arising on the acquisition of Moderna) (2008: Â£14.8m). * Shareholder equity on EEV basis (pre proposed interim dividend payment) now Â£262.6m - Â£2.59p per share (2008: Â£182.7m - Â£1.80p per share) * Group solvency ratio remains strong, after utilising Â£20m from existing cash resources to purchase Moderna, at 316% post dividend (2008: 358%). UK life company solvency ratio strong at 197% (2008: 177%). Swedish business solvency ratio healthy at 302% (2008 illustrative: 168%) * Final dividend increased to 10.3p (2008:10.05p). Total dividend for the year increased by 2.6% to 15.95p (2008:15.55p) * Completed acquisition of further 42% stake in AkademikerRÃ¥dgivning I Sverige AB, an IFA, in late 2009 - now own 91% of the business * Completed acquisition of operations and certain assets of Aspis FÃ¶rsÃ¤kringar Liv AB ('Aspis'), a relatively small Swedish life and health insurer, in February 2010 * Board remains confident about future dividend flows * Continue to examine value adding acquisition opportunities Graham Kettleborough, Chief Executive, said: 'We entered 2010 with a somewhat different shape to our business. The resilience of our underlying UK business has enabled us to deliver strong results whilst also providing the capital to acquire Moderna. This acquisition, secured at a significant discount to its embedded value, brings an immediate uplift to shareholder value. In addition, our recent acquisition of the operations of Aspis brings new capabilities, opportunities for operational synergies and enables Moderna to offer a fully rounded product range to the Swedish market. Overall our business remains strong and the improved investment market conditions have helped to underpin our results. On the acquisition front we are seeing a reasonable flow of opportunities but will continue to be selective and only pursue opportunities which will deliver an acceptable value uplift or support our future dividend paying capability. The Board is pleased to recommend an increase in the final dividend to 10.3p per share. This gives rise to a total dividend for the year of 15.95p per share which represents a 2.6% increase.' The Board approved this statement on 30 March 2010. Enquiries Graham Kettleborough Chief Executive, Chesnara plc 07799 407519 Michael Henman Cubitt Consulting 0207 367 5100 Notes to editors: Chesnara plc, which listed on the London Stock Exchange in May 2004, is the owner of Countrywide Assured plc ("CA") and Moderna FÃ¶rsÃ¤kringar Liv AB ("Moderna"). CA is a UK life assurance subsidiary that is substantially closed to new business. In June 2005 Chesnara acquired a further closed life insurance company - City of Westminster Assurance ("CWA") - for Â£47.8m. With effect from 30 June 2006, CWA's policies and assets were transferred into CA plc. Moderna, a life assurance company which focuses on pensions and savings, was acquired on 23 July 2009 for Â£20m. The company, which was launched in 2002, continues to write new business and grow its strong position in the Swedish unit-linked market. Moderna's market presence was increased through the acquisition of a controlling stake in AkademikerRÃ¥dgivning I Sverige AB, an IFA, in late 2009 and the purchase of the policyholders, personnel, intellectual property and systems of Aspis FÃ¶rsÃ¤krings Liv AB, a life and health insurer, in February 2010. Note on terminology This document refers throughout to the 'UK Business' and the 'Swedish Business'. As explained in Note 4 to the IFRS financial statements following, these are the business segments of the Group, comprising, for the UK Business, Countrywide Assured Life Assurance Holdings Limited and its subsidiary companies and, for the Swedish Business, Moderna FÃ¶rsÃ¤kringar Liv AB and its subsidiary and associated companies. FINANCIAL HIGHLIGHTS Year ended 31 December IFRS basis 2009 2008 Operating profit/(loss) UK Business 24.7 23.6 Swedish Business (2.1) - Other group activities (2.3) (0.1) Profit arising on acquisition of Swedish Business 25.1 - --------- --------- 45.4 23.5 Financing costs (0.7) (0.8) --------- --------- Profit before income taxes Â£44.7m Â£22.7m ========= ========= Basic earnings per share 45.26p 19.24p Dividend per share 15.95p 15.55p Shareholders' net equity Â£159.8m Â£126.4m ========= ========= European Embedded Value basis (EEV) Operating profit UK Business 22.0 25.5 Swedish Business (2.9) - Other group activities 0.9 0.4 --------- --------- 20.0 25.9 Investment variances and economic assumption changes UK Business (6.1) (9.9) Swedish Business 10.1 - --------- --------- Profit before tax and before exceptional item 24.0 16.0 Exceptional item Profit on acquisition of Swedish Business 54.2 - --------- --------- Profit before tax 78.2 16.0 Tax 12.1 (1.2) --------- --------- Profit for the period Â£90.3m Â£14.8m ========= ========= Shareholders' equity on EEV basis Embedded value UK Business 157.8 154.3 Swedish Business 91.5 - --------- --------- Embedded value of covered business 249.3 154.3 Acquired embedded value financed by debt (4.2) (8.4) Shareholders' equity in other Group companies 17.5 36.8 --------- --------- Â£262.6m Â£182.7m ========= ========= EEV per share 258.7p 180.0p UKbusiness Life annual premium income (AP) Â£85.5m Â£92.6m Life single premium income (SP) Â£23.3m Â£23.9m Life annualised premium income (AP + 1/10 SP) Â£87.8m Â£95.0m Swedish business New business premium income (AP + 1/10 SP) Â£49.9m Â£77.7m Total premium income (AP + SP) Â£269.4m Â£245.3m In contrast with the IFRS basis of reporting, the EEV basis recognises the discounted value of the expected future cash flows, arising from the long-term business contracts in force at the year end, as a component of shareholder equity. Accordingly, the EEV result recognises, within profit, the movement in this component. The Swedish Business was acquired on 23 July 2009. Accordingly, certain of the premium income amounts shown above relate to the pre-acquisition period and are presented here for illustrative purposes. CHAIRMAN'S STATEMENT I am pleased to present the sixth annual financial statements of Chesnara plc ('Chesnara'). With recovery in global investment markets and the acquisition of Moderna FÃ¶rsÃ¤kringar Liv AB ('Moderna') mid way through the year, 2009 has seen two major developments in the current and future trading prospects and in the financial strength of the Group. In the light of continuing economic uncertainty, it is pleasing that our results continue to show a high degree of resilience, allowing us to maintain a reliable and progressive dividend policy, while being in a good position to pursue further value-enhancing acquisitions as they arise. Review of the Business On 23 July 2009, Chesnara completed the acquisition of Moderna, an open Swedish life assurance and pensions company specialising in unit-linked pensions business written predominantly through independent financial advisers. It currently manages a portfolio of some 75,000 life assurance and pensions policies and it is expected that its embedded value will increase over time as further new business is written. Moderna's prospects were subsequently enhanced by the acquisition of a further 42% share in AkademikerRÃ¥dgivning i Sverige AB (leading to 91% ownership), an IFA trading in a specialist area of the market. In early 2010, we also completed the acquisition of the operations and certain assets of Aspis FÃ¶rsÃ¤krings Liv AB, a Swedish life risk and health insurer. These acquisitions widen the scope of Moderna's activities and underpin its ability to offer a fully-rounded proposition to the Swedish market. Moderna was acquired for Â£20m, from existing cash resources, at a significant discount of 73% to its embedded value, which gave rise to an accretion to Group embedded value of Â£54.2m. On the IFRS basis of reporting, we have recognised a profit on acquisition of Â£25.1m. Global investment market influences have also had a significant impact on the Group's results, with the leading UK market indices, for example, posting gains of between 22% and 24% over the whole of 2009. While the low interest rate environment dampened returns on the Group's shareholder funds, this was more than offset by the favourable impact of rising equity markets on the Group's embedded value. This leads to higher current and prospective deductions from unit-linked funds under management, with the UK Business's embedded value benefiting to the extent of Â£6.0m and the Swedish Business's embedded value benefiting to the extent of Â£7.5m in the post-acquisition period. On the EEV basis of reporting, excluding the profit of Â£54.2m arising on the acquisition of Moderna, we have made pre-tax profits of Â£24.0m for the year ended 31 December 2009, including Â£8.8m post-acquisition pre-tax profits attributable to Moderna, compared with Â£16.0m for the year ended 31 December 2008. Apart from the impact of rising equity markets, other key factors underlying the EEV result are: In respect of the UK Business: (i) Â£7.4m expected return from the unwind of the discount rate; (ii) Â£6.8m benefit from continuing favourable persistency experience; and (iii) Â£1.3m release from a unit pricing remedial provision no longer required, offset by (iv) a Â£5.6m reduction in pre-tax embedded value earnings arising from a change in the basis of tax on overseas dividends: while this gives rise to lower deductions from policyholder unit-linked funds, there is a broadly offsetting release from the estimate of future tax payable, resulting in a credit to tax. The EEV tax movement also benefited from a writeback, in excess of Â£4m, in respect of a tax provision relating to 2007 within the UK Business. As to the underlying persistency assumptions for the UK Business, we have been cautious in the extent to which we have adjusted these while the prospects for the UK economy and household budgets remain uncertain. In respect of the Swedish Business: (i) a Â£0.7m contribution from new business; (ii) Â£1.7m expected return from the unwind of the discount rate; (iii) a Â£2.6m favourable investment mix effect, driven also by rising equity markets; (iv) Â£1.5m profit arising from life risk and health insurance business and from other business activities; and (v) other experience effects, including mortality profits, in excess of Â£2.5m, offset by (vi) a Â£7.8m adverse persistency effect, largely arising from the resetting of the assumptions relating to future persistency rates: this cautious approach reflects the continuing uncertain state of the Swedish economy and its impact on the savings market. On the IFRS basis, we have posted a pre-tax profit of Â£44.7m for the year ended 31 December 2009. Adjusting for the effects of the Swedish Business, including the profit of Â£25.1m arising on acquisition, the profit before tax from continuing UK Business and Group activities was Â£23.8m, compared with Â£22.7m in respect of the year ended 31 December 2008. Besides favourable investment market effects, this result also includes, with respect to the UK Business, net mortality and morbidity profits of some Â£2.1m and the impact of the release to income of Â£1.3m from the unit-pricing remedial provision, the establishment of which we first reported in respect of the results for the year ended 31 December 2007. The Swedish Business posted a post-acquisition loss of Â£2.6m, which is in line with expectations as the business continues to build scale and, when profits from an increasing base of in-force investment contracts outweighs the front-end strain of writing new business, it is expected to be profitable, on the IFRS basis within two to three years. Shareholder Value and Returns to Shareholders Total shareholder equity on the EEV basis, pre appropriation of Â£10.5m for the final 2009 dividend, is Â£262.6m (258.7p per share), compared with Â£182.7m (180.0p per share) as at 31 December 2008. The significant uplift reflects principally the positive impact of acquiring the Swedish Business at a discount of 73% to its embedded value, together with a strong core trading result in both the UK and Swedish Businesses, driven by the recovery in global investment markets. In addition, the weakening of sterling against the Swedish Krona, between the acquisition date and the end of 2009, gave rise to a further Â£5.5m accretion in embedded value through the recognition of foreign exchange translation gains. The capacity of the Group to pursue its dividend policy relies on the continuing emergence of surplus in the UK Business and in the ability to distribute that surplus which, in turn, depends on the regulatory solvency position of the UK Business. I am pleased to report that the UK Business's solvency ratio, post proposed dividends, at 197% (177% as at 31 December 2008) remains in excess of the target of 150% set by the Board of the Life subsidiary. The Group's dividend policy now has to take account of the competing need for funds of the developing Swedish Business which, in turn, depends on the underlying regulatory solvency ratio of the Swedish Life Business. This was 302% as at 31 December 2009 which is comfortably in excess of the target of 150% set by the Moderna Board. The combined Group post dividend solvency ratio remains at a healthy 316% as at 31 December 2009 (31 December 2008: 358%). Based on the strength of our results and of our capital solvency ratios, the Board has decided to recommend a final dividend of 10.3p per share (2008 final dividend: 10.05p per share), giving rise to total dividends of 15.95p per share for 2009, which represents a 2.6% increase over total dividends of 15.55p per share for 2008. At the recent trading range of 200p and 220p per share, this represents a yield to shareholders of between 7.3% and 8.0%. Outlook We enter 2010 with a somewhat different shape to our business than we entered 2009. The purchase of Moderna and subsequent investments in Sweden have brought a new dimension to the Group. We fully expect that these investments will deliver further value to shareholders in excess of the significant value the acquisition has already delivered. The fall-out from the credit crunch and the prospect of Solvency II in 2012 have led to an increase in the flow of available acquisition opportunities. However, we continue to be selective and will only pursue opportunities which demonstrate the capability of prolonging our dividend and/or of delivering a significant value uplift for shareholders. We wish to welcome our new colleagues in Sweden to the Group and thank all our employees for the dedication and commitment they continue to demonstrate. Peter Mason Chairman 30 March 2010 OPERATING AND FINANCIAL REVIEW Basis of Accounting The Group reports in accordance with International Financial Reporting Standards ('IFRS'). IFRS essentially permits the 'grandfathering' of the principles and bases used to measure profit arising on long-term insurance contracts under previously-adopted UK and Swedish GAAP, where the contracts contain significant insurance risk. Profits on contracts where no significant insurance risk subsists are measured using the principles of IAS 39 Financial Instruments: Recognition and Measurement. The Group continues to provide financial information supplementary to the IFRS basis. With effect from reporting periods commencing on 1 January 2006, the Group adopted European Embedded Value ('EEV') principles as the basis for providing this supplementary information. EEV methodology aims to measure the underlying embedded value of the Group's life assurance, pensions and annuity businesses and provides a framework which is intended to improve the comparability and transparency of embedded value reporting across Europe. We have decided to defer compliance with the European Insurance CFO Forum Market Consistent Embedded Value (MCEV) Principles (copyright Â© Stichting CFO Forum Foundation 2008) until 2011. IFRS Result The IFRS result for the year ended 31 December 2009 comprises: Year ended 31 December 2009 Year ended 31 December 2008 Pre-tax Tax Post-tax Pre-tax Tax Post-tax Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Profit arising on acquisition 25,056 of Swedish - 25,056 - - - Business UK Business 24,784 948 25,732 23,614 (2,856) 20,758 result Swedish (2,626) (148) (2,774) - - - Business result Other group (2,473) 392 (2,081) (887) 146 (741) activities --------- --------- --------- --------- --------- --------- Total result 44,741 1,192 45,933 22,727 (2,710) 20,017 --------- --------- --------- --------- Non-controlling interest 7 - Total result --------- --------- attributable to shareholders 45,940 20,017 --------- --------- Total result excluding Swedish 23,757 1,340 25,097 22,727 (2,710) 20,017 Business items* --------- ---------- --------- --------- --------- ---------- *Includes adjustment for Â£1,446,000 expenses, included in Other Group Activities, incurred during 2009 in connection with the acquisition of the Swedish Business. The profit of Â£25.1m arising on the acquisition of the Swedish Business represents the excess of the Â£45.1m fair value of net assets acquired over the purchase consideration of Â£20.0m. The result for the UK Business continues to be dominated by the strong emergence of surplus from the underlying life and pensions contracts, which are in run off. Key influences which have maintained the pre-tax result above the 2008 level are: (i) the impact of a significant appreciation in the value of fixed interest securities over the year, which has contributed some Â£2.4m; (ii) favourable net mortality/ morbidity experience of Â£2.1m; and (iii) the release back to income of Â£1.3m from a unit-pricing provision, based on experience of redress and complaints levels during the year. The effect of these positive influences was dampened somewhat by lower returns on shareholder funds due to the low interest rate environment. The Swedish Business incurred a small, but expected, loss over the 23-week post-acquisition period. It is expected to incur trading losses for a further three years, as it continues to build scale and until realised profits from an increasing base of in-force investment contracts outweigh the front-end strain of writing new business. The result of other group activities, which principally relates to the operations of the parent company, include Â£1.4m of expenses incurred in connection with the acquisition of the Swedish Business: this accounts for the increase in the level of loss over 2008. Other significant factors were a recovery of Â£0.3m in respect of a cash deposit with Kaupthing, Singer & Friedlander, previously written off, and financing costs on bank borrowings which were Â£0.2m lower than expected, both offset by lower returns on invested cash deposits. The recognition for total tax in the Group for the year ended 31 December 2009 is, unusually, a credit of Â£1.2m, whereas a net charge would normally be expected. This situation arises from the writeback, in excess of Â£4m, of a provision for current tax in the UK Business in respect of 2007. The provision had been established, because of uncertainty surrounding the interpretation of tax legislation pertaining to that year, which was clarified as a result of the 2007 tax computation being submitted to, and accepted, by HMRC. EEV Result Supplementary information prepared in accordance with EEV principles and set later is presented to provide alternative information to that presented under IFRS. EEV principles assist in identifying the value being generated by the UK and Swedish Life Businesses. The result determined under this method represents principally the movement in the UK and Swedish Businesses' embedded value, before transfers made to the parent company and ignoring any capital movements. Through including the in-force value of insurance and investment contracts, EEV recognises the discounted profit stream expected to arise from those contracts. The principal underlying components of the EEV result are the expected return from existing business, in both the UK and Swedish businesses, being the unwind of the rate used to discount the related cash flows, and the value added by the writing of new business in the Swedish Business. Adjustments are made to the result for variations in actual experience from that assumed for each component of policy cash flows arising in the period and for the impact of restating assumptions for each component of the prospective cash flows. The following is a summarised statement of the EEV result: Year ended 31 December 2009 Year ended 31 December 2008 Swedish UK Swedish UKbusiness Business Total Business Business Total Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Operating profit 22,000 (2,880) 19,120 25,521 - 25,521 Variation from longer-term investment return 6,206 7,544 13,750 (16,831) - (16,831) Economic assumption changes (12,286) 2,556 (9,730) 6,951 - 6,951 --------- --------- --------- --------- --------- --------- Profit on covered business before tax 15,920 7,220 23,140 15,641 - 15,641 Tax thereon 11,893 - 11,893 (1,376) - (1,376) --------- --------- --------- --------- --------- --------- Profit on covered business after tax 27,813 7,220 35,033 14,265 - 14,265 --------- --------- --------- --------- Results of non-covered business and of other Group companies profit before tax and exceptional items 868 385 Exceptional profit arising on acquisition of Swedish Business 54,187 - Tax 177 176 ---------- --------- Profit after tax 90,265 14,826 Non-controlling interest 7 - --------- --------- Profit after tax attributable to shareholders 90,272 14,826 ========= ========= The profit of Â£54.2m arising on the acquisition of the Swedish Business is the excess of the embedded value of Moderna at the acquisition date over the purchase consideration of Â£20m. This represents a discount of 73% to Moderna's embedded value at the acquisition date. The dominating feature underlying the EEV result of both the UK Business and of the Swedish Business for the 23-week post-acquisition period was the recovery in global investment markets. The leading UK equity indices, for example, posted gains of between 22% and 24% over 2009. The favourable impact of global investment market growth is reflected through higher current and prospective deductions from unit-linked funds under management, with the UK and Swedish Businesses benefiting to the extent of Â£6m and Â£7.5m respectively. Other significant influences underlying EEV earnings for the year are: In respect of the UK Business: (i) Â£7.4m expected return from the unwind of the discount rate; (ii)Â£6.8m continuing favourable persistency experience; and (iii)Â£1.3m release from a unit-pricing remedial provision no longer required, offset by (iv) Â£5.6m reduction to income arising from a lower estimate of future deductions from policyholder linked funds in respect of tax on overseas dividends. The treatment of tax on overseas dividends follows legislative change and is offset by a corresponding credit to tax in the overall prospective future tax charge, so that the effect on net-of-tax EEV is, broadly, neutral. Other items which have contributed to the significant tax credit attributed to the UK Business are (i) the writeback of an amount in excess of Â£4m in respect of the 2007 current tax provision, as explained under 'IFRS Result' above and (ii) improvements to the underlying modelling processes. In respect of the Swedish Business: (i) Â£0.7m contribution from new business; (ii) Â£1.7m expected return from the unwind of the discount rate; (iii)Â£2.6m favourable investment mix effects, also driven by the recovery in equity markets; (iv) Â£1.5m profit in respect of business not modelled for EEV purposes and in respect of other activities of the Swedish Business: this relates principally to the life risk and health insurance business, which is not modelled; and (v)underlying experience effects, including mortality profits, in excess of Â£2.5m, offset by (vi) Â£7.8m adverse persistency effects: this reflects deteriorating experience over the second half of 2009 and includes Â£7.1m in respect of the assumption for future lapses. It has been decided to adopt a prudent approach in view of the uncertain state of the Swedish economy and its impact on the savings market. Overall, the embedded value has proved resilient in the face of a difficult trading environment. As this is likely to be subject to continuing volatility, attention is drawn to the sensitivity of the EEV to various factors as set out in Note 7 to the EEV Supplementary Information. Shareholders' Equity and Embedded Value of Covered Business - EEV Basis The consolidated balance sheet prepared in accordance with EEV principles may be summarised as: 31 December 2009 UK Swedish Other Group Business Business Activities Total Â£000 Â£000 Â£000 Â£000 Value of in-force business 85,559 112,753 - 198,312 Other net assets 68,098 (22,323) 18,498 64,273 --------- --------- --------- ---------- 153,657 90,430 18,498 262,585 ========= ========= ========= ========= Represented by: Embedded value ('EV') of 157,854 91,478 regulated entities - 249,332 Less: amount financed by (4,197) - borrowings - (4,197) --------- --------- --------- ---------- EV of regulated entities 153,657 91,478 attributable to shareholders - 245,135 Net equity of other Group - (1,048) companies 18,498 17,450 --------- --------- --------- --------- Shareholders' equity 153,657 90,430 18,498 262,585 ========= ========= ========= ========= 31 December 2008 UK Swedish Other Group Business Business Activities Total Â£000 Â£000 Â£000 Â£000 Value of in-force business 84,940 - - 84,940 Other net assets 61,031 - 36,737 97,768 --------- ---------- --------- ---------- 145,971 - 36,737 182,708 ========= ========= ========= ======== Represented by: Embedded value ('EV') of 154,329 - - 154,329 regulated entities Less: amount financed by (8,358) - borrowings - (8,358) --------- --------- --------- --------- EV of regulated entities 145,971 - attributable to shareholders - 145,971 Net equity of other Group - - companies 36,737 36,737 --------- --------- ---------- ---------- Shareholders' equity 145,971 - 36,737 182,708 ========= ========= ========== ========= The tables below set out the components of the value of in-force business by major product line at each period end: Year ended 31 December 2009 Year ended 31 December 2008 UK Swedish UK Swedish Business Business Total Business Business Total Number of policies 000 000 000 000 000 000 Endowment 55 15 70 62 - 62 Protection 58 - 58 64 - 64 Annuities 5 - 5 5 - 5 Pensions 51 70 121 53 - 53 Other 7 - 7 8 - 8 ---------- ----------- --------- ---------- --------- ---------- Total 176 85 261 192 - 192 ---------- --------- --------- --------- --------- --------- Year ended 31 December 2009 Year ended 31 December 2008 UK Swedish UK Swedish business Business Total Business Business Total Value of in-force Â£m Â£m Â£m Â£m Â£m Â£m Endowment 40.2 15.2 55.4 53.8 - 53.8 Protection 48.1 - 48.1 51.2 - 51.2 Annuities 3.9 - 3.9 4.5 - 4.5 Pensions 36.2 98.6 134.8 33.5 - 33.5 Other 0.7 - 0.7 - - - --------- --------- --------- --------- --------- --------- Total at product level 129.1 113.8 242.9 143.0 - 143.0 Valuation adjustments Holding company expenses (9.8) - (9.8) (8.7) - (8.7) Other (26.5) - (26.5) (26.3) - (26.3) Cost of capital (0.8) (1.0) (1.8) (5.1) - (5.1) --------- --------- --------- --------- --------- --------- Value in-force pre-tax 92.0 112.8 204.8 102.9 - 102.9 Taxation (6.4) - (6.4) (18.0) - (18.0) --------- --------- --------- --------- --------- --------- Value in-force post-tax 85.6 112.8 198.4 84.9 - 84.9 ======== ========= ========= ========= ========= ========== The value-in-force represents the discounted value of the future surpluses arising from the insurance and investment contracts in force at each respective period end. The future surpluses are calculated by using realistic assumptions for each component of the cash flow. 'Other' valuation adjustments in the UK Business principally comprise expenses of managing policies which are not attributed at product level. The movement on Group EEV in respect of the year ended 31 December 2009, before recognition of the final dividend of Â£10.5m in respect of 2009 (year ended 31 December 2008: Â£10.2m) may be summarised as: Year ended 31 December 2009 Year ended 31 December 2008 Â£000 Â£000 Â£000 Â£000 Beginning of year 182,708 187,315 Profit arising on acquisition of Swedish Business 54,187 - UK Business result Pre-tax 16,257 15,641 Tax 11,799 (1,376) --------- --------- Post-tax 28,056 14,265 Other group operations (653) 561 Swedish Business result Pre-tax 8,836 - Tax (161) - --------- --------- Post-tax 8,675 - Foreign exchange gain 5,539 - Dividends paid during the year (15,934) (16,054) Reduction in equity following share buy-back operation - (3,379) Non-controlling interest 7 - --------- ---------- End of year 262,585 182,708 ========= ========= The results attributable to the UK and Swedish Businesses shown above comprise the results of the covered business, non-covered business and of other Group companies within the respective business, whereas the results attributed to the UK Business and Swedish Business in the 'EEV Result' section shown above relate solely to the covered business. Returns to Shareholders Returns to shareholders are underpinned by the emergence of surplus in, and transfer of surplus from, the UK life business' long-term insurance fund to shareholder funds and by the return on shareholder net assets representing shareholder net equity. These realisations are utilised in the first instance for the repayment and servicing of the bank loan on the basis set out in Note 6. The surplus arises from the realisation of in-force value of the UK Business, which is in run-off. The return on shareholder net assets is determined by the Group's investment policy. Shareholder funds bear central corporate governance costs which cannot be fairly attributed to the long-term insurance funds and which arise largely in connection with Chesnara's obligations as a listed company. The acquisition of the Swedish Business in July 2009 has had a twofold impact on the prospect for shareholder returns. First, as the business was acquired at a significant discount of 73% to its embedded value, there was an immediate accretion of Â£54.2m to shareholder net equity as measured on the European Embedded Value basis. Secondly, in contrast to the UK Business, which is in run-off, the Swedish Business is open and now offers a growth element to total shareholder return. The Swedish Business is expected to become cash generative and, therefore, to have the ability to support the Group's dividend capacity within three to four years. The Board's primary aim is to continue to provide a reliable and progressive dividend flow to shareholders within the context of the emergence of surplus in the UK life business: in the absence of further acquisitions there is also the prospect of a return of capital to shareholders. Between the beginning of 2009 up until the acquisition of the Swedish Business towards the end of July 2009, the shares generally traded in a range of between 120p and 150p per share. With total proposed dividends in respect of the year ended 31 December 2009 at 15.95p per share, this implied a yield of between 10.6% and 13.3%. The shares may also be characterised as having traded at a discount to Group embedded value of Â£182.7m, as reported on the EEV basis as at 31 December 2008, within a range of 16.7% to 33%.The share price performance over this period is largely attributable to an overhang from the investment market turbulence experienced towards the end of 2008, in combination with adverse market sentiment towards financial institutions. Following the acquisition of the Swedish Business up until mid November 2009, the share price strengthened, generally trading in a range of between 150p and 185p per share: this improving trend was helped, in part, by general investment market recovery. Notwithstanding this, the shares traded in this period at a discount of between 20% and 35% of embedded value, as adjusted for the extent of value accretion we had signalled to the market arising on the acquisition of the Swedish business. Between mid November 2009 and early March 2010, the share price has strengthened considerably, generally trading in a range of between 185p and 210p per share. This implies a yield, based on total 2009 proposed dividends, of between 7.6% and 8.6%, with the shares trading at a discount of between 19% and 28% to embedded value of Â£262.6m, as now reported at 31 December 2009. The improvement follows our interim management statement issued on 19 November 2009, which set out the full extent of the accretive impact of the acquisition of the Swedish Business, while also pointing to an improvement in the fundamentals underpinning the UK Business. Solvency and Regulatory Capital Regulatory Capital Resources and Requirements The regulatory capital of both the UK and Swedish Businesses is calculated by reference to regulations established and amended from time to time by the FSA in the UK and by Finansinspektionen in Sweden. The rules are designed to ensure that companies have sufficient assets to meet their liabilities in specified adverse circumstances. As such, there is, in the UK a restriction on the full transfer of surplus from the long-term business fund to shareholder funds of CA, and on the full distribution of reserves from CA to Chesnara and, in Sweden, on distributions from shareholder funds. Within the UK, the regulations include minimum standards for assessing the value of liabilities, including making an appropriate allowance for default risk on corporate bonds held to match liabilities when assessing the valuation discount rates used for valuing these liabilities. Market turmoil in 2008 led to significant widening of spreads on corporate bonds above gilts, through changed assessment of default risk and liquidity issues, and therefore, with the widening spreads, this issue was of concern to the industry. CA continues to maintain a prudent approach of limiting the assumed liquidity premium in corporate bonds to a maximum of 50bps as at 31 December 2009 (31 December 2008: 50bps). Additionally, the CA Board continues to maintain their stance that permissive changes to regulations introduced in 2006, in FSA policy statement PS06/14, that would allow a reduction in liabilities are not appropriate for CA at this time. The following summarises the capital resources and requirements of CA for UK regulatory purposes, after making provision for dividend payments from CA to Chesnara, which were approved after the respective period ends: 31 December 2009 2008 Â£m Â£m Available capital resources ('CR') 43.6 43.0 --------- ---------- Long-term insurance capital requirement ('LTICR') 19.8 22.5 Resilience capital requirement ('RCR') 2.3 1.8 --------- ---------- Total capital resources requirement ('CRR') 22.1 24.3 ---------- --------- Target capital requirement cover 32.0 35.6 --------- ---------- Ratio of available CR to CRR 197% 177% ---------- ---------- Excess of CR over target requirement Â£11.6m Â£7.4m ---------- ---------- The CA Board, as a matter of policy, continues to target CR cover for total CRR at a minimum level of 150% of the LTICR and 100% of the RCR. To the extent that the target capital requirement cover of Â£32.0m as at 31 December 2009 falls short of the Â£40m share capital component of CR, so it follows that Â£8.0m of the reported excess of CR over target requirement is not available for distribution to shareholders except by way of a capital reduction. It can be seen from this information that Chesnara, which relies on dividend distributions from its life company, is currently in a favourable position to service its loan commitments and to continue to pursue a progressive dividend policy. The Swedish Business, in contrast to the UK Business, and being open to new business, is, in the short to medium term, a net consumer of capital. The ratio of capital resources to capital resource requirements is a key indicator of the capital health of the business as it expands and provides the context in which further capital contributions are made by the parent company to finance that expansion in a predictable and orderly manner. The following summarises the capital resources and requirements of Moderna for Swedish regulatory purposes: 31 December 2009 2008 Â£m Â£m Available capital resources (CR) represented by: - Share capital 1.1 1.1 - Additional equity contributions 33.6 24.2 - Accumulated deficit (10.2) (12.6) ---------- --------- 24.5 12.7 ---------- --------- Regulatory capital resource requirement (CRR) 8.1 7.7 --------- --------- Target requirement 12.1 11.5 --------- --------- Ratio of CR to CRR 302% 165% --------- --------- Excess of CR over target requirements Â£12.4m Â£1.2m --------- --------- The information as at 31 December 2008 relates to the pre-acquisition period and is provided for illustrative purposes. The fall in the accumulated deficit over the year was impacted by a pre-acquisition restatement of the period for the straight-line amortisation of deferred acquisition costs from 10 to 17 years, such costs being an admissible asset for Swedish regulatory purposes. Equity contributions were enhanced by an additional Â£2.1m funding by the parent company in the post-acquisition period. The Moderna Board sets a minimum target of 150% of the regulatory capital requirement. Swedish solvency regulation requires that a certain proportion of assets, to be fully admissible, are to be held in the form of cash. The operation of this requirement may, from time to time, act as the operative constraint in determining the level of additional funding requirements, thereby causing the solvency ratio to rise above what it would otherwise have been, had the form of assets matching capital resources not been a constraint. Insurance Groups Directive In accordance with the EU Insurance Groups Directive, the Group calculates the excess of the aggregate of regulatory capital employed over the aggregate minimum solvency requirement imposed by local regulators for all of the constituent members of the Group, all of which are based in Europe. The following sets out these calculations after the recognition of final dividends for the respective financial year, but approved by the Board and paid to Group shareholders after the respective dates: 31 December 2009 2008 Â£m Â£m Available group capital resources 99.7 86.9 Group regulatory capital requirement (31.6) (24.3) --------- ---------- Excess 68.1 62.6 --------- -------- Cover 316% 358% --------- --------- The regulatory requirement is that available group capital resources should be at least 100% of the capital requirement. Individual Capital Assessments The FSA Prudential Sourcebooks require UK insurance companies to make their own assessment of its capital needs to a required standard (a 99.5% probability of being able to meet liabilities to policyholders after one year). In the light of scrutiny of this assessment, the FSA may impose its own additional individual capital guidance. The Individual Capital Assessment is based on a realistic liability assessment, rather than on the statutory mathematical reserves, and involves stress testing the resultant realistic balance sheet for the impact of adverse events, including such market effects as significant falls in equity values, interest rate increases and decreases, bond defaults and further widening of bond spreads. CA completed a further full annual assessment during 2009 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. We are currently developing the Swedish Business's ability to produce similar assessments, so that the determination of risk-based capital is more clearly aligned with UK best practice. In the meantime, the Swedish Business, in accordance with local regulatory requirements, continues to make quarterly assessments of the risk-based capital requirements of its business: these indicate that capital resources currently provide a comfortable margin over capital resource requirements. Capital Structure, Treasury Policy and Liquidity The Group's UK operations are ordinarily financed through retained earnings and through the current emergence of surplus in the UK Life Business. The Swedish Business is financed by a combination of financial reinsurance arrangements and capital contributions from Chesnara. There is, otherwise, no further reliance on debt financing within the Group, with the last tranche of our borrowings, to part finance the acquisition of CWA in 2005, due to be repaid in June 2010. Cash available for more than twelve months in the UK is normally transferred to fund managers for longer-term investment. The Board continues to have a conservative approach to the investment of shareholders' funds in the Life businesses, which underpins our strong solvency position. For the UK Business, where the greater part of shareholders' funds subsist, this approach targets the investment of 100% of available funds in cash and fixed interest securities. In the light of recent volatility in financial markets, particular attention is given to the mix and spread of these investments to ensure that we are not unduly exposed to particular sectors and that our counterparty limits are strictly adhered to. Current economic conditions heighten the risk of corporate bond default and observations on this are made in the 'Going Concern' section below. The profile and mix of investment asset holdings between fixed interest stocks and cash on deposit in the UK is such that realisations to support dividend distributions can be made in an orderly and efficient way. Other factors which may place a demand on capital resources in the future include the costs of unavoidable large scale systems development such as those which may be involved with changing regulatory requirements and the requirement to finance further possible acquisitions. To the extent that ongoing administration of the UK Life Business is performed within the terms of its third party outsourcing agreements, the Group is sheltered, to a degree, from these development costs as they are likely to be on a shared basis. To the extent that the Group proposes to acquire life businesses in the future, it is intended that this could be done through a suitable combination of equity and debt financing and, to a lesser degree, from internal resources. This would be done, however, within the constraints of the operation of regulatory rules regarding the level of debt finance which may be borne by Insurance Groups. Cash Flows The Group's longer-term cash flow cycle continues to be characterised by the strong inflow to shareholders' funds of transfers from the long-term insurance fund of the UK Business, which are supported by the emergence of surplus within that fund. These flows are used (i) to support dividend distributions to shareholders; (ii) to repay our debt obligations as set out in Note 6 and (iii) to support the medium-term requirements of the Swedish Business to meet regulatory solvency capital requirements as it expands. Going Concern The Group's cash flow position described above, together with the return on financial assets in the parent company, supports the ability to trade in the short-term. Accordingly, the underlying solvency position of the UK Life Business and its ongoing ability to generate surpluses which support cash transfers to shareholders' funds is critical to the ongoing ability of the Group to continue trading and to meet its obligations as they fall due. The information set out in 'Solvency and Regulatory Capital' above indicates a strong solvency position as at 31 December 2009 as measured at both the individual regulated life company levels in both the UK and Sweden and at the Group level. In addition, in respect of the UK Life Business, a Financial Condition Report and a detailed annual Individual Capital Assessment have been prepared, as also set out above. These include assessments of the ability of the business to withstand key events, including those which may now become more significantly adverse in the current financial and economic environment, being an increased rate of policy lapse, expense overruns and unfavourable investment market conditions. The assessments indicate that the UK Business is able to withstand the impact of these adverse scenarios, including the effect of continuing significant investment market falls, while the business's outsourcing arrangements protect it from significant expense overruns. As also indicated above, the current assessment of the risk-based capital requirements of the Swedish Business indicates a comfortable excess of capital resources over those requirements. Notwithstanding that the Group is well capitalised, the current financial and economic environment presents some specific threats to its short-term cash flow position and it is appropriate to assess these. In the first instance, the Group does not rely on the renewal or extension of bank facilities to continue trading - indeed, as indicated, its normal operations are cash generative. The Group does, however, rely on cash flow from the maturity or sale of fixed interest securities which match its obligations to its Guaranteed Bond policyholders: in the current economic environment there is clearly a continuing higher risk of bond default, particularly in respect of financial institutions. In order to manage this risk we ensure that our bond portfolio is actively monitored and well diversified. Further, this risk abated through 2009 as our underlying bond obligations to policyholders continued to mature. Other significant counterparty default risk relates to our principal reassurer Guardian Assurance ('Guardian'). We monitor Guardian's financial position and are satisfied that any associated credit default risk is low. Our expectation is that, notwithstanding the risks set out above, the Group will continue to generate surplus in its UK long-term business sufficient to meet its debt obligations as they fall due, to continue to pursue a reliable and progressive dividend policy and to meet the medium-term financing requirements of the Swedish Business, which is expected to become cash-generative within three to four years. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2009 Year ended 31 December 2009 2008 Note Â£000 Â£000 Insurance premium revenue 100,105 94,274 Insurance premium ceded to reinsurers (24,997) (17,193) --------- --------- Net insurance premium revenue 75,108 77,081 Fee and commission income Insurance contracts 35,864 35,289 Investment contracts 15,256 9,305 Net investment return 326,680 (222,742) --------- --------- Total revenue (net of reinsurance payable) 452,908 (101,067) Other operating income 4,689 1,314 --------- ---------- Total income 457,597 (99,753) --------- ---------- Insurance contract claims and benefits incurred Claims and benefits paid to insurance contract holders (129,557) (131,829) Net (increase)/decrease in insurance contract provisions (127,840) 180,265 Reinsurers' share of claims and benefits 47,897 (8,736) --------- --------- Net insurance contract claims and benefits (209,500) 39,700 --------- --------- Change in investment contract liabilities (199,748) 108,516 Reinsurers' share of investment contract liabilities 4,710 (4,743) --------- --------- Net change in investment contract liabilities (195,038) 103,773 --------- --------- Fees, commission and other acquisition costs (5,167) (1,377) Administrative expenses (18,245) (13,633) Other operating expenses Charge for amortisation of acquired value of in-force business (6,953) (3,578) Charge for amortisation of acquired value of customer relationships (188) - Other (2,195) (1,653) --------- --------- Total expenses (437,286) 123,232 --------- --------- Total income less expenses 20,311 23,479 Share of profit from associates 39 - Profit recognised on acquisition of subsidiary 3 25,056 - ---------- --------- Operating profit 45,406 23,479 Financing costs (665) (752) --------- --------- Profit before income taxes 44,741 22,727 Income tax credit/(expense) 5 1,192 (2,710) --------- ---------- Profit for the year 45,933 20,017 --------- ---------- Attributable to: Shareholders 4 45,940 20,017 Non-controlling interest (7) - --------- --------- 45,933 20,017 Foreign exchange translation differences arising on the revaluation of foreign operations 3,381 - --------- --------- Total comprehensive income for the year 49,314 20,017 ========= ======== Attributable to: Shareholders 49,321 20,017 Non-controlling interest (7) - --------- --------- 49,314 20,017 ========= ========= Basic earnings per share (based on profit for the year attributable to shareholders) 9 45.26p 19.24p ========= ========= Diluted earnings per share (based on profit for the year attributable to shareholders) 9 45.26p 19.24p ========= ========= CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2009 31 December 2009 2008 Note Â£000 Â£000 Assets Intangible assets Deferred acquisition costs 9,327 8,590 Acquired value of in-force business Insurance contracts 14,937 16,866 Investment contracts 71,526 11,610 Acquired value of customer relationships 2,682 - Internally-developed software 4,060 - Property and equipment 491 - Investment in associates 1,051 - Investment properties 3,355 3,432 Reinsurers' share of insurance contract provisions 236,866 182,693 Amounts deposited with reinsurers 27,056 22,181 Financial assets Equity securities at fair value through income 454,970 363,879 Holdings in collective investment schemes at fair value through income 1,612,861 576,502 Debt securities at fair value through income 247,836 279,104 Policyholders' funds held by the Group 41,107 - Insurance and other receivables 19,822 11,056 Prepayments 3,784 1,600 Derivative financial instruments 7,964 5,570 ---------- --------- Total financial assets 2,388,344 1,237,711 --------- --------- Reinsurers' share of accrued policyholder claims 4,728 4,100 Income taxes 395 - Cash and cash equivalents 155,241 192,381 --------- ---------- Total assets 2,920,059 1,679,564 --------- --------- Liabilities Bank overdrafts 2,312 1,094 Insurance contract provisions 1,077,033 923,506 Financial liabilities Investment contracts at fair value through income 1,529,221 558,542 Liabilities relating to policyholders' funds held by the Group 41,107 - Borrowings 6 28,996 8,358 Derivative financial instruments 54 70 --------- --------- Total financial liabilities 1,599,378 566,970 --------- --------- Provisions 1,452 3,397 Deferred tax liabilities 10,366 10,798 Reinsurance payables 15,039 1,397 Payables related to direct insurance and investment contracts 30,433 23,891 Deferred income 13,132 14,575 Income taxes 1,313 1,074 Other payables 9,833 6,494 --------- --------- Total liabilities 2,760,291 1,553,196 --------- --------- Net assets 4 159,768 126,368 ========= ========= Shareholders' equity Share capital 7 41,501 41,501 Share premium 20,458 20,458 Treasury shares (3,379) (3,379) Other reserves 3,431 50 Retained earnings 8 97,744 67,738 ---------- ---------- Total shareholders' equity 159,755 126,368 Non-controlling interest 13 - --------- ---------- Total equity 159,768 126,368 ========= ========= CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2009 Year ended 31 December 2009 2008 Â£000 Â£000 Profit for the year 45,940 20,017 Adjustments for: Depreciation of property and equipment 65 - Amortisation of deferred acquisition costs 2,080 952 Amortisation of acquired value of in-force business 6,953 3,577 Amortisation of acquired value of customer relationships 188 - Amortisation of internally-developed software 414 - Tax (recovery)/expense (1,192) 2,710 Interest receivable (17,959) (24,398) Dividends receivable (24,048) (35,781) Interest expense 665 752 Change in fair value of investment properties 77 324 Fair value (gains)/ losses on financial assets (284,739) 247,210 Loss on sale of property and equipment 21 - Profit arising on acquisition of subsidiary company (25,056) - Share of profit of associate net of impairment 122 - Interest received 20,893 22,150 Dividends received 23,304 39,278 Increase in intangible assets related to insurance and investment contracts (3,157) - Changes in operating assets and liabilities (Increase)/decrease in financial assets (58,028) 38,166 (Increase)/decrease in reinsurers share of insurance contract provisions (27,211) 30,221 (Increase)/decrease in amounts deposited with reinsurers (4,875) 5,377 (Increase)/decrease in insurance and other receivables (4,671) 194 (Increase)/decrease in prepayments (1,293) 1,316 Increase/(decrease) in insurance contract provisions 120,648 (187,342) Increase/(decrease) in investment contract liabilities 219,609 (167,961) Decrease in provisions (2,229) (178) Increase/(decrease) in reinsurance payables 3,629 (225) Increase in payables related to direct insurance and investment contracts 3,604 1,032 Decrease in other payables (970) (2,728) ---------- ---------- Cash utilised by operations (7,216) (5,337) Income tax paid (2,371) (2,921) --------- --------- Net cash utilised by operating activities (9,587) (8,258) ========= ========= Cash flows from investing activities Acquisition of subsidiary net of cash acquired (5,944) - Investment in associates (334) - Development of software (918) - Purchases of property and equipment (180) - ----------- ---------- Net cash utilised by investing activities (7,376) - ========== ========== Cash flows from financing activities Repayment of borrowings (5,759) (4,200) ---------- ---------- Dividends paid (15,934) (16,054) Interest paid (821) (720) Purchase of treasury shares - (3,379) ---------- ---------- Net cash utilised by financing activities (22,514) (24,353) ========== ========== Net decrease in cash and cash equivalents (39,477) (32,611) Cash and cash equivalents at beginning of the year 191,287 223,898 Effect of exchange rate changes on cash and cash equivalents 1,119 - ---------- ---------- Cash and cash equivalents at end of the year 152,929 191,287 ========== ========== CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2009 Year ended 31 December 2009 Share Share Other Treasury Retained capital premium reserves Shares earnings Total Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Equity shareholders' funds at 1 January 2009 41,501 20,458 50 (3,379) 67,738 126,368 Purchase of treasury shares - - - - - - Profit for the year attributable to shareholders - - - - 45,940 45,940 Dividends paid - - - - (15,934) (15,934) Foreign exchange translation reserve - - 3,381 - - 3,381 ---------- ---------- ----------- ---------- ------------ ----------- Equity shareholders' funds at 31 December 2009 41,501 20,458 3,431 (3,379) 97,744 159,755 ========== ========== ========== ========== ========= ========== Year ended 31 December 2008 Share Share Other Treasury Retained capital premium reserves Shares earnings Total Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Equity shareholders' funds at 1 January 2008 41,501 20,458 50 - 63,775 125,784 Purchase of treasury shares - - - (3,379) - (3,379) Profit for the year attributable to shareholders - - - - 20,017 20,017 Dividends paid - - - - (16,054) (16,054) ---------- --------- --------- --------- --------- ---------- Equity shareholders' funds at 31 December 2008 41,501 20,458 50 (3,379) 67,738 126,368 ========= ========= ========= ========= ========= ========= NOTES 1 Significant accounting policies (a) Statement of compliance The preliminary announcement is based on the Group's financial statements for the year ended 31 December 2009, which are prepared in accordance with International Financial Reporting Standards as adopted by the EU. The Group has applied, for the first time, IFRS 8 Operating Segments, Amendments to IFRS7 Financial Instruments: Disclosures and Amendments to IAS 1 Presentation of Financial Statements: A Revised Presentation, which became effective during the reporting period. The Group has also elected to early adopt IFRS 3 (revised 2008): Business Combinations and IAS 27 (revised 2008): Consolidated and Separate Financial Statements which came into effect for accounting periods beginning after 1 July 2009. Their application has not led to any changes in group accounting policies, but has given rise to extensive additional disclosures. At the date of authorisation of these financial statements, the following Standards, which are applicable to the Group and which have not been applied in these financial statements, were in issue, but were not yet effective, and in some cases had not yet been adopted by the EU: - IFRS 9 Financial Instruments - IAS 24 (revised) Related Party Disclosures - Improvements to IFRSs 2009 The Directors anticipate that the application of these Standards in future periods will have no material impact on the financial statements of the Group. (b) Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and of entities controlled by the company (its subsidiaries), made up to 31 December each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.. Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Group's equity therein. Non-controlling interests consist of the amount of those interests at the date of the original business combination (see below) and the non-controlling interest's share of changes in equity since the date of the combination. Losses applicable to the non-controlling interest in excess of the non-controlling interest's interest in the subsidiary's equity are allocated against the interests of the Group except to the extent that the non-controlling interest has a binding obligation and is able to make an additional investment to cover the losses. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition or up to the effective date of disposal. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation. (c) Basis of preparation General The Consolidated financial statements have been prepared on a going concern basis. The Directors believe that they have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. In making this assessment, the Directors have taken into consideration the points as set out in the Operating and Financial Review in the section headed 'Going Concern'. The financial statements are presented in pounds sterling, rounded to the nearest thousand and are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments, financial instruments at fair value through income, investment property and investment contract liabilities at fair value through income. Assets and liabilities are presented on a current and non-current basis in the notes to the financial statements. If assets are expected to be recovered and liabilities expected to be settled within a year, they are classified as current. If they are expected to be recovered or settled in more than one year, they are classified as non-current. The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimate is revised if the revision affects only that year, or in the year of the revision and future years if the revision affects both current and future years. The accounting policies set out below have been applied consistently to all years presented in these consolidated financial statements. Life business demerger and acquisition by Chesnara plc: reverse acquisition accounting On 24 May 2004, Chesnara plc acquired the whole of the issued ordinary share capital of Countrywide Assured Life Holdings Limited ('CALH') from Countrywide plc ('Countrywide'), which had, itself, acquired the whole of the issued ordinary share capital of CALH on 22 May 2004 from Countrywide Assured Group plc ('CAG'). These arrangements were effected to secure the demerger from CAG of CALH, which, together with its subsidiary companies, comprised the life business of CAG. On the acquisition of CALH, Chesnara plc issued, as fully paid, 2.5p ordinary shares to the shareholders of Countrywide ('the Countrywide shareholders') as recorded on the shareholders register on 21 May 2004, pro rata to their holding in Countrywide, such that they received one ordinary share in Chesnara plc for every two ordinary shares held in Countrywide. On 25 May 2004, the existing ordinary shares of 2.5p in Chesnara plc were consolidated into ordinary shares of 5p each on the basis of one new share for every two old shares, so that, in effect, the Countrywide shareholders received one ordinary 5p share in Chesnara plc for every four ordinary shares held in Countrywide. In substance, the transactions described above represent a continuation of the business of CALH. Chesnara plc, a company with net assets of Â£2 prior to its acquisition of CALH, was used as a vehicle effectively to secure a listing for the business of CALH on the London Stock Exchange, and, prior to its acquisition of CALH, such net assets did not comprise an integrated set of activities and assets which were capable of generating revenue or of providing a return to investors. Chesnara plc, at the date of its acquisition of CALH, did not, therefore, comprise a business as defined in IFRS 3 Business Combinations. However the consolidated financial statements of Chesnara plc have been prepared based on the reverse acquisition method as set out in IFRS 3, as the Directors consider that this is the fairest way of presenting the financial position, results of operations and cash flows of the combined entities. Accordingly CALH is deemed to be the effective acquirer of Chesnara plc and the consolidated financial statements have been prepared as a continuation of the consolidated financial statements of CALH and its subsidiaries. The fair value of the identifiable net assets and of the equity instruments of Chesnara plc before its deemed acquisition by CALH are negligible and the deemed consideration, based on the fair value of the equity instruments deemed to have been issued by CALH to the shareholders of Chesnara plc, is also negligible and is taken as Â£nil. Accordingly, the application of the purchase method of accounting for the deemed acquisition of Chesnara plc by CALH does not give rise to any goodwill or negative goodwill in the consolidated financial statements. (d) Business combinations The Group uses the purchase method of accounting to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Expenses directly attributable to the acquisition are expensed as incurred. The acquiree's identifiable assets, liabilities, and contingent liabilities, which meet the conditions for recognition under IFRS3 are measured initially at their fair values at the acquisition date. Gains arising on a bargain purchase, where the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree exceeds the cost of acquisition, is recognised in profit or loss at the acquisition date. The non-controlling interest in the acquiree is initially measured at the non-controlling interest's proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. (e) Investments in associates An associate is an entity over which the Group is in a position to exercise significant influence, but not control or joint control, through participation in the financial and operating policy decisions of the investee. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. Investments in associates are carried in the balance sheet at cost as adjusted by post-acquisition changes in the Group's share of the net assets of the associate, less any impairment in the value of individual investments. Losses of an associate in excess of the Group's interest in that associate are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate. Where a Group company transacts with an associate of the Group, profits and losses are eliminated to the extent of the Group's interest in the associate. Losses may provide evidence of an impairment of assets transferred, in which case appropriate provision is made for impairment. (f) Foreign currencies The individual financial statements of each Group company are presented in the currency of the primary economic environment in which it operates, being its functional currency. For the purpose of these consolidated financial statements, the results and financial position of each group company are expressed in pounds sterling, which is the functional currency of the Parent Company and the presentation currency of the consolidated financial statements. In preparing the financial statements of the individual companies, transactions in currencies other than the entity's functional currency, being foreign currencies, are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities which are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value, which are denominated in foreign currencies are translated at the rates prevailing when the fair value was determined. Non-monetary items, which are measured in terms of historical cost in a foreign currency, are not retranslated. Exchange differences are recognised in profit or loss in the period in which they arise, except when they relate to items for which gains and losses are recognised in equity. For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group's foreign operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during the period, in which case the exchange rates at the dates of transactions are used. Exchange differences arising are classified as equity and are recognised in the Group's foreign currency translation reserve. Such translation differences are recognised as income or as expense in the period in which the operation is disposed of. Transactions relating to Business Combinations denominated in foreign currencies are translated into sterling at the exchange rates prevailing on the transaction date. (g) Product classification The Group's products are classified at inception as either insurance or investment contracts for accounting purposes. Insurance contracts are contracts which transfer significant insurance risk and remain as insurance contracts until all rights and obligations are extinguished or expire. They may also transfer financial risk. Investment contracts are contracts which carry financial risk, with no significant insurance risk. Where contracts contain both insurance and investment components and the investment components can be measured reliably, the contracts are unbundled and the components are separately accounted for as insurance contracts and investment contracts respectively. In some insurance contracts and investment contracts the financial risk is borne by the policyholders. Such contracts are usually unit-linked contracts. (h) Insurance contracts There are fundamental differences as between the nature of the insurance contracts subsisting in the UK and Swedish businesses, including inter alia contract longevity.. As a consequence, the alignment of income and expense recognition with the underlying assumption of risk leads to the adoption of separate accounting policies appropriate to each business, as follows: UKBusiness (i) Premiums Premiums are accounted for when due, or in the case of unit-linked insurance contracts, when the liability is recognised, and exclude any taxes or duties based on premiums. Outward reinsurance premiums are accounted for when due. (ii) Claims and benefits Claims are accounted for in the accounting period in which they are due or notified. Surrenders are accounted for in the accounting period in which they are paid. Claims include policyholder bonuses allocated in anticipation of a bonus declaration. Reinsurance recoveries are accounted for in the same period as the related claim. (iii) Acquisition costs Acquisition costs comprise all direct and indirect costs arising from the conclusion of insurance contracts. They are initial fees amortised at a rate based on the pattern of anticipated margins in respect of the related policies. An explicit deferred acquisition cost asset is established in the balance sheet to the extent that acquisition costs exceed initial fees deducted. At 31 December each year, such costs that are deferred to future years are reviewed to ensure they do not exceed available future margins. Renewal commission and other direct and indirect acquisition costs arising on enhancements to existing contracts are expensed as incurred. (iv) Measurement of insurance contract provisions Insurance contract provisions are measured using accounting policies having regard to the principles laid down in Council Directive 2002/83/EC. Unit-linked provisions are measured by reference to the value of the underlying net asset value of the Group's unitised investment funds, determined on a bid value basis, at the balance sheet date. Deferred tax on unrealised capital gains is also reflected in the measurement of unit-linked provisions and is not discounted. Insurance contract provisions are determined following an annual actuarial investigation of the long-term funds in accordance with regulatory requirements. The provisions are calculated on the basis of current information, using appropriate valuation methods as set out below. For immediate annuities in payment the provision is calculated as the discounted value of the expected future annuity payments under the policies, allowing for mortality, including projected improvements in future mortality, interest rates and expenses. For the other classes of non-linked business the provision is calculated on a net premium basis, being the level of premium consistent with a premium stream, the discounted value of which, at the outset of the policy, would be sufficient to cover exactly the discounted value of the original guaranteed benefits at maturity, or at death if earlier, on the valuation basis. The provision is then calculated by subtracting the present value of future net premiums from the present value of the benefits guaranteed at maturity, or death if earlier, as a result of events up to the balance sheet date. Negative provisions do not arise under the net premium method, which makes no allowances for voluntary discontinuances by policyholders, and which only implicitly allows for future policy maintenance costs. Insurance contract provisions are tested for adequacy by discounting current estimates of all contractual cash flows and comparing this amount to the carrying value of the provision and any related assets: this is known as the liability adequacy test. Where a shortfall is identified, an additional provision is made and the Group recognises the deficiency in income for the year. For those classes of non-linked and unit-linked business where policyholders participate in profits the liability is wholly reassured to Guardian Assurance plc ('Guardian'), a subsidiary of Aegon NV. The liability is calculated on a net premium basis, but is then increased to the realistic liability as a result of the liability adequacy test. Insurance contract provisions can never be definitive as to their timing or the amount of claims and are therefore subject to subsequent reassessment on a regular basis. Swedish Business - Life (i) Premiums Premiums are accounted for when received, and exclude any taxes or duties based on premiums. Outward reinsurance premiums are accounted for when due. (ii) Claims and benefits Claims are accounted for in the accounting period in which they are due or notified. Reinsurance recoveries are accounted for in the same period as the related claim. (iii) Acquisition costs Acquisition costs comprise expenditure incurred arising from the completion of insurance contracts. They are initial fees amortised at a rate based on the pattern of anticipated margins in respect of the related policies. An explicit deferred acquisition cost asset is established in the balance sheet to the extent that acquisition costs exceed initial fees deducted. At the end of each year, such costs that are deferred to future years are reviewed to ensure they do not exceed available future margins. Renewal commission and other direct and indirect acquisition costs arising on enhancements to existing contracts are expensed as incurred. (iv) Measurement of insurance contract provisions Provision is made at the year-end for the estimated cost of claims incurred but not settled at the balance sheet date, including the cost of claims incurred but not yet reported. The estimated cost of claims includes expenses to be incurred in settling claims. Outstanding claim provisions are not discounted other than for income protection and waiver of premium benefits, where payments may be made for a considerable period of time. All reasonable steps are taken to ensure that there is appropriate information regarding claims exposures. However, given the uncertainty in establishing claims provisions, it is likely that the final outcome will prove to be different from the original liability established. Insurance contract provisions are tested for adequacy by discounting current estimates of all contractual cash flows and comparing this amount to the carrying value of the provision and any related assets: this is known as the liability adequacy test. Where a shortfall is identified, an additional provision is made and the deficiency in income for the year is recognised. Swedish Business - Non-life (i) Premiums Written premiums for non-life (general) insurance business comprise the premiums on contracts incepting in the financial year. Written premiums are stated gross of commission payable to intermediaries and exclusive of taxes and duties paid on premiums. Unearned premiums are those proportions of the premium which relate to periods of risk after the balance sheet date. Unearned premiums are calculated on a straight-line basis according to the duration of the policy underwritten. (ii) Acquisition costs Acquisition costs, which represent commission payable, incurred in writing written premiums, are deferred and amortised over the period in which the related premiums are earned. (iii) Claims Claims incurred Claims incurred comprise claims and related expenses paid in the year and changes in provisions for outstanding claims, including provisions for claims incurred but not yet reported and related expenses, together with any adjustments to claims from previous years. Outstanding claims provisions Provision is made at the year-end for the estimated cost of claims incurred but not settled at the balance sheet date, including the cost of claims incurred but not yet reported. The estimated cost of claims includes expenses to be incurred in settling claims. Outstanding claims provisions are not discounted. Provisions are calculated gross of any reinsurance recoveries. All reasonable steps are taken to ensure that there is appropriate information regarding claims exposures. However, given the uncertainty in establishing claims provisions, it is likely that the final outcome will prove to be different from the original liability established. (i) Investment contracts (i) Amounts collected Amounts collected on investment contracts, which primarily involve the transfer of financial risk such as long-term savings contracts, are accounted for using deposit accounting, under which the amounts collected, less any initial fees deducted, are credited directly to the balance sheet as an adjustment to the liability to the investor. (ii) Amounts deposited with reinsurers Amounts deposited with reinsurers under reinsurance arrangements, which primarily involve the transfer of financial risk, are entered directly to the balance sheet as amounts deposited with reinsurers. These assets are designated on initial recognition as at fair value through income. (iii) Benefits For investment contracts, benefits paid are not included in the income statement but are instead deducted from investment contract liabilities in the accounting period in which they are paid. (iv) Acquisition costs Acquisition costs relating to investment contracts comprise directly attributable incremental acquisition costs, which vary with, and are related to, securing new contracts, and are recognised as an asset to the extent that they represent the contractual right to benefit from the provision of investment management services. The asset is presented as a deferred acquisition cost asset and is amortised over the expected term of the contract, as the fees relating to the provision of the services are recognised. All other costs are recognised as expenses when incurred. (v) Liabilities All investment contract liabilities are designated on initial recognition as held at fair value through income. The Group has designated investment contract liabilities at fair value through income as this more closely reflects the basis on which the businesses are managed. The financial liability in respect of unit-linked contracts is measured by reference to the value of the underlying net asset value of the unitised investment funds, determined on a bid value, at the balance sheet date. For UK business, deferred tax on unrealised capital gains and for Swedish business a yield tax in respect of an estimate of the investment return on the underlying investments in the unitised funds are also reflected in the measurement of the respective unit-linked liabilities. In respect of UK business guaranteed income and guaranteed growth bond liabilities and other investment contract liabilities are managed together with related investment assets on a fair value basis as part of the documented risk management strategy. The fair value of other investment contracts is measured by discounting current estimates of all contractual cash flows that are expected to arise under contracts. (j) Contracts with discretionary participation features (DPF) A discretionary participation feature is a contractual right held by a policyholder to receive, as a supplement to guaranteed minimum payments, additional payments that are likely to be a significant portion of the total contractual payments. All such contracts, which exist only within the UK business, are wholly reinsured with Guardian and the amount or timing of the additional payments are contractually at the discretion of the reinsurer and are contractually based on: (i) the performance of a specified pool of contracts or a specified type of contract; (ii) realised and/or unrealised investment returns on a specified pool of assets held by the reinsurer; or (iii) the profit or loss of the reinsurer. All contracts with discretionary participation features, whether classified as investment or insurance contracts, are accounted for as insurance contracts. (k) Reinsurance The Group cedes reinsurance in the normal course of business for the purpose of avoiding the retention of undue concentration of risk on any one life, policyholder or loss event (for example multiple losses under a Group Life contract). Assets, liabilities and income and expense arising from ceded reinsurance contracts are presented separately from the related assets, liabilities, income and expenses from the related insurance contracts because the reinsurance arrangements do not relieve the Group from its direct obligations to its policyholders. Only rights under contracts that give rise to a significant transfer of insurance risk are accounted for as reinsurance assets, which comprise amounts due from insurance companies for paid and unpaid losses and ceded life policy benefits. Rights under contracts that do not transfer significant insurance risk are accounted for as financial instruments and are presented as amounts deposited with reinsurers. The net premiums payable to a reinsurer may be more or less than the reinsurance assets recognised by the Group in respect of the reinsurance cover purchased. Any gain or loss is recognised in the income statement in the period in which the reinsurance premiums are payable. Rights under reinsurance contracts comprising the reinsurers' share of insurance contract provisions and accrued policyholder claims are estimated in a manner that is consistent with the measurement of the provisions held in respect of the related insurance contracts and in accordance with the terms of the reinsurance contract. Such assets are deemed impaired if there is objective evidence, as a result of an event that occurred after its initial recognition, that the Group may not recover all amounts due and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer. Impairment losses reduce the carrying value of the related reinsurance assets to their recoverable amount and are recognised as an expense in the income statement. The Group enters into certain financing arrangements, which are established in the form of a reinsurance contract, but which are substantively in the form of a financial instrument. Such arrangements are classified and presented as borrowings within financial liabilities. (l) Fee and commission income Fees charged for investment management services provided in connection with investment contracts are recognised as revenue as the services are provided. Initial fees which exceed the level of recurring fees and relate to the future provision of services are deferred and amortised over the anticipated period in which services will be provided. Initial fees charged for investment management services provided in connection with insurance contracts are recognised as revenue when earned. For both insurance and investment contracts, initial fees, annual management charges and contract administration charges are recognised as revenue on an accruals basis. Surrender charges are recognised as a reduction to policyholder claims and benefits incurred when the surrender benefits are paid. Benefit-based fees comprising charges made to unit-linked insurance and investment funds for mortality and morbidity benefits are recognised as revenue on an accruals basis. For insurance and investment contracts, commissions received or receivable which do not require the Group to render further services are recognised as revenue by the Group on the effective commencement or renewal dates of the related contract. However, when it is probable that the Group will be required to render further services during the life of the contract, the commission, or part thereof, is deferred and recognised as revenue over the period in which services are rendered. (m) Investment income Investment income comprises income from financial assets and rental income from investment properties. Income from financial assets comprises dividend and interest income, net fair value gains and losses (both unrealised and realised) in respect of financial assets classified as fair value through income, and realised gains on financial assets classified as loans and receivables. Dividends are accrued on an ex-dividend basis. Interest received and receivable in respect of interest-bearing financial assets classified as fair value through income is included in net fair value gains and losses. For loans and receivables and cash and cash equivalents interest income is calculated using the effective interest method. Rental income from investment properties under operating leases is recognised in the income statement on a straight-line basis over the term of each lease. Lease incentives are recognised in the income statement as an integral part of the total lease income. (n) Expenses (i) Operating lease payments Leases where a significant proportion of the risks and rewards of ownership is retained by the lessor are classified as operating leases. Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense. (ii) Financing costs Financing costs comprise interest payable on borrowings and on reinsurance claims deposits included within reinsurance payables, calculated using the effective interest rate method. (o) Income taxes Income tax on the profit or loss for the year comprises current and deferred tax and is recognised in the income statement. Tax that relates directly to transactions reflected within equity is also presented within equity. (i) Current tax Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. (ii) Deferred tax Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. (iii) Policyholders' fund yield tax Certain of the Group's policyholders within the Swedish Business are subject to a Swedish yield tax which is calculated based on an estimate of the investment return on underlying investments within their unitised funds. The Group is under an obligation to deduct the yield tax from the policyholders' unitised funds and to remit these deductions to the tax authorities. The deduction from policyholders' unitised funds is presented as management fee income with an equal charge reflected in the current tax charge. (p) Acquired value of in-force business Acquired in-force insurance and investment contracts arising from business combinations are measured at fair value at the time of acquisition. The difference between the fair value of insurance contracts and the liability measured in accordance with the Group's accounting polices for the contracts is recorded as acquired present value of in-force business. Present value of in-force business is carried gross of tax and is amortised against income on a time profile which, it is intended, will broadly match the profile of the underlying emergence of surplus as anticipated at the time of acquisition. The present value of in-force insurance contracts is tested for recoverability/ impairment as part of the liability adequacy test. The present value of in-force investment contracts is stated at cost less accumulated amortisation and impairment losses. The initial cost is deemed to be the fair value of the contractual customer relationships acquired. The acquired present value of the in-force investment contracts is carried gross of tax and is amortised against income on a time profile which, it is intended, will broadly match the profile of the underlying emergence of profit from the contracts. The recoverable amount is estimated at each balance sheet date. If the recoverable amount is less than the carrying amount, an impairment loss is recognised in the income statement and the carrying amount is reduced to its recoverable amount. (q) Acquired value of customer relationships The acquired value of customer relationships arising from business combinations is measured at fair value at the time of acquisition. This comprises the discounted cashflows relating to new insurance and investment contracts which are expected to arise from existing customer relationships. These are carried gross of tax, are amortised in accordance with the expected emergence of profit from the new contracts and are tested periodically for recoverability. (r) Internally-developed software An intangible asset in respect of internal development software costs is only recognised if all of the following conditions are met: (i) an asset is created that can be identified; (ii) it is probable that the asset created will generate future economic benefits; and (iii) the development costs of the asset can be measured reliably. Software development costs are amortised on a straight-line basis over their estimated useful life, which typically varies between 3 and 5 years. Where no internally-generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred. (s) Property and equipment Items of property and equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation is charged to the income statement on a straight-line basis over the estimated useful economic lives of the property and equipment on the following basis: Computers and similar equipment 3 years Fixtures and other equipment 5 years Assets held under finance leases are depreciated over their useful economic lives on the same basis as owned assets, or where shorter, over the term of the relevant lease. (t) Investment property Investment properties are properties which are held either to earn rental income or for capital appreciation or for both. On initial recognition investment properties are measured at cost including attributable transaction costs, and are subsequently measured at fair value. Independent external valuers, having an appropriate recognised professional qualification and recent experience in the location and category of property being valued, value the portfolio every twelve months. The fair values reflect market values at the balance sheet date, being the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. Any gain or loss arising from a change in fair value is recognised in the income statement. Rental income from investment property is accounted for as described in accounting policy (m). (u) Financial assets Financial assets are classified into different categories depending on the type of asset and the purpose for which it is acquired. Currently two different categories of financial assets are used: 'financial assets at fair value through income' and 'loans and receivables'. Financial assets classified as at fair value through income comprise financial assets designated as such on initial recognition and derivative financial instruments. All financial assets held for investment purposes other than derivative financial instruments are designated as at fair value through income on initial recognition since they are managed, and their performance is evaluated, on a fair value basis in accordance with documented investment and risk management strategies. This designation is also applied to the Group's investment contracts, since the investment contract liabilities are managed together with the investment assets on a fair value basis as part of the documented risk management strategy. Purchases and sales of 'regular way' financial assets are recognised on the trade date, which is when the Group commits to purchase, or sell, the assets. All financial assets are initially measured at fair value plus, in the case of financial assets not classified as at fair value through income, transaction costs that are directly attributable to their acquisition. Subsequent to initial recognition, financial assets classified as at fair value through income are measured at their fair value without any deduction for transaction costs that may be incurred on their disposal. The fair values of financial assets quoted in an active market are their bid prices at the balance sheet date. Financial assets classified as loans and receivables are stated at amortised cost less impairment losses. A provision for the impairment of loans and receivables is established when there is objective evidence that the Group will not be able to collect all the amounts due according to the original contract terms after the date of the initial recognition of the asset and when the impact on the estimated cash flows of the financial asset can be reliably measured. Financial assets classified as prepayments are held at cost and are amortised over the relevant time period. Financial assets at fair value through income are regularly reviewed for objective evidence of impairment. In determining whether objective evidence exists, the Group considers, among other factors, the financial stability of the counterparty, current market conditions and fair value volatility. Financial assets are derecognised when contractual rights to receive cash flows from the financial assets expire, or where the financial assets have been transferred together with substantially all the risks and rewards of ownership. Investments in subsidiaries are carried in the Company balance sheet at cost less impairment. (v) Derivative financial instruments Derivative financial instruments are recognised at fair value. The gain or loss on remeasurement to fair value is recognised immediately in profit or loss. Hedge accounting has not been applied. The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties. The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price. Embedded derivatives which are not closely related to their host contracts and which meet the definition of a derivative are separated and fair valued through income. (w) Policyholders' funds held by the group and liabilities relating to policyholders' funds held by the group Policyholders' funds held by the Group and liabilities relating to policyholders' funds held by the Group are recognised at fair value. Policyholders' funds held by the Group The policyholders' funds held by the Group represent the assets associated with an Investment product in the Swedish business, where the assets are held on behalf of the policyholder and where all the risks and rewards associated with the assets are the policyholders' not the Group's. The policyholders' funds held by the Group are held for investment purposes on behalf of the policyholders and are designated as at fair value through income. The fair values of the policyholders' funds held by the Group are the accumulation of the bid prices of the underlying assets at the balance sheet date. Transactions in these financial assets are recognised on the trade date, which is when the Group commits (on behalf of the policyholder) to purchase, or sell the assets. Liabilities relating to policyholders' funds held by the Group The liability relating to policyholders' funds held by the Group represents the liability that matches the asset Policyholders' Funds Held by the Group. As stated previously, the risk and rewards associated with the investment product (and its underlying assets and matching liability) lie with the policyholders not the Group. (x) Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks and other short-term highly liquid investments. Highly liquid is defined as realisable into cash within 90 days. (y) Impairment The carrying amounts of the Group's assets other than reinsurance assets (refer to (k) above) and assets which are carried at fair value are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the assets' recoverable amount is estimated in order to determine the extent of the impairment loss, if any. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount and impairment losses are recognised in the income statement. The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money. Impairment losses are reversed through the income statement if there is a change in the estimates used to determine the recoverable amount. Such losses are reversed only to the extent that the assets' carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation where applicable, if no impairment loss had been recognised. (z) Provisions Provisions are recognised when the Group has a present, legal or constructive obligation as a result of past events such that it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Where the effect of the time value of money is material, the amount of the provision is the present value of the expenditures expected to be required to settle the obligation. The Group recognises provisions for onerous contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract. (aa) Borrowings Borrowings are recognised initially at fair value, less transaction costs, and are subsequently measured at amortised cost using the effective interest method, with interest expense recognised in the income statement on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts future cash payments through the expected life of the financial liability. (bb) Employee benefits (i) Pension obligations UKBusiness Group companies operate defined contribution pension schemes, which are funded through payments to insurance companies, to which Group companies pay fixed contributions. There are no legal or constructive obligations on Group companies to pay further contributions if the fund does not hold sufficient assets to pay employee benefits relating to service in current and prior periods. Accordingly, Group companies have no further payment obligations once the contributions have been paid. Contributions to defined contribution pension schemes are recognised in the income statement when due. Swedish Business The Group participates in a combined defined benefit and defined contribution scheme for the benefit of its employees. However, the scheme is a multi-employer scheme, with the associated assets and liabilities maintained on a pooled basis. There is limited information available to the Group to allow it to account for the scheme as a defined benefit scheme and, in accordance with IAS19 Employee Benefits, it is, therefore, accounted for as a defined contribution scheme. Contributions paid to the scheme are recognised in the income statement when due. (ii) Bonus plans The Group recognises a liability and an expense for bonuses based on a formula that takes into consideration the profit attributable to the Company's shareholders after certain adjustments. The expense is recognised in the income statement on an accruals basis. (cc) Share capital and shares held in treasury (i) Share capital Shares are classified as equity when there is no obligation to transfer cash or other assets. Incremental costs directly attributable to the issue of equity instruments are shown in equity as a deduction from the proceeds, net of tax. Incremental costs directly attributable to the issue of equity instruments, as consideration for the acquisition of a business, are included in the cost of acquisition. (ii) Shares held in treasury Where the Company purchases its own equity share capital, the consideration paid, including directly attributable costs, is deducted from total shareholders' equity and shown separately as 'treasury shares' until they are cancelled. Where such shares are subsequently sold, any consideration received is included within shareholders' equity. (dd) Dividends Dividend distributions to the Company's shareholders are recognised in the period in which the dividends are paid, and, for the final dividend, when approved by the Company's shareholders at the annual general meeting. (ee) Other payables and payables related to direct insurance and investment contracts Insurance and investment contract payables and other payables are recognised when due and are measured on initial recognition at the fair value of the consideration paid. Subsequent to initial recognition, payables are measured at amortised cost using the effective interest rate method. 2 Status of financial information The financial information contained in this preliminary announcement does not constitute the Company's consolidated statutory financial statements for the years ended 31 December 2008 or 2009 but is derived from those financial statements. The financial statements for the year ended 31 December 2009 will be delivered following the Company's Annual General Meeting. The auditors have reported on those financial statements; their reports were unqualified and did not contain statements under section 498(2) or (3) of the Companies Act 2006. 3 Acquisition of subsidiaries Acquisition of Moderna FÃ¶rsÃ¤kringar Liv AB On 23 July 2009, Chesnara plc acquired the entire issued share capital (100%) of Moderna FÃ¶rsÃ¤kringar Liv AB ('Moderna") from Moderna Finance AB for a total consideration of SEK 250m (Â£19,956,000), paid in cash. Moderna is a Stockholm-based insurance and investment company which specialises in corporate and personal pension arrangements and life assurance policies. Primarily it aggregates client funds into a range of investment providers and provides policy wrappers. It sells principally through the independent financial adviser channel and has, approximately, a 5.7% per cent market share of the Swedish unit-linked pension market. It was established in 2000, with its unit-linked business being launched in 2002. The business was acquired from Moderna Finance AB which is owned by Glitnir Bank in Iceland. The acquisition of this shareholding has given rise to a profit on acquisition of Â£25,056,000 calculated as follows: Fair value and accounting The estimated book and fair values of policy the assets and liabilities at the date of Book value adjustments Fair value acquisition were: Â£000 Â£000 Â£000 Assets Intangible assets Value of in-force insurance contracts - 779 779 Value of in-force investment contracts - 59,746 59,746 Value of customer relationships - 2,352 2,352 Deferred acquisition costs 41,831 (41,831) - Internally-developed software 3,313 - 3,313 Property and equipment 369 - 369 Investment in associates 781 - 781 Reinsurers' share of insurance contract provisions 25,713 - 25,713 Financial assets 749,279 - 749,279 Cash and cash equivalents 14,012 - 14,012 --------- --------- --------- Total assets 835,298 21,046 856,344 --------- --------- ---------- Liabilities Insurance contract provisions 30,642 - 30,642 Investment contracts 737,858 - 737,858 Borrowings 23,451 1,279 24,730 Provisions 265 - 265 Deferred tax liabilities 172 826 998 Reinsurance payables 9,324 - 9,324 Payables related to direct insurance and investment contracts 2,732 - 2,732 Income taxes 2,193 - 2,193 Other payables 2,590 - 2,590 --------- ---------- ---------- Total liabilities 809,227 2,105 811,332 --------- --------- --------- Net assets 26,071 18,941 45,012 --------- --------- --------- Net assets acquired (100%) 45,012 Total consideration (19,956) ---------- Profit arising on acquisition of subsidiary 25,056 ========== The assets and liabilities as at the acquisition date in the table above are stated at their provisional fair values and may be amended for 12 months after the date of acquisition in accordance with paragraph 62 of IFRS 3, Business Combinations. The results of Moderna have been included in the consolidated financial statements of the Group with effect from 23 July 2009, and have contributed revenue of Â£103.3 million over this period, whilst contributing Â£2.8 million loss to the overall consolidated profit before tax. Had Moderna been consolidated from 1 January 2009 the consolidated statement of comprehensive income would have included revenue of Â£209.7 million, and have contributed Â£0.3 million loss to the overall consolidated profit before tax. Acquisition of AkademikerRÃ¥dgivning i Sverige AB On 23 November 2009, Moderna acquired 41% of the share capital in the associated company AkademikerRÃ¥dgivning i Sverige AB ('AkademikerRÃ¥dgivning') from AkademikertjÃ¤nst I.A.S for a total consideration of SEK 3,550,000 (Â£ 311,321), payable in cash, resulting in 90% total ownership. AkademikerRÃ¥dgivning is an independent financial adviser of insurance and savings products. The target customers are the members of one of the six Unions of Academics that are also shareholders in the company. AkademikerRÃ¥dgivning was established in 2006, but started its operations in 2007 and is based in Stockholm. Fair Value The estimated book and fair values and of the assets and liabilities at the date of accounting acquisition were: Book Value Book Value policy 100% 41% adjustments Fair Value Â£000 Â£000 Â£000 Â£000 Assets Intangible assets Other intangibles - - 348 348 Internally-developed software 82 33 - 33 Property and equipment 55 23 - 23 Financial assets 21 9 - 9 Deferred tax asset 190 78 - 78 Cash and cash equivalents 42 17 - 17 --------- ---------- ---------- ---------- Total assets 390 160 348 508 --------- ---------- ---------- ----------- Liabilities Borrowings 228 93 - 93 Deferred tax liabilities - - 92 92 Other payables 30 12 - 12 --------- --------- ---------- ----------- Total liabilities 258 105 92 197 --------- --------- --------- ---------- Net assets 132 55 256 311 ========= ========= ========= ========= Net assets acquired (41%) 311 Total consideration (311) --------- Profit arising on acquisition of this holding - ========= The assets and liabilities as at the acquisition date in the table above are stated at their provisional fair values and may be amended for 12 months after the date of acquisition in accordance with paragraph 62 of IFRS 3, Business Combinations. The results of AkadermikerRÃ¥dgivning have been included in the consolidated financial statements of the Group with effect from 23 November 2009, and have contributed a Â£66,031 loss to the overall consolidated profit before tax. Had AkadermikerRÃ¥dgivning been consolidated from 1 January 2009, the consolidated statement of comprehensive income would have included revenue of Â£217,127 and a loss of Â£585,597 On 31 December 2009 Moderna acquired an additional 1% of the share capital of AkademikerRÃ¥dgivning for a consideration of SEK 87,000 (Â£7,545), resulting in a total ownership of 91%. The consideration paid represents the additional net assets acquired and no goodwill was recognized. 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. There were no changes to the basis of segmentation or the measurement basis for segment profit during the year ended 31 December 2009. UKBusiness This segment comprises the UK insurance and investment operation, Countrywide Assured Life Holdings Limited ('CAHL'), which holds the Group's UK insurance and investment assets and liabilities, and is responsible for managing both unit-linked and non-linked business. Swedish Business This segment comprises the Swedish insurance and investment operation, Moderna FÃ¶rsÃ¤kringar Liv AB ('Moderna'), which holds the Group's Swedish insurance and investment assets and liabilities, and is responsible for managing both unit-linked and non-linked business. Other Group Activities The functions performed by the holding company, Chesnara plc, are defined under the operating segment analysis as Other Group Activities. Also included therein are consolidation and elimination adjustments. Measurement basis The accounting policies of the segments are the same as those for the Group as a whole. Any transactions between the business segments are on normal commercial terms and market conditions. The Group evaluates performance of operating segments on the basis of the profit before tax attributable to shareholders and the total assets and liabilities of the reporting segments and the Group. (i) Segmental income statement for the year ended 31 December 2009 UK Swedish Other Group Business Business Activities Total Â£000 Â£000 Â£000 Â£000 Insurance premium revenue 88,469 11,636 - 100,105 Insurance premium ceded to reinsurers (15,831) (9,166) - (24,997) --------- ----------- ---------- --------- Net insurance premium revenue 72,638 2,470 - 75,108 Fee and commission income Insurance contracts 34,285 1,579 - 35,864 Investment contracts 8,258 6,998 - 15,256 Net investment return 233,926 92,239 515 326,680 --------- --------- ----------- ---------- Total revenue (net of reinsurance payable) 349,107 103,286 515 452,908 Other operating income 4,689 - - 4,689 ---------- ---------- ---------- --------- Segmental income 353,796 103,286 515 457,597 ---------- ---------- ---------- --------- Insurance contract claims and benefits incurred Claims and benefits paid to insurance contract holders (126,737) (2,820) - (129,557) Net (increase)/ decrease in insurance contract provisions (128,064) 224 - (127,840) Reinsurers' share of claims and benefits 45,630 2,267 - 47,897 ---------- ---------- ----------- ---------- Net insurance contract claims and benefits incurred (209,171) (329) - (209,500) ---------- ---------- ------------ ----------- Change in investment contract liabilities (107,524) (92,224) - (199,748) Reinsurers' share of investment contract liabilities 4,710 - - 4,710 ---------- ---------- ----------- ---------- Net change in investment contract liabilities (102,814) (92,224) - (195,038) ---------- --------- --------- ---------- Fees, commission and other acquisition costs (1,116) (4,051) - (5,167) Administrative expenses (9,806) (5,276) (3,163) (18,245) Other operating expenses Charge for amortisation of acquired value of in-force business (3,688) (3,265) - (6,953) Charge for amortisation of customer relationships - (188) - (188) Other (2,417) (110) 332 (2,195) --------- ---------- ---------- --------- Segmental expenses (329,012) (105,443) (2,831) (437,286) ---------- --------- --------- --------- Segmental income less expenses 24,784 (2,157) (2,316) 20,311 Share of profit from associates - 39 - 39 Profit recognised on acquisition of subsidiary - - 25,056 25,056 --------- --------- --------- --------- Segmental operating profit/ (loss) 24,784 (2,118) 22,740 45,406 Financing costs - (508) (157) (665) ---------- --------- ---------- ---------- Profit/(loss) before tax 24,784 (2,626) 22,583 44,741 Income tax credit/ (expense) 948 (148) 392 1,192 Non-controlling interest 7 7 --------- --------- --------- --------- Profit/(loss) after tax attributable to shareholders 25,732 (2,767) 22,975 45,940 ========= ========= ========= ========= (ii) Segmental income statement for the year ended 31 December 2008 UK Swedish Other Group Business Business Activities Total Â£000 Â£000 Â£000 Â£000 Insurance premium revenue 94,274 - - 94,274 Insurance premium ceded to reinsurers (17,193) - - (17,193) ---------- --------- --------- --------- Net insurance premium revenue 77,081 - - 77,081 Fee and commission income Insurance contracts 35,289 - - 35,289 Investment contracts 9,305 - - 9,305 Net investment return (225,080) - 2,338 (222,742) --------- ---------- ---------- ---------- Total revenue (net of reinsurance payable) (103,405) - 2,338 (101,067) Other operating income 1,224 - 90 1,314 ---------- ---------- --------- ---------- Segmental income (102,181) - 2,428 (99,753) ---------- --------- ---------- --------- Insurance contract claims and benefits incurred Claims and benefits paid to insurance contract holders (131,829) - - (131,829) Net decrease in insurance contract provisions 180,265 - - 180,265 Reinsurers' share of claims and benefits (8,736) - - (8,736) --------- --------- ---------- --------- Net insurance contract claims and benefits incurred 39,700 - - 39,700 ---------- --------- ----------- --------- Change in investment contract liabilities 108,516 - - 108,516 Reinsurers' share of investment contract liabilities (4,743) - - (4,743) --------- ---------- --------- ---------- Net change in investment contract liabilities 103,773 - - 103,773 ---------- --------- --------- ---------- Fees, commission and other acquisition costs (1,377) - - (1,377) Administrative expenses (12,161) - (1,472) (13,633) Other operating expenses Charge for amortisation of acquired value of in-force business (3,578) - - (3,578) Other (562) - (1,091) (1,653) ---------- --------- --------- --------- Segmental expenses 125,795 - (2,563) 123,232 ---------- --------- --------- ---------- Segmental operating profit/(loss) 23,614 - (135) 23,479 Financing costs - - (752) (752) ---------- ---------- --------- ---------- Profit/(loss) before tax 23,614 - (887) 22,727 Income tax (expense)/credit (2,856) - 146 (2,710) ----------- ---------- ---------- ----------- Profit/(loss) after tax attributable to shareholders 20,758 - (741) 20,017 ========= ========= ========= ========== (iii) Segmental balance sheet as at 31 December 2009 Other Group UK Swedish Activities Business Business Total Â£000 Â£000 Â£000 Â£000 Intangible assets 32,471 70,061 - 102,532 Property and equipment - 491 - 491 Investment in associates - 1,051 - 1,051 Reinsurers' share of insurance contract provisions 209,604 27,262 - 236,866 Amounts deposited with reinsurers 27,056 - - 27,056 Investment properties 3,355 - - 3,355 Financial assets 1,413,798 974,475 71 2,388,344 Reinsurers' share of accrued policyholder claims 4,728 - - 4,728 Income tax - - 395 395 Cash and cash equivalents 120,830 14,776 19,635 155,241 --------- ---------- ---------- ---------- Total assets 1,811,842 1,088,116 20,101 2,920,059 --------- ---------- ---------- ---------- Bank overdrafts 2,312 - - 2,312 Insurance contract provisions 1,044,680 32,353 - 1,077,033 Investment contracts at fair value through income 610,930 918,291 - 1,529,221 Liabilities relating to policyholders' funds held by the Group - 41,107 - 41,107 Borrowings - 24,799 4,197 28,996 Derivative financial instruments 54 - 54 Provisions 1,452 - - 1,452 Deferred tax liabilities 9,613 751 2 10,366 Reinsurance payables 2,064 12,975 - 15,039 Payables related to direct insurance and investment contracts 24,751 5,682 - 30,433 Deferred income 13,132 - - 13,132 Income taxes 854 459 - 1,313 Other payables 3,825 3,990 2,018 9,833 --------- --------- ---------- ---------- Total liabilities 1,713,667 1,040,407 6,217 2,760,291 --------- --------- --------- ---------- Net assets 98,175 47,709 13,884 159,768 Non-controlling interest - (13) - (13) --------- ---------- --------- ---------- Net assets attributable to shareholders 98,175 47,696 13,884 159,755 ========= ========== ========== ========== (iv) Segmental balance sheet as at 31 December 2008 UK Other Swedish Group Business Business Activities Total Â£000 Â£000 Â£000 Â£000 Intangible assets 37,066 - - 37,066 Reinsurers' share of insurance contract provisions 182,693 - - 182,693 Amounts deposited with reinsurers 22,181 - - 22,181 Investment properties 3,432 - - 3,432 Financial assets 1,236,534 - 1,177 1,237,711 Reinsurers' share of accrued policyholder claims 4,100 - - 4,100 Cash and cash equivalents 155,009 - 37,372 192,381 --------- ---------- ---------- ---------- Total assets 1,641,015 - 38,549 1,679,564 ---------- ---------- --------- ---------- Bank overdrafts 1,086 - 8 1,094 Insurance contract provisions 923,506 - - 923,506 Investment contracts at fair value through income 558,542 - - 558,542 Borrowings - - 8,358 8,358 Derivative financial instruments 70 - - 70 Provisions 3,397 - - 3,397 Deferred tax liabilities 10,798 - - 10,798 Reinsurance payables 1,397 - - 1,397 Payables related to direct insurance and investment contracts 23,891 - - 23,891 Deferred income 14,575 - - 14,575 Income taxes 1,213 - (139) 1,074 Other payables 4,207 - 2,287 6,494 ---------- ---------- ---------- ----------- Total liabilities 1,542,682 - 10,514 1,553,196 --------- ---------- --------- --------- Net assets 98,333 - 28,035 126,368 ========= ========== ========= ========== 5 Income tax expense Year ended 31 December Total income tax (credit)/expense comprises: 2009 2008 Â£000 Â£000 UK Business and Other Group Activities (1,340) 2,710 Swedish Business 148 - --------- --------- Total (1,192) 2,710 ========= ========= Year ended 31 December UK Business and Other Group Activities 2009 2008 Â£000 Â£000 Current tax expense Current year 3,548 3,037 Overseas tax 976 730 Adjustment to prior years (4,681) (8) ---------- ---------- Net (credit)/expense (157) 3,759 Deferred tax credit Origination and reversal of temporary differences (1,183) (1,049) ---------- --------- Total income tax (credit)/expense (1,340) 2,710 ========= ========== Reconciliation of effective tax rate on profit Year ended 31 December before tax 2009 2008 Â£000 Â£000 Profit before tax 47,367 22,727 --------- --------- Income tax using the domestic corporation tax rate of 28% (2008: 28.5%) 13,263 6,477 Non-taxable profit on acquisition of subsidiary (7,016) - Impact of small companies rate for subsidiaries - Permanent differences 304 116 Effect of UK taxing bases on insurance profits Offset of franked investment income (3,859) (3,885) Variation in rate of tax on amortisation of acquired in-force value 73 90 Other 576 (80) Overprovided in prior years (4,681) (8) --------- --------- Total income tax (credit)/expense (1,340) 2,710 ========= ========= The amount overprovided in prior years relates principally to the writeback of a provision for current tax made in respect of 2007. This provision had been established because of uncertainty surrounding the interpretation of UK tax legislation relating to that year. In the event, the submission to HMRC of the tax computation for that year has resolved the uncertainty and the provision has, accordingly, been released. The Income tax credit relates to the UK Business and Other Group Activities operating segments together. Year ended 31 December Swedish Business 2009 2008 Â£000 Â£000 Current tax expense Current year 12 - Overseas tax - - Adjustment to prior years - - --------- --------- 12 Deferred tax expense Origination and reversal of temporary differences 136 - --------- --------- Total income tax expense 148 - ========= ========= Reconciliation of effective tax rate on profit Year ended 31 before tax December 2009 2008 Â£000 Â£000 Loss before tax (2,626) - --------- --------- Income tax using the domestic corporation tax rate of 26.3% (691) - Non-taxable income in relation to unit-linked business 349 Policyholder tax 13 - Non-taxable fair value adjustment on acquisition 440 - Impact of different rate for subsidiaries 5 - Permanent differences (13) - Unrecognised tax recoverable 47 Non-deductible expenses 8 - Overprovided in prior years (10) - --------- --------- Total income tax expense 148 - --------- --------- 6 Borrowings 31 December 2009 2008 Â£000 Â£000 Bank loan 4,197 8,358 Amount due in relation to financial reinsurance 24,686 - Other 113 - --------- --------- Total 28,996 8,358 ========= ========= Current 12,474 4,168 Non-current 16,522 4,190 --------- --------- Total 28,996 8,358 ========= ========= The bank loan, which was drawn down on 2 June 2005 under a facility made available on 4 May 2005, is unsecured and is repayable in five equal annual instalments on the anniversary of the draw down date. Accordingly the current portion as at 31 December 2008, being that payable within one year, is Â£ 4,168,000 and the non-current portion is Â£4,190,000. The outstanding principal on the loan bears interest at a rate based on the London Inter-bank Offer Rate, payable in arrears over a period which varies between one and six months at the option of the borrower. The fair value of the bank loan at 31 December 2009 was Â£4,200,000 (31 December 2008: Â£8,400,000). The fair value of amounts due in relation to financial reinsurance was Â£26,415,353 (31 December 2008: Â£nil) The fair value of other borrowings is not materially different from its carrying value. 7 Share capital 31 December 2009 31 December 2008 Share Share capital capital Number of Number of shares Â£000 shares Â£000 Share capital 104,588,785 41,501 104,588,785 41,501 ========= ======== ========= ========= There have been no changes in Group share capital and share premium during the year ended 31 December 2009. The number of shares in issue at the balance sheet date included 3,096,194 shares held in treasury (31 December 2008: 3,096,194). Under the reverse acquisition basis of accounting referred to in Note 1, at the date of acquisition of Chesnara plc (the legal parent) the amount of issued share capital in the consolidated balance sheet represents the amount of issued share capital of Countrywide Assured Life Holdings Limited (the legal subsidiary) immediately before the acquisition and the deemed cost of acquisition, as explained in Note 1, is taken as Â£nil. The number of shares, representing the equity structure, reflects the equity structure of Chesnara plc as set out below. 8 Retained earnings 31 December 2009 2008 Â£000 Â£000 Retained earnings attributable to equity holders of the parent company comprise Balance at 1 January 67,738 63,775 Profit for the year 45,940 20,017 Dividends Final approved and paid for 2007 - (10,302) Interim approved and paid for 2008 - (5,752) Final approved and paid for 2008 (10,200) - Interim approved and paid for 2009 (5,734) - ---------- ---------- Balance at 31 December 97,744 67,738 ========= ========== The interim dividend in respect of 2008, approved and paid in 2008, was paid at the rate of 5.50p per share. The final dividend in respect of 2008, approved and paid in 2009, was paid at the rate of 10.05p per share so that the total dividend paid to the equity shareholders of the Parent Company in respect of the year ended 31 December 2008 was made at the rate of 15.55p per share. The interim dividend in respect of 2009, approved and paid in 2009, was paid at the rate of 5.65p per share to equity shareholders of the Parent Company registered at the close of business on 12 September 2009, the dividend record date. A final dividend of 10.3p per share in respect of the year ended 31 December 2009 payable on 20 May 2010 to equity shareholders of the Parent Company registered at the close of business on 16 April 2010, the dividend record date, was approved by the Directors after the balance sheet date. The resulting total final dividend of Â£10.5m has not been provided for in these financial statements and there are no income tax consequences. The following summarises dividends per share in respect of the year ended 31 December 2008 and 31 December 2009: 2009 2008 p p Interim - approved and paid 5.65 5.50 Final - proposed 10.30 10.05 --------- --------- Total 15.95 15.55 ========= ========= 9 Earnings per share Earnings per share are based on the following: Year ended 31 December 2009 2008 Profit for the year attributable to shareholders (Â£000) 45,940 20,017 --------- --------- Weighted average number of ordinary shares 101,492,591 104,021,765 --------- --------- Basic earnings per share 45.26p 19.24p --------- ---------- Diluted earnings per share 45.26p 19.24p ========= ========== The weighted average number of ordinary shares in respect of the year ended 31 December 2009 is based on 104,588,785 shares in issue at the beginning and end of the period less 3,096,194 shares held in treasury at the beginning and end of the period. The weighted average number of ordinary shares in respect of the year ended 31 December 2008 is based on 104,588,785 shares in issue at the beginning of the period and on 104,588,785 shares in issue at the end of the period less 3,096,194 own shares held in treasury, taking account of the timing of the purchases of own shares. There were no share options outstanding during the year ended 31 December 2008 or during the year ended 31 December 2009. Accordingly, there is no dilution of the average number of ordinary shares in issue in respect of these periods. Earnings per share for the year ended 31 December 2009 includes the impact of Â£ 25,056,000 of profit recognised on the acquisition of Moderna. Excluding this item both the basic and diluted earnings per share for the year ended 31 December 2009 would have been 20.58p per share. 10 Additional Information Additional information relating to the Company can be found on its website www.chesnara.co.uk. 11 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 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 jurisdiction in which Chesnara plc and its subsidiaries operate. As a result, Chesnara plc's actual future condition, business performance and results may differ materially from the plans, goals and expectations expressed or implied in these forward-looking statements. SUPPLEMENTARY INFORMATION - EUROPEAN EMBEDDED VALUE BASIS SUMMARISED EEV CONSOLIDATED INCOME STATEMENT Year ended 31 December 2009 2008 Note Â£000 Â£000 Operating profit of covered business 6 19,120 25,521 Other operational result 868 385 ----------- ---------- Operating profit 19,988 25,906 Variation from longer-term investment return 13,750 (16,831) Effect of economic assumption changes (9,730) 6,951 --------- ---------- Profit before tax and before exceptional item 24,008 16,026 Exceptional item Profit on acquisition of subsidiary company 54,187 - --------- --------- Profit before tax 78,195 16,026 Tax 12,070 (1,200) --------- --------- Profit for the year 90,265 14,826 --------- --------- Attributable to: Shareholders 90,272 14,826 Non-controlling interest (7) - --------- ---------- 90,265 14,826 ========= ========= Earnings per share Based on profit for the period attributable to shareholders 88.94p 14.25p --------- ---------- Diluted earnings per share Based on profit for the period attributable to shareholders 88.94p 14.25p --------- --------- SUPPLEMENTARY INFORMATION - EUROPEAN EMBEDDED VALUE BASIS SUMMARISED EEV CONSOLIDATED BALANCE SHEET 31 December 2009 2008 Note Â£000 Â£000 Assets Value of in force business 5,8 198,312 84,940 Deferred acquisition costs arising on unmodelled business 197 - Acquired value of customer relationships 346 - Internally-developed software 4,060 - Property and equipment 491 - Investment in associate 1,051 - Reinsurers' share of insurance contract provisions 209,537 165,648 Amounts deposited with reinsurers 26,240 21,404 Investment properties 3,355 3,432 Deferred tax assets 1,972 - Financial assets Equity securities at fair value through income 454,970 363,879 Holdings in collective investment schemes at fair value through income 1,612,861 576,502 Debt securities at fair value through income 247,836 279,104 Insurance and other receivables 19,822 11,056 Prepayments 3,784 1,600 Policyholders' funds held by the Group 41,107 - Derivative financial instruments 7,964 5,570 --------- --------- Total financial assets 2,388,344 1,237,711 --------- --------- Reinsurers' share of accrued policy claims 4,728 4,100 Income taxes 395 - Cash and cash equivalents 155,241 192,381 --------- --------- Total assets 2,994,269 1,709,616 --------- --------- Liabilities Bank Overdraft 2,312 1,094 Insurance contract provisions 1,049,906 907,071 Financial liabilities Investment contracts at fair value through income 1,543,915 573,955 Borrowings 36,307 8,358 Derivative financial instruments 54 70 Liabilities relating to policyholders' funds held by the Group 41,107 - --------- --------- Total financial liabilities 1,621,383 582,383 --------- --------- Provisions 1,452 3,397 Reinsurance payables 15,039 1,397 Payables related to direct insurance and investment contracts 30,433 23,891 Income taxes 1,313 1,181 Other payables 9,833 6,494 --------- --------- Total liabilities 2,731,671 1,526,908 --------- ---------- Net assets 262,598 182,708 ========= ========= Equity Share capital 41,501 41,501 Share premium 20,458 20,458 Treasury shares (3,379) (3,379) Foreign exchange reserve 5,539 - Other reserves 50 50 Retained earnings 198,416 124,078 --------- ---------- Total shareholders' equity 262,585 182,708 Non-controlling interest 13 - ---------- ---------- Total equity 5,8 262,598 182,708 ========= ========== SUPPLEMENTARY INFORMATION - EUROPEAN EMBEDDED VALUE BASIS SUMMARISED EEV CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Year ended 31 December 2009 2008 Â£000 Â£000 Shareholders' equity at 1 January 182,708 187,315 Purchase of treasury shares - (3,379) Profit for the period attributable to shareholders 90,272 14,826 Foreign exchange reserve movement 5,539 Dividends paid (15,934) (16,054) --------- --------- Shareholders' equity at 31 December 262,585 182,708 ========= ========= NOTES TO THE SUPPLEMENTARY INFORMATION 1 Basis of preparation This section sets out the detailed methodology followed for producing these Group financial statements which are supplementary to the Group's primary financial statements which have been prepared in accordance with International Financial Reporting Standards ('IFRS'). These financial statements have been prepared in accordance with the European Embedded Value ('EEV') principles issued in May 2004 by the European CFO Forum and supplemented by Additional Guidance on EEV Disclosures issued by the same body in October 2005. The principles provide a framework intended to improve comparability and transparency in embedded value reporting across Europe. In order to improve understanding of the Group's financial position and performance, certain of the information presented in these financial statements is presented on a segmental basis: the business segments are the same as those described in Note 4 to the primary financial statements prepared on the IFRS basis above. The Swedish Business was acquired on 23 July 2009: accordingly, the results relating thereto, as reflected in segmental analysis are for a period just in excess of five months. Prior year information in respect of the financial position as at 31 December 2008 and for the year then ended is designated as Â£nil in respect of the Swedish Business, while other prior year data 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 Business, 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, the covered business comprises the business's long-term pensions and savings unit-linked business. Group life and sickness business, including waiver of premium and non-linked individual life assurance policies are not included in the covered business: the result relating to this business is established in accordance with IFRS principles and is included within 'other operational result' within the consolidated summarised income statement. Under EEV principles no distinction is made between insurance and investment contracts, as there is under IFRS, which accords these classes of contracts different accounting treatments. 3 Methodology (a) Embedded Value Overview Shareholders' equity comprises the embedded value of the covered business, together with the net equity of other Group companies, including that of the holding company which is stated after writing down fully the carrying value of the covered business. The embedded value of the covered business is the aggregate of the shareholder net worth ('SNW') and the present value of future shareholder cash flows from in-force covered business (value of in-force business) less any deduction for the cost of required capital. It is stated after allowance has been made for aggregate risks in the business. SNW comprises those amounts in the long-term business, which are either regarded as required capital or which represent surplus assets within that business. New business UK Business Much of the covered business is in run-off and is, accordingly, substantially closed to new business. The UK Business does still sell a small amount of new business but, overall, the contribution from new business to the results established using EEV methodology is not material. Accordingly, not all of those items related to new business values, which are recommended by the EEV guidelines, are reported in this supplementary financial information. Swedish Business New business, in relation to the pensions and savings covered business is taken as all business where contracts are signed and new premiums paid during the reporting period, for both new policies and premium increases on existing business, but excluding standard renewals. New business premium volume for the period which is consistent with the analysis of profit in Note 6, being the period from 23 July 2009, the date of acquisition of the Swedish Business, to 31 December 2009, is as follows: New business premium income relating to pensions and savings covered business, Â£16.5m * *Basis: annualised premium plus 1/10 single premium translated into sterling at the post-acquisition average rate of SEK 11.5594 = Â£1. The new business contribution has been assessed as at the end of the period, using opening assumptions. Value of in-force business The cash flows attributable to shareholders arising from in-force business are projected using best estimate assumptions for each component of cash flow. The present value of the projected cash flows is established by using a discount rate which reflects the time value of money and the risks associated with the cash flows which are not otherwise allowed for. There is a deduction for the cost of holding the required capital, as set out below. Taxation The present value of the projected cash flows arising from in-force business takes into account all tax which is expected to be paid under current legislation, including tax which would arise if surplus assets within the covered business were eventually to be distributed. 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 Business and yield tax in the Swedish Business. Cost of capital The cost of holding the required capital to support the covered business (see 3 (b) below) is reflected as a deduction from the value of in-force business and is determined as the difference between the amount of the required capital and the projected release of capital and investment income. Financial options and guarantees UK Business The principal financial options and guarantees in the UK Business are (i) guaranteed annuity rates offered on some unit-linked pension contracts and (ii) a guarantee offered under Timed Investment Funds that the unit price available at the selected maturity date (or at death, if earlier) will be the highest price attained over the policy's life. The cost of these options and guarantees has been assessed, in principle, on a market-consistent basis, but, in practice, this has been carried out on approximate bases, which are appropriate to the level of materiality of the results. Swedish Business In respect of the Swedish Business, some contracts provide policyholders with an investment guarantee, whereby a minimum rate of return is guaranteed for the first 5 years of the policy, at a rate of 3% per annum. As at 31 December 2009, the total amount guaranteed was approximately Â£0.6m. Thus, due to low volumes and the limited exposure, the value of the guarantee is ignored as 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 UK and Swedish Businesses ( the 'Directors'); (ii) setting the risk discount rate, which is applied to the projected cash flows arising on the in-force business, at a level which includes an appropriate risk margin; and (iii) explicit allowance for the cost of financial options and guarantees and, where appropriate, for reinsurer default. Internal Group Company EEV Guidance requires that actual and expected profit or loss incurred by an internal group company on services provided to the covered business should be included in allowances for expenses. The covered business in the Swedish Business is partially managed by an internal group fund management company. Not all relevant future income and expenses of that company have been included in the calculation of embedded value. However, the effect is not considered to be material. (b) Level of Required Capital The level of required capital of the covered business reflects the amount of capital that the Directors consider necessary and appropriate to manage the respective businesses. In forming their policy the Directors have regard to the minimum statutory requirements and an internal assessment of the market, insurance and operational risks inherent in the underlying products and business operations. The capital requirement resulting from this assessment represents (a) for the UK Business, 150% of the long-term insurance capital requirement ('LTICR') together with 100% of the resilience capital requirement ('RCR'), as determined by the regulations of the Financial Services Authority in the UK and (b) for the Swedish Business, 150% of the regulatory solvency requirement as determined by Finansinspektionen in Sweden. The required level of regulatory capital is provided as follows: (i) for the UK Business, by the retained surplus within the long-term business fund and by share capital and retained earnings within the shareholder funds of the regulated entity; and (ii) for the Swedish Business, by share capital and additional equity contributions from the parent company, net of the accumulated deficit in the regulated entity, these components together comprising shareholder's equity. The Swedish Business is reliant, in the medium term, on further equity contributions from the parent company, Chesnara plc. (c) Discount Rates The discount rates are a combination of the reference rate and a risk margin. The reference rate reflects the time value of money and the risk margin reflects any residual risks inherent in the covered business and makes allowance for the risk that future experience will differ from that assumed. In order to reduce the subjectivity when setting the discount rates, the Group has decided to adopt a 'bottom up' market-consistent approach to allow explicitly for market risk. Using the market-consistent approach, each cash flow is valued at a discount rate consistent with that used in the capital markets: in accordance with this, equity-based cash flows are discounted at an equity discount rate and bond-based cash flows at a bond discount rate. In practice a short-cut method known as the 'certainty equivalent' approach has been adopted. This method assumes that all cash flows earn the reference rate of return and are discounted at the reference rate. In general, and consistent with the market's approach to valuing financial instruments for hedging purposes, the reference rate is based on swap yields. In respect of the UK Business, where, in prior years, non-linked business was substantially backed by government bonds, the yields on these assets were taken. During 2009, the investment guidelines for the relevant part of the UK Business were revised, so the use of yields on government backed bonds is no longer appropriate, resulting in the use of swap yields for all reference rates. Within the risk margin, allowance also needs to be made for non-market risks. For some of these risks, such as mortality and expense risk, it is assumed that the shareholder can diversify away any uncertainty where the impact of variations in experience on future cash flows is symmetrical. For those risks that are assumed to be diversifiable, no adjustment to the risk margin has been made. For any remaining risks that are considered to be non-diversifiable risks, there is no risk premium observable in the market and, therefore, a constant margin has been added to the risk margin. The margin added reflects the assumed risks within the businesses and is 50 basis points for the UK Business and 70 basis points for the Swedish Business. A market-consistent valuation approach also generally requires consideration of 'frictional' costs of holding shareholder capital: in particular, the cost of tax on investment returns and the impact of investment management fees can reduce the face value of shareholder funds. For the UK Business, the expenses relating to corporate governance functions eliminate any taxable investment return in shareholder funds, while investment management fees are not material. For the Swedish Business, appropriate allowance is made for the cost of tax on locked-in capital and the cost for an investor of owning an asset indirectly via an investment policy rather than by direct investment into the underlying assets. At previous reporting dates it has been our practice, having calculated an embedded value using a market-consistent method, to undertake a process known as the calibration of the Risk Discount Rate ('RDR'), whereby we have equated the results from a traditional embedded value approach, including assumed actual investment returns and traditional cost of capital, to that derived using the market-consistent method. Accordingly, the discount rate required for the traditional embedded value, to equate the results, represents the RDR, and the difference between this derived RDR and the risk-free rate is the risk margin. Disclosures, including the analysis of profit and the sensitivities, were then presented on the traditional embedded value method. In order to streamline the process, all amounts disclosed for 2009 reporting have been presented using the market-consistent method. This does not impact the level of embedded value reported, but results in changes in the disclosed sensitivities and in the analysis of profit. Unlike previous reporting periods there is no RDR to disclose. (d) Analysis of Profit The contribution to operating profit, which is identified at a level which reflects an assumed longer-term level of investment return, arises from three sources: (i) new business; (ii) return from in-force business; and (iii) return from shareholder net worth. Additional contributions to profit arise from: (i) variances between the actual investment return in the period and the assumed long-term investment return; and (ii) the effect of economic assumption changes. The contribution from new business represents the value recognised at the end of each period in respect of new business written in that period, after allowing for the cost of acquiring the business, the cost of establishing the required technical provisions and after making allowance for the cost of capital, calculated on opening assumptions. The return from in-force business is calculated using closing assumptions and comprises: (i) the expected return, being the unwind of the discount rates over the period applied to establish the value of in-force business at the beginning of the period; (ii) variances between the actual experience over the period and the assumptions made to establish the value of business in force at the beginning of the period; and (iii) the net effect of changes in future assumptions, made prospectively at the end of the period, from those used in establishing the value of business in force at the beginning of the period, other than changes in economic assumptions. The contribution from shareholder net worth comprises the actual investment return on residual assets in excess of the required capital. (e) Assumption Setting There is a requirement under EEV methodology to use best estimate demographic assumptions and to review these at least annually with the economic assumptions being reported 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 2009. The detailed projection assumptions, including mortality, morbidity, persistency and expenses reflect recent operating experience. Allowance is made for future improvement in annuitant mortality based on experience and externally published data. Favourable changes in operating experience, particularly in relation to expenses and persistency, are not anticipated until the improvement in experience has been observed. Holding company expenses (for the Chesnara Group such expenses relate largely to listed company functions) are allocated to the UK covered business, except for a relatively small amount of expense, which is assumed to relate to business development functions, to reflect effort expended within the holding company relating to the transaction of life assurance business through the subsidiary companies. Hence the expense assumptions used for the cash flow projections include the full cost of servicing this business. The economic assumptions are reviewed and updated at each reporting date based on underlying investment conditions at the reporting date. The assumed discount rate and inflation rates are consistent with the investment return assumptions. In addition, the demographic assumptions used at December 2009 are considered to be best estimate and, consequently, no further adjustments are required. In respect of the UK Business, the assumptions required in the calculation of the value of the annuity rate guarantee on pension business have been set equal to best-estimate assumptions. (f) Pension Schemes In the Swedish Business, 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. 4 Assumptions (a) Investment Returns Investment returns are assumed to be equal to the reference rate, as covered in note 3I above. For linked business, the aggregate return has been determined by the reference rate less an appropriate allowance for tax. UK Business Swedish Business 31 December 31 December 2009 2008 2009 2008 Investment Return 3.8% 3.6% 3.74%* n/a Inflation RPI 2.9% 1.5% 2.0% n/a * A full swap curve is used: the rate quoted is for a term of ten years and is presented as an indicative rate. (b) Actuarial Assumptions The demographic assumptions used to determine the value of the in-force business have been set at levels commensurate with the underlying operating experience identified in the periodic actuarial investigations. (c) Taxation Projected tax has been determined assuming current tax legislation and rates continue unaltered, except where future tax rates or practices have been announced. (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 the UK Business, 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 governance costs relating to the covered business. For the Swedish business, these have been determined by reference to: (i)an expense analysis in which all expenses were allocated to covered and uncovered business, with expenses for the covered business being allocated to acquisition and maintenance activities; and (ii) expense drivers, being, in relation to acquisition costs, the number of policies sold during the period and, in relation to maintenance expenses, the average number of policies in force during the period. The expense assumptions for the UK Business also include the expected future holding company expenses which will be recharged to the worldwide covered business. No allowance has been made for future productivity improvements in the expense assumptions. (e) Discount Rate The reference rate is set by reference to mid swap rates available in the market at the end of the reporting period. An explicit constant margin is added to the reference rate to cover any remaining risks that are considered to be non-market, non-diversifiable risks, as there is no risk premium observable in the market. This margin, which is 50 basis points for the UK Business and 70 basis points for the Swedish Business, gives due recognition to the fact that: a) For the UK Business: (i) the covered business is substantially closed to new business; (ii) there is no significant exposure in the with profit 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 the Swedish Business: (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. The sensitivity of the value of in-force business to the discount rate being greater for the Swedish Business than for the UK Business, the relative margins provided by these adjustments is more material (more than twice) for the Swedish Business than for the UK Business, to reflect these different risks. UK Business Swedish Business 31 December 31 December 2009 2008 2009 2008 Reference rate 3.8% 3.6% 3.74%* n/a Non-diversifiable risk 0.5% 0.5% 0.7% n/a Discount rate 4.3% 4.1% 4.44%* n/a * A full swap curve is used: the rate quoted is for a term of ten years and is presented as an indicative rate. 5 Analysis of shareholders' equity 31 December UK Swedish Other Group 2009 Business Business Activities Total Â£000 Â£000 Â£000 Â£000 Regulated entities Capital 32,042 44,165 required 12,123 - Free 40,253 52,590 surplus 12,337 - --------- --------- --------- --------- Shareholders' net worth of 72,295 24,460 - 96,755 regulated entities Adjustments to shareholder net worth Deferred acquisition - (44,721) - (44,721) costs Financial reinsurance - (5,313) - (5,313) liability Other - 4,299 asset / - 4,299 liability adjustments --------- --------- --------- --------- Adjusted 72,295 (21,275) - 51,020 shareholder net worth In-force 85,559 112,753 - 198,312 value of covered business --------- --------- --------- --------- Embedded 157,854 91,478 - 249,332 value of regulated entities Less: amount (4,197) - - (4,197) financed by borrowings --------- --------- --------- --------- Embedded 153,657 91,478 - 245,135 value of regulated entities attributable to shareholders Net equity of other Group - (1,048) 18,498 17,450 companies --------- --------- --------- ---------- Total 153,657 18,498 262,585 shareholders' 90,430 equity ========= ========= ========= ========= Swedish Other Group UK Business Business Activities Total 31 December 2008 Â£000 Â£000 Â£000 Â£000 Regulated entities Capital 35,615 - - 35,615 required Free 33,774 - - 33,774 surplus --------- --------- --------- --------- Shareholders net worth of 69,389 - - 69,389 regulated entities In-force 84,940 - - 84,940 value of covered business --------- --------- -------- --------- Embedded value of 154,329 - - 154,329 regulated entities Less: amount (8,358) - - (8,358) financed by borrowings --------- --------- --------- --------- Embedded value of 145,971 - - 145,971 regulated entities attributable to shareholders Net equity of other Group - - 36,737 36,737 companies --------- --------- --------- --------- Total 145,971 - 36,737 182,708 shareholders' equity ========= ========= ========= ========= The movement in the in-force value of covered business comprises: UK Swedish Total Year ended 31 Business Business December 2009 Â£000 Â£000 Â£000 Value at beginning 84,940 - 84,940 of period Amount arising on - 95,953 95,953 acquisition Amount credited/ 619 16,800 17,419 charged to operating profit --------- --------- --------- Value at end of 85,559 112,753 198,312 period ========= ========= ========= UK Swedish Total Year ended 31 Business Business December 2008 Â£000 Â£000 Â£000 Value at beginning of 94,007 - 94,007 period Amount charged to (9,067) - (9,067) operating profit --------- --------- --------- Value at end of 84,940 - 84,940 period ========= ========= ========= UKBusiness (i) On 2 June 2005, the Group drew down Â£21m on a bank loan facility, in order to part fund the acquisition of CWA Life Holdings plc. This effectively represented a purchase of part of the underlying value in force of CWA by way of debt finance and it follows that the embedded value of the UK regulated entity is not attributable to equity shareholders of the Group to the extent of the outstanding balance on the loan account at each balance sheet date. The loan is repayable in five equal annual instalments on the anniversary of the draw down date, the funds for the repayment effectively being provided by way of the realisation of the underlying value of in-force business of the covered business. In accordance with this, Â£4.2m of the loan was repaid on 2 June 2008 and a further Â£4.2m was repaid on 2 June 2009, leaving principal outstanding at that date of Â£4.2m. (ii) The embedded value of regulated entities comprises the embedded value of the covered business only. Swedish Business (i) The adjusted shareholder net worth of the Swedish Business is that of the regulated entity, which includes also the net worth attributable to the non-covered business within the regulated entity. (ii) Accordingly, for the Swedish Business, the embedded value of regulated entities comprises the embedded value of covered business and the value of the non-covered business of the regulated entity, the latter component being valued on an IFRS basis. 6 Analysis of profit Year ended 31 UK Swedish December 2009 Business Business Total Â£000 Â£000 Â£000 Covered business New business 1,482 783 2,265 contribution Return from in-force business Expected return 7,357 1,682 9,039 Experience 4,499 2,060 6,559 variances Operating 8,862 (7,405) 1,457 assumption changes Return on shareholder (200) - (200) net worth --------- --------- --------- Operating profit 22,000 (2,880) 19,120 Variation from 6,206 7,544 13,750 longer-term investment return Effect of economic (12,286) 2,556 (9,730) assumption changes --------- --------- --------- Profit on covered 15,920 7,220 23,140 business before tax Tax thereon 11,893 - 11,893 --------- --------- ---------- Profit on covered 27,813 7,220 35,033 business after tax ========= ========= Results of non-covered business and of other group companies Profit before tax, 868 and exceptional item Exceptional profit arising on acquisition of 54,187 Swedish Business Tax 177 --------- Profit after tax 90,265 Non-controlling interest 7 --------- Profit for the period 90,272 attributable to shareholders ========= Year ended 31 December 2008 UK Swedish Business Business Total Â£000 Â£000 Â£000 Covered business New business contribution 715 - 715 Return from in-force business Expected return 10,445 - 10,445 Experience variances 9,166 - 9,166 Operating assumption changes 4,590 - 4,590 Return on shareholder net worth 605 - 605 --------- --------- ---------- Operating profit 25,521 - 25,521 Variation from longer-term investment return (16,831) - (16,831) Effect of economic assumption changes 6,951 - 6,951 --------- --------- --------- Profit on covered business before tax 15,641 - 15,641 Tax thereon (1,376) - (1,376) --------- --------- --------- Profit on covered business after tax 14,265 - 14,265 ========= ========= Results of non-covered business and of other group companies Profit before tax, 385 Tax 176 Profit after tax attributable to shareholders 14,826 ========= The results of the non-covered business and of other Group companies before tax and before exceptional item are presented as 'other operating income' in the consolidated income statement. For UK Business, the result of the covered business includes the expenses of the holding company, with an equal and opposite adjustment to the result of the non-covered business and of other Group companies. Included within the effect of economic assumption changes in respect of the UK Business for the year ended 31 December 2009 is an amount of Â£5,620,000 being a reduction of pre-tax profit relating to a change in the basis of taxation of overseas dividends. This change leads to a reduction in the estimate of future deductions for taxation from policyholder linked funds and is matched by a broadly offsetting reduction in the estimate of future tax payable. This is a significant component of the tax credit of Â£11,893,000 in respect of tax for the UK Business for the year ended 31 December 2009 as shown above. 7 Sensitivities to alternative assumptions The following tables show the sensitivity of the embedded value as reported at 31 December 2009, and of the new business contribution of the Swedish Business for the five months then ended, to variations in the assumptions adopted in the calculation of the embedded value. Sensitivity analysis is not provided in respect of the new business contribution of the UK Business for the year ended 31 December 2009 as the reported level of new business contribution is not considered to be material (see Note 3a) above). It largely relates to guaranteed bond business, where a close asset/liability matching approach leaves values broadly insensitive to changes in experience. New Business Embedded Value Contribution UK Swedish Swedish Business Business Business Â£m Â£m Â£m Published value as at 153.7 90.4 0.8 31 December 2009 Changes in embedded value/new business contribution arising from: Economic sensitivities 100 basis point (3.9) (1.5) (0.1) increase in yield curve 100 basis point 2.5 1.4 0.1 reduction in yield curve 10% decrease in equity (3.5) (6.4) (0.3) and property values Operating sensitivities 10% decrease in 2.1 5.4 0.3 maintenance expenses 10% decrease in lapse 2.5 8.4 0.5 rates 5% decrease in mortality/morbidity rates Assurances 1.2 0.4 0.1 Annuities (0.9) n/a n/a Reduction in the required capital to statutory minimum 0.1 0.1 - The published value of the new business contribution relating to the Swedish Business and the related changes due to the stated sensitivities are for a five-month post-acquisition period. 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%. 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%. The rate of future inflation has also been reduced by 1% so that real yields remain constant; and iii) 10% decrease in the equity and property values. This gives rise to a situation where, for example, a Managed Fund unit liability with a 60% equity holding would reduce by 6% in value. Operating sensitivities i) 10% decrease in maintenance expenses, giving rise to, for example, a base assumption of Â£20 per policy pa reducing to Â£18 per policy pa; ii) 10% decrease in persistency rates giving rise to, for example, a base assumption of 10% of policy base lapsing pa reducing to 9% pa; iii) 5% decrease in mortality/morbidity rates giving rise to, for example, a base assumption of 95% of the parameters in a selected mortality/morbidity table reducing to 90.25% of the parameters in the same table; and iv) the sensitivity to the reduction in the required capital to the statutory minimum shows the effect of reducing the required capital from that defined in Note 3(b) above to the minimum requirement prescribed by regulation. In each sensitivity calculation all other assumptions remain unchanged except where they are directly affected by the revised economic conditions: for example, as stated, changes in interest rates will directly affect the reference rate. Excluding the sensitivities relating to a 100 basis point increase and reduction in the yield curve, both of which are presented, the sensitivities to changes in the assumptions in the opposite direction will result in changes of similar magnitude to those shown in the above table but in the opposite direction. 8 Reconciliation of shareholders' equity on the IFRS basis to shareholders' equity on the EEV basis Other Swedish UK Group Business Business Activities Total Â£000 Â£000 Â£000 Â£000 31 December 2009 Shareholders' 47,696 93,561 18,498 159,755 equity on the IFRS basis Adjustments Deferred acquisition costs Investment (1,447) (7,173) - (8,620) contracts Deferred - 12,319 - 12,319 income Adjustment to provisions on investment contracts, net of - (15,038) - (15,038) amounts deposited with reinsurers Adjustments to provisions on insurance - (238) - (238) contracts, net of reinsurers' share Acquired (61,675) (18,282) - (79,957) in-force value Acquired (2,336) - - (2,336) value of customer relationships Adjustment to (5,073) - - (5,073) borrowings Deferred tax 512 2,949 - 3,461 --------- --------- --------- --------- Shareholder (22,323) 68,098 18,498 64,273 net worth Value of 112,753 85,559 - 198,312 in-force business --------- --------- --------- --------- Shareholders' 90,430 153,657 18,498 262,585 equity on the EEV basis ========= ========= ========= ========= Shareholder net worth comprises: Shareholder (21,275) 72,295 - 51,020 net worth in regulated entities Shareholders' net equity in other Group companies (1,048) - 18,498 17,450 Debt finance - (4,197) - (4,197) --------- --------- --------- --------- Total (22,323) 68,098 18,498 64,273 ========= ========= ========= ========= Other Swedish UK Group Business Business Activities Total Â£000 Â£000 Â£000 Â£000 31 December 2008 Shareholders' equity on the - 89,631 36,737 126,368 IFRS basis Adjustments - Deferred acquisition - costs Investment contracts - (8,047) - (8,047) Deferred income - 13,705 - 13,705 Adjustment to provisions on investment contracts, net of - (15,863) - (15,863) amounts deposited with reinsurers Adjustments to provisions on insurance - (610) - (610) contracts, net of reinsurers' share Acquired in-force - (21,020) - (21,020) value Deferred tax - 3,235 - 3,235 --------- --------- --------- ---------- Shareholder - 61,031 36,737 97,768 net worth Value of - 84,940 - 84,940 in-force business --------- -------- --------- --------- Shareholders' equity on the - 145,971 36,737 182,708 EEV basis ========= ========= ========= ========= Shareholder net worth comprises: Shareholder net worth in - 69,389 - 69,389 regulated entities Shareholders' net equity on other Group companies - - 36,737 36,737 Debt finance - (8,358) - (8,358) --------- -------- --------- --------- Total - 61,031 36,737 97,768 ========= ========= ========= ========= 9 Exceptional item The profit arising on acquisition of a subsidiary company is presented as an exceptional item in the consolidated income statement. It arises on the purchase, on 23 July 2009, of 100% of the issued share capital of Moderna FÃ¶rsÃ¤kringar Liv AB ('Moderna'), comprising the Swedish Business, and is measured as the difference between the purchase consideration of SEK 250,000,000 (Â£19,956,000) and the embedded value of the Moderna Group at the purchase date, being SEK 917,356,510 (Â£74,143,000), which was established in accordance with the methodology set out in Notes 2 to 4 of these supplementary financial statements. 10 Earnings per share Year ended Year ended 31 December 31 December 2009 2008 p p Basic earnings per share Based on profit for the period attributable to shareholders 88.94 14.25 --------- --------- Based on profit for the period attributable to shareholders before exceptional item 35.55 14.25 --------- --------- Diluted earnings per share Based on profit for the period attributable to shareholders 88.94 14.25 --------- --------- Based on profit for the period attributable to shareholders before exceptional item 35.55 14.25 --------- --------- 11 Foreign exchange translation reserve A foreign exchange translation reserve arises on the translation of the financial statements of the Swedish Business, the functional currency of which is the Swedish Krona, into pounds sterling, which is the presentational currency of the Group financial statements. Items in the consolidated income statement are translated at the average exchange rate of SEK11.5594= Â£1 ruling in the reported period, while all items in the balance sheet are stated at the closing rates ruling at the reported balance sheet date, being SEK11.5305 = Â£1 at 31 December 2009. The differences arising on translation using this methodology are recognised directly in shareholders' equity within the foreign exchange translation reserve. The reported embedded value is sensitive to movements in the SEK:Â£ exchange rate. Had the exchange rate as at 31 December 2009 been 10% higher at SEK12.6836 = Â£1, then the reported embedded value of Â£262.6m as at 31 December 2009 would have been reported as Â£254.4m.

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