Final Results

RNS Number : 3902D

Chesnara PLC

28 March 2014

Chesnara plc

Chesnara announces 208% increase in IFRS pre-tax profit and 3.4% dividend uplift

Chesnara today reported final results for the year ended 31 December 2013. The Group remains committed to delivering value for shareholders, principally through an attractive dividend stream, while maximising returns to its policyholders.

Financial Highlights

· IFRS profit of £60.6m before tax, an increase of 208% (2012: £19.7m)

· Gross cash generation of £49.7m (2012: £34.0m) giving a Total Shareholder Return (TSR) of 79% for 2013 and 261% over 5 years

· Increase of £65.3m in EEV to £376.4m (2012: £311.1m)

· EEV earnings net of tax increased by £51.5m to £82.7m (165%) before modelling adjustments (2012: £31.2m)

· Recommended dividend of 11.63p per share, an increase of 3.4%. Total proposed dividend increased by 3% to 17.88p - ten years of consecutive growth

· Group solvency ratio remains very robust at 194%

· Subsidiary solvency ratios also strong and above targets. CA at 218%, PL at 156% and Movestic at 311%

Operational Highlights

· Acquisition of Protection Life (formerly Direct Line Life Insurance) for £39.3m delivering an EEV gain of £12.3m upon completion in November 2013

· Movestic achieves 61.9% increase in like for like new business volumes and £7.2m of new business profit (2012: £2.6m)

· Movestic captures 8% of new unit-linked pensions business market share (2012: 5.3%)

· Group's regulatory compliance record remains robust

· Value enhancing acquisition opportunities in the UK and Western Europe, principally in the £50m - £200m price range, continue to be sought and examined

Statement regarding 2014 UK Budget

In his Budget announcement on 19 March, the Chancellor of the Exchequer announced significant changes which will affect the pensions and annuity markets. Chesnara's UK business does not have a significant exposure to annuities and has not sought to write such business for a number of years. We note the changes to flexibility of pensions arrangements however we are not expecting any immediate or significant change to our book of business, or the value of it.

Graham Kettleborough, Chief Executive said:

'2013 has been an extremely positive year for Chesnara with the Company achieving significant advances across all elements of the business and against key objectives. Focus and commitment to a proven business model is delivering both operational depth and robustness allowing us to report strong financial results for the existing and new books of business throughout both the UK and Swedish operations.

'The Board is therefore pleased to recommend an increase in the final dividend to 11.63p per share, a 3.4% rise.

'Our strong operational platforms and positive indications of support for sources of funding for potential future acquisitions, give us confidence in the continued success of Chesnara through 2014 and beyond, whilst ensuring that we continue to reward the loyalty of our shareholders and policyholders'.

The Board approved this statement on 27 March 2014.

Enquiries

Graham Kettleborough, Chief Executive, Chesnara plc - 07799 407519

Roddy Watt, Newgate Threadneedle - 0207 653 9855 / 07714 770 493

Notes to Editors

Chesnara plc ('Chesnara'), which listed on the London Stock Exchange in May 2004, is the owner of Countrywide Assured plc ('CA plc'), Protection Life Company Limited ('PL') and Movestic Livförsäkringar AB ('Movestic').

CA plc is a UK life assurance subsidiary that is closed to new business. In June 2005 Chesnara acquired a further closed life insurance company - City of Westminster Assurance - for £47.8m. With effect from 30 June 2006, CWA's policies and assets were transferred into CA plc. Save & Prosper Insurance Limited and its subsidiary, Save & Prosper Pensions Limited, were acquired on 20 December 2010 for £63.5 million. With effect from 31 December 2011, the business of Save & Prosper was transferred into CA plc. On 28 November 2013 Chesnara acquired Direct Line Life Insurance Company Limited (subsequently renamed Protection Life Company Limited) from Direct Line Group plc for £39.3m. A process to transfer the PL business into CA plc is underway. CA plc operates an outsourced business model.

Movestic, a Swedish life assurance company which originally focused on pensions and savings, was acquired on 23 July 2009 for £20 million. The company is open to new business and seeks to grow its position in the Swedish unit-linked market. Its proposition was strengthened in February 2010 with the acquisition of the operations of Aspis Försäkringar Liv AB which has a risk and health product bias.

FORWARD-LOOKING STATEMENTS

This document may contain forward-looking statements with respect to certain of the plans and current expectations relating to the future financial condition, business performance and results of Chesnara plc. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the control of Chesnara plc including, amongst other things, UK domestic, Swedish domestic and global economic and business conditions, market-related risks such as fluctuations in interest rates, currency exchange rates, inflation, deflation, the impact of competition, changes in customer preferences, delays in implementing proposals, the timing, impact and other uncertainties of future acquisitions or other combinations within relevant industries, the policies and actions of regulatory authorities, the impact of tax or other legislation and other regulations in the jurisdictions in which Chesnara plc and its subsidiaries operate. As a result, Chesnara plc's actual future condition, business performance and results may differ materially from the plans, goals and expectations expressed or implied in these forward-looking statements.

NOTE ON TERMINOLOGY

The principal reporting segments of the Group are:

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

S&P, which was acquired on 20 December 2010. This business was transferred from Save & Prosper Insurance Limited and Save & Prosper Pensions Limited to Countrywide Assured plc on 31 December 2011 under the provisions of Part VII of the Financial Services and Markets Act 2000;

PL, which was purchased on 28 November 2013 from Direct Line Insurance Group plc. On acquisition the company was called Direct Line Life Insurance Company, and was subsequently renamed Protection Life Company Limited. PL is included within the Group's UK business; and

Movestic, which was purchased on 23 July 2009 and comprises the Group's Swedish business, Movestic Livförsäkring AB and its subsidiary and associated companies.

In this preliminary announcement:

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

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

(iii) 'CA plc' refers to the legal entity Countrywide Assured plc, which includes the long term business of CA, CWA and S&P;

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

(v) 'S&P' may also refer collectively to Save & Prosper Insurance Limited and Save & Prosper Pensions Limited, as the context implies. Where it is necessary to distinguish reference to Save & Prosper Insurance Limited and Save & Prosper Pensions Limited, or to the businesses subsisting in those companies prior to the transfer referred to above, they are designated 'SPI' and 'SPP' respectively;

(vi) PL refers to Protection Life Company Limited (previously Direct Line Life Insurance Company Limited), which was purchased on 28 November 2013; and

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

2013 HIGHLIGHTS Note 1

FINANCIAL

· Increase in IFRS pre-tax profit for the year ended 31 December 2013 to £60.6m (year ended 31 December 2012: £19.7m). This is stated after a gain arising on the purchase of Protection Life of £2.8m.

· Gross cash generated in the year of £49.7m (year ended 31 December 2012: £34.0m) Note 2.

· Increase in EEV from £311.1m at 31 December 2012 to £376.4m at 31 December 2013 after dividend distributions of £20.1m paid in the year.

· EEV earnings net of tax and before modelling adjustments, increased by £51.5m to £82.7m for the year ended 31 December 2013 (year ended 31 December 2012: £31.2m).

· Movestic has generated a new business contribution of £7.2m in the year (year ended 31 December 2012: £2.6m).

· Strong Insurance Group Directive solvency (IGD) cover of 194% (31 December 2012: 244%).

· Proposed final dividend increased by 3.4% to 11.63p per share.

OPERATIONAL

· The purchase of Protection Life completed on 28 November 2013, in line with one of our core objectives of purchasing value-adding closed life books in the UK.

· Good regulatory compliance record continues.

· Return of IFA support to Movestic has driven a 61.9% increase in like for like APE (Annual Premium Equivalent) new business volumes.

· Strong recovery in the Movestic business of new unit-linked pensions business market share continues in the year to 8.0% (2012: 5.3%).

Notes

1. Throughout the Chairman's Statement, Business Review and Financial Review sections, all results quoted at a business segment level exclude the impact of consolidation adjustments, which are analysed further below.

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

(i) Gross cash generation, defined as:

(a) the change in the excess of actual regulatory capital resources over target capital resources in respect of the CA, S&P and PL operating segments

(b) less capital contributions made by the Group to the Movestic operating segment; and

(ii) Plus the cash impact of one-off management actions coupled with movements in the restrictions of policyholder funds to shareholder funds.

As such, the net and gross cash generation KPIs defined above do not align to the Cash Flow Statement as included in the IFRS Financial Statements.

CHAIRMAN'S STATEMENT

2013 has been an extremely positive year for Chesnara. Operationally the business has delivered strongly across all of its stated strategic objectives. In particular, the successful acquisition of Direct Line Life (now Protection Life), the continued emergence of significant value from the in-force books and the generation of material Movestic new business profits demonstrates the effective delivery of the main value enhancement pillars of our corporate strategy. The operational performance has resulted in impressive financial results in the year. We commence 2014 with increasingly robust operational and financial foundations which bode well for the continued success of the Chesnara Group.

I am pleased to report that Chesnara has performed towards the top end of realistic expectations across all aspects of the corporate strategy.

Objective	Outcome Headline
1. Maximise value from the in-force books	£49.7m of gross cash generation
2. Enhance value through new business	£7.2m of Swedish new business profit
3. Acquire Life and Pension businesses	Successful acquisition of Direct Line Life
4. Maintain a strong solvency position	Group solvency of 194%
5. Adopt good regulatory practice at all times	Continued good regulatory record.

The strong performance has enabled the continuation of our attractive dividend policy and the subsequent value enhancement has resulted in competitive share price growth. This has led to an impressive total shareholder return (TSR) of 79% in the year. My statement considers the more material components of our strategy in a little more detail as follows:

1. Maximise value from the in-force books

The UK in-force book is the primary source of IFRS surplus and cash generation. I am particularly pleased to report that significant value has emerged from the UK in-force book during the year. As explained in more detail in the Financial Review section of the Strategic Report, the in-force book can be characterised into two components in terms of value emergence dynamics. The "stable core", consisting of the CA, and CWA books (and now also Protection Life), has generated a strong level of surplus very much towards the higher end of expectations. The "variable element", namely S&P is known to be more sensitive to investment market conditions. During 2013 investment market conditions have been beneficial, resulting in a significant reduction in the expected exposure to policy guarantees. In addition, Management has, with regulatory approval, released £15.5m of capital previously constrained in S&P. Gross cash of £49.7m was generated and the total combined impact of the financial results, capital restrictions, Protection Life capital requirements and the exceptional capital release results in a net cash available for distribution from the in-force book of £36.7m during 2013.

2. Enhance value through new business

I noted in my statement in the 2012 Annual Report and Accounts that following a difficult period, I was encouraged that there were signs of recovery in the Movestic business. I am delighted to report that those early positive signs have resulted in a significant recovery in IFA support of the Movestic business during 2013.

This is illustrated by the 61.9% increase in APE new business volumes compared with 2012. This growth has been achieved without any discernible increase in the acquisition cost base and hence the results show a significant new business contribution for the year. On an EEV basis Movestic has delivered a new business contribution of £7.2m in 2013 (2012: £2.6m).

From this profitable base and with the level of momentum and positive sentiment to the new business proposition, I expect Movestic, now that it has re-established its strong market position, to continue to make a significant contribution to the Embedded Value of the Group from its new business operations in the future.

3. Acquiring Life and Pension Businesses

The acquisition of Protection Life during the year was a good transaction. The business fits well with the existing UK product portfolio and operating model. The transaction has created incremental embedded value of £12.3m which is consistent with the low level of risk associated with the acquired business.

In addition to the stand alone benefits of the Protection Life acquisition, the deal continues to give momentum to our acquisition strategy and reaffirms the strength of our acquisition proposition. The process confirms our continued presence in the consolidation market, the support of our investors and debt finance providers and our credibility with the regulatory authorities following the move to the dual regulation model.

I would like to thank those involved in the transaction including our business partners, advisors, the Chesnara governance team and also the management team of Direct Line Group who were professional and efficient throughout the acquisition process.

4. Maintain Strong Solvency position

It was mutually beneficial to both parties that Protection Life was acquired with no capital surplus and subsequently Chesnara recapitalised the business on acquisition. This, together with the fact that the PL purchase consideration was greater than the net worth acquired, has resulted in a reduction in the Group solvency position at the end of the year. The impact was as expected based on our assessment of the PL acquisition. The Part VII transfer planned for 2014 will have a positive impact such that much of the adverse effect is expected to be reversed. Despite the impact on Group solvency from the PL acquisition, the position remains strong, at 194% (2012: 244%), and significantly higher than the internal governance target of 100%.

5. Adopt Good Regulatory Practice at all times

2013 has seen a significant amount of regulatory change. The Solvency II programme has picked up more momentum as guidelines and timetables have become clearer. Reporting developments, including improvements to the way we articulate the performance of the business in the year and enhancements to the reporting of our remuneration policy, have been made and the improvements are incorporated in the 2013 Report & Accounts. Our regulatory framework remains robust. I report on regulatory and governance matters in more detail in my governance overview in the 2013 Report & Accounts.

Risk Management

Risk Management is not stated as a specific objective. It is ingrained in the culture and decision making in all we do as a business and is seen as an integral and key priority that feeds into all our objectives. We simply do not consider the delivery of any strategic objective as being successful if the appropriate balance between risk and reward has not been retained. As such I am reassured that our assessment is that we have marginally reduced the overall risk profile of the Group during the year.

Pension reforms

Outlook

We commence 2014 with strong operational platforms in both the UK and Sweden, solvency margins are healthy and increased levels of cash generation provide a reassuring buffer against future potential earnings variability and a good source of funding for future potential acquisitions and dividend payments. This, together with the fact that we have reaffirmed our acquisition capabilities and credentials during the year, gives cause for optimism for the continued success of Chesnara in terms of providing value to both policyholders and shareholders.

Peter Mason

Chairman

27 March 2014

BUSINESS REVIEW

INTRODUCTION

The Business Review is structured to report on how we have performed against each of our stated strategic objectives. For each objective the review reports separately for our UK and Swedish operations to the extent separate reporting is relevant. For each objective the review focuses on:

· How we have performed generally

· Key developments or challenges

· Key performance indicators

· Risks associated with each objective

The strategic objectives are reassessed on an annual basis as part of the Group business planning process. The continued relevance of the objectives gives consideration to recent performance, emerging risks and future opportunity. They are assessed giving full regard to both internal and external influences e.g. changes to regulatory requirements.

The strategic objectives have not changed during 2013 nor is there expected to be any significant change in focus during 2014.

In addition to the five core objectives there is an over-arching objective to "Deliver value to stakeholders on a responsible and balanced basis". That is, over-arching the fulfilment of strategic objectives is the core value shared by the Board and Management team of recognising responsibilities to all stakeholders on a balanced basis. Often decisions are required that may have conflicting impacts on the different stakeholders. Maintaining a balanced view across the stakeholder groups is critical to ensuring Management continues to make decisions that benefit all stakeholders in the longer term.

The governance framework seeks to ensure that controls and procedures are in place to protect all stakeholders. The control environment has remained effective and robust throughout the year. Further details of the operation of the governance framework are included in Section C - Corporate Governance of the 2013 Report & Accounts, including a governance overview from the Chairman.

Our over-arching objective is to "Deliver value to stakeholders on a responsible and balanced basis". We maintain this over-arching objective when delivering to our stated five core key objectives:

1. Maximise value from the in-force book

2. Enhance value through new business

3. Acquire Life and Pension businesses

4. Maintain a strong solvency position

5. Adopt good regulatory practice at all times

MAXIMISE VALUE FROM THE IN-FORCE BOOK - UK

Significant levels of cash have emerged from the in-force book during the year at levels towards the top end of realistic expectations.

Highlights

· £54.1m of gross cash generation (excluding Chesnara parent company cash)

· £15.5m exceptional cash release due to the removal of a capital constraint in S&P (see table in "Cash generation" section below")

· 5% growth in funds under management

· Positive EEV development

· Strong fund performance

· Improved policy attrition levels

Review of the year

Operational performance has been strong across the three key areas of focus for the in-force book, namely: management of the assets, regulatory compliance and ensuring we continue to provide a high quality service to policyholders in terms of administration service levels and investment return.

Our administration and asset management outsource partners have all performed well during the year and generally exceeded service level arrangements and relevant benchmarks. Further assessment of our future expenses associated with our outsourcing model have led to a strengthening of our expense assumptions during the year.

The CA plc Investment Committee has continued its oversight of policyholder funds through regular meetings with the investment managers. We continue to work with our managers in order to ensure the underlying investment mix is the most appropriate for policyholders. In particular, the programme to move the ex-S&P Pension Property Fund from direct investment to collective funds has progressed well.

Cash generation during the year has been particularly strong, with £54.1m of gross cash being generated from business as usual operations. This is primarily due to the core product based surpluses remaining resilient together with a significant reduction in the cost of S&P guarantees. The S&P book has made a significant contribution of £28.9m to the 2013 cash generation. This is consistent with the fact that the S&P surplus is sensitive to investment market performance, which was generally favourable during the year.

In addition to the operational cash generated, a process has been undertaken whereby, with regulatory approval, £15.5m of constrained capital in Save & Prosper has been released to shareholder funds.

Unit-linked funds under management

The continuing strong level of unit-linked funds under management supports the on-going level of profitability of the UK businesses, as fund-related charges are an important component of profit.

The movement in the value of unit-linked funds under management is a function of:

i) performance of the funds across UK equities, international equities, property and fixed interest securities;

ii) received and invested premiums; and

iii) policies closed, due to surrender, transfer or claim.

Good performance by our administration and investment management business partners has contributed positively to all three of the above factors which have contributed to a 5% growth in funds under management during the year. The following tables provide more detail of fund performance during the year:

Funds under management

2013

£m

2012

£m

Total UK

2,331

2,221

Fund performance (annual return)

	2013	2012
CA Pension Managed	18.2%	10.9%
CWA Balanced Managed Pension	13.9%	11.4%
S&P Managed Pension	20.4%	11.5%
Benchmark - ABI Mixed Inv 40%-85% shares	14.6%	9.9%

Annual policy attrition rate, based on policy count

	2013	2012
CA	8.3%	8.2%
S&P	5.6%	6.7%
Total UK	6.9%	7.4%

Risks associated with the strategic objective

The acquisition of S&P, as signalled at the time of the acquisition, has added an increased level of earnings volatility for the UK business. S&P has a proportion of its product base that provides guaranteed returns. The probability of guarantees being of value to policyholders increases when the value of assets held to match the policy liabilities fall or when, particularly for those guarantees expressed as an amount of pension, bond yields fall. To mitigate this risk, to some extent, assets held by shareholders to provide security for these guarantees are invested in cash and long bonds. As a consequence, our results will be negatively affected if falls in equity and property values, which impact assets backing policyholder liabilities and/or falls in bond yields, which impacts the cost of providing the guarantees were to occur. Conversely, increasing markets and yields will positively affect the results. Close management of the portfolio backing these liabilities continues.

MAXIMISE VALUE FROM THE IN-FORCE BOOK - SWEDEN

Following favourable investment market performance and the evident increase in IFA support, Movestic's funds under management have increased by 24.1% during 2013.

Highlights

· Strong growth in funds under management; increase of 24.1% during 2013.

· Positive EEV development

· Fund performance improved significantly during 2013

· Significant improvement in the ratio of transferred in business to transferred out business

Review of the year

During 2013 the efforts to regain confidence in the market were manifested by the increased IFA support which was evident not only in new sales but also in the large amount of transferred in business and in the stabilised position for transferred out business. The focus to ensure that we continue to provide a high quality service to IFAs and policyholders in terms of administration service levels and investment return continues and independent market surveys show continuously improving ratings.

Within the Life & Health book of business, the portfolio continues to deliver high quality in terms of claims development with a gross loss ratio of 50.3% for 2013 (2012: 48.4%).

The scale of the Pension and Savings in-force book in Sweden is such that profits emerging from it are relatively modest in comparison to UK equivalents. As such, the challenge is to increase the value of the funds under management from which we earn income in the form of management charges and fund rebates. The factors that directly influence the growth of the in force book are:

· New business;

· Policy attrition;

· Fund performance; and

· Premium income.

The general performance on all four factors has been positive resulting in strong fund growth. The factors are considered in more detail below:

New business

The review of the new business operation is covered in the "Enhance value from new business" objective review.

Policy attrition

The strengthened IFA support so evident in the new business results has had a less marked impact on policy attrition levels. Whilst the lapse rates did improve significantly during 2013 the level of policy transfers out remains broadly stable. We believe this indicates that the levels of transfers experienced during 2013 are reflective of the broader dynamics of the IFA market, rather than being a direct reflection of customer service levels within Movestic. In light of this, the persistency assumptions were further strengthened during 2013. The embedded value, as reported within the 2013 results, therefore now broadly aligns to current levels of persistency. Management still believes that, in time, the impact of continued improvements in service levels, together with general external market developments, should have a positive impact on the long term persistency levels. Any positive impact will only be recognised if improvements are seen in actual attrition rates.

Policy attrition trend analysis

	Q1 2013	Q2 2013	Q3 2013	Q4 2013
Transfers (Pensions)	5.6%	5.8%	4.5%	5.0%
Lapses/Paid-ups (Pensions and Endowments)	21.1%	15.5%	13.0%	9.5%

Policy attrition 2013 vs. 2012

	2013	2012
Transfers (Pensions)	5.2%	5.4%
Lapses/Paid-ups (Pensions and Endowments)	15.0%	17.6%

Despite there being no improvements in transfer levels, the ratios of transferred in business to transferred out has significantly improved from 1:4 during 2012 to 1:1.5 during 2013.

Fund performance

The increase in the number of funds out-performing their indices is a testament to our investment and fund selection strategy. One of Movestic's key differentiators is its approach to selecting the funds available to investors. Rather than adopt mainstream funds, which, in Sweden, are those predominantly managed by subsidiaries of banks which also have life assurance subsidiaries, we select a limited number of funds from a wide range of independent fund managers.

The funds selected are, in general, actively managed funds with a value approach. The performance of all funds is closely monitored and regular contact is made with managers to ensure that the underlying reason for fund performance, whether positive or negative, is fully understood. Funds that do not perform favourably compared with the relevant index are wholly replaced if there are no acceptable strategies for improvement. Where applicable we continue to add further funds to fill perceived gaps in the range.

The relative fund performance measure focuses on the number of funds under or over performing their relevant indices. An alternative and well established fund performance measure, produced by a respected industry magazine, compares the value of savers' average fund holdings. This measure best reflects the investment performance from a policyholder perspective. According to that measure, Movestic's fund range performed very well during 2013 with an average return of 13.8%, building on 7.7% in 2012, which maintains our strong market position.

Relative fund performance

	2013	2012
Under-performed against relevant index	26	30
Outperformed against relevant index	39	26

Premium income

The increase in premium income is predominantly due to an increase in new business levels. The recurring regular premiums have increased marginally year on year for the Pensions and Savings business which is key to achieving sustained growth. Regular premiums for the Life and Health business have remained broadly flat year on year.

Total premium income (£m)

	2012				2013
	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Pensions & Savings - Unit Linked	48.8	49.5	48.1	44.7	49.0	52.6	51.5	63.4
Pensions & Savings - Deposit insurance	8.6	-	2.0	3.5	8.6	23.1	8.7	20.7
Risk & Health	10.7	9.8	10.5	8.5	10.8	9.0	9.8	9.8
Total	68.1	59.3	60.6	56.7	68.4	84.7	70.0	93.9

Risks associated with the strategic objective

The risk of high levels for persistency rates has somewhat altered during the year. It has become more evident that there is inherent risk in the Swedish market where customer awareness of the ability to transfer their pension is a feature with increasing influence as a consequence of intensified public discussion. The Movestic product proposition already offers significantly more portability for transferring pensions than the general market. As such, although higher transfer rates would create challenges, an increased right to transfer would be beneficial to Movestic in terms of its market position with other more traditional competitors.

ENHANCE VALUE THROUGH NEW BUSINESS - SWEDEN

IFA support of the Movestic proposition has continued to gain momentum as evidenced by a 61.9% increase in APE new business volumes compared with 2012.

Highlights

· 61.9% increase in new business volumes compared with 2012.

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

· IFA support as measured by the number of IFA's that sell Movestic products, shows an increase of 32.5% in 2013.

· The development of innovative product concepts continues.

Review of year

In light of the administration performance issues in 2011 and 2012 it is particularly encouraging to report the significant recovery in new business rates and also that the re-engineered processes have coped well with the sharp increase in new business volumes.

Changes to the senior management structure together with the transfer of certain IFA-critical processes to Stockholm have had a positive impact and ensure the operating model is now better suited to support the acquisition and marketing proposition.

There is a positive management environment which means that staff are well motivated and there is a strong collective sense of commitment to continue with improvements required to fully recover and consolidate its market position. The Group CEO made a statement in the 2012 Annual Report and Accounts that "The business foundations are significantly stronger than last year and from this improved base I am confident that Movestic can begin to deliver longer-term financial benefits to the Chesnara Group". The strong performance in 2013 is confirmation that the previous signs of recovery were real and have supported the development of a profitable new business operation.

New business premium income

New sales in the unit-linked business have shown substantial growth in 2013, with a 61.9% increase compared to 2012. A key driver of this is the recovery in IFA sentiment towards Movestic following the significant improvements in service levels when compared with prior year. The monthly trend is upwards and we expect new business growth to continue but at a more modest growth rate following the significant recovery.

Trend analysis of new business premium income (£m)

2012

2013

Total

10.6

11.4

7.5

10.4

14.0

16.6

15.3

18.8

New business markets, as ever, remain challenging. Whilst some companies have continued to offer traditional investment products which have a lower risk profile and contain guarantees (which we believe to be unsustainable) we have started to see some movement to equity-linked products as a consequence of strong market performance. Further momentum in this area would have a positive impact on future new business potential.

								2013	2012
New business premium income (£m)								64.6	39.9

Market Share

In a mature market with low levels of overall growth, the increase in new business volumes means that the company has gained market share during the year, leading to a position within the top five suppliers in the core unit-linked company pension market. In fact during the third quarter of the year Movestic was the largest provider in terms of market share in our core unit-linked company pension market.

During the third quarter of the year Movestic's 15.4% market share was the largest share of the unit-linked company contribution market.

This performance should be seen in the context of some of the traditional product providers having undertaken campaigns to move customers from traditional insurance contracts to 'new' unit-linked policies to address the challenges inherent in traditional guaranteed return products. Such internal switches are having an adverse distorting effect on the unit linked market share figures from Movestic's perspective.

Trend analysis of Movestic's share of new business

2011

2012

2013

Total business

5.2%

6.9%

5.1%

5.6%

7.1%

8.9%

Unit-linked company-paid business (excluding 'tick the box' market)

11.9%

9.9%

7.8%

8.7%

12.4%

15.1%

Movestic's share of new unit-linked company paid pension business year on year (total business only)

(excluding 'tick the box' market)

							2013	2012
New business premium income (£m)							8.0%	5.3%

Development of innovative product concepts

The trend within the company paid insurance solutions market in Sweden is to look for overall concepts where the pension plan is complemented by risk insurance products to cover the entire need for companies and their employees. Movestic's full range offering within both pension and risk products makes it possible to create such concepts and smaller variations to existing risk products packaged together with competitive pension plans can provide the adapted solutions the market asks for.

A differentiating feature of Movestic is the carefully selected fund range which over time has proven to perform very well compared to similar offerings. The work to further develop and improve the fund range is continually given high priority.

Risks associated with the strategic objective

Economic conditions in Sweden have remained stable and it has proved to be relatively immune to economic pressures experienced across the rest of Europe. However, there remains a general sense of uncertainty that has led to consumers preferring more traditional investment products to equity-based unit-linked investments. Recent improvements in confidence and good equity market performance has led to a shift to equities and Movestic remains committed to the unit-linked market. We believe that as equity market confidence continues to recover and that as the traditional investment offerings become less sustainable for providers, there will be a gradual shift back towards unit-linked investments. New business volumes remain sensitive to market preferences and continued IFA support.

New business remains relatively concentrated towards several large IFA's. This is inevitable to some extent but the fact that Movestic has extended the breadth of IFA support in the year has reduced the concentration risk to some extent. The competitive market puts pressure on new sales margins and even though Movestic's margins have held up well, these external pressures have led to management focussing on achieving better terms in the fund operation.

ACQUIRE LIFE AND PENSIONS BUSINESSES

The acquisition of Direct Line Life (now Protection Life) during the year is a continuation of the successful acquisition track record of the Group. In addition to the direct financial benefits of the transaction, it reaffirms that Chesnara has the specialist skills, experience and reputation to complete value-adding deals in an increasingly active market.

Highlights

· Successful acquisition of Protection Life for £39.3m.

· EEV increase of £12.3m as a direct consequence of acquisition of Protection Life.

· General increase in acquisition market activity in the sector.

Review of the year

There has been a significant increase in general market activity in the UK and across Europe. The activity is due to a number of factors including larger financial organisations wishing to re-focus on core activities and the desire to release capital or generate funds from potentially capital intensive Life and Pension businesses. Chesnara has been involved in several opportunities and has progressed to various stages dependent on our view of how well the opportunities align to our assessment criteria. It is encouraging that Chesnara continues to be invited to consider many of the known opportunities which reflects well on our continued presence and credibility in the market. There is of course competition in the market and hence the completion of the acquisition of Protection Life towards the end of 2013 was particularly pleasing.

Protection Life

The Protection Life acquisition fits well with our stated strategy. It is however towards the lower end of our target value range and hence the absolute level of value enhancement is relatively modest in comparison to previous deals.

The level of incremental embedded value of £12.3m is, however, deemed to be attractive in the context of the funding structure for the acquisition and the risk profile of the Protection Life business:

· The transaction has been funded by a combination of bank debt and cash both of which represent a relatively low cost source of finance. We also utilised debt capacity due to pre-existing low levels of gearing and supportive debt providers.

· The Protection Life book has a low risk profile. The products are primarily straight forward term assurance policies, which are predominantly reinsured, with the matching assets being held in corporate bonds and the book being well managed by a small and effective dedicated team. The acquisition therefore has minimal impact on both the insurance and finance risk profiles of the Group.

· Whilst there is operational risk associated with the acquisition due to the planned migration of the business to our outsourcer's systems, the substantial migration experience of our outsourcing partner, the good progress made to date and the relatively simple nature of the products being migrated gives us confidence that the overall migration risk is low.

Acquisition process and approach

Chesnara is an established Life and Pensions consolidator with a proven track record. This together with a good network of contacts in the adviser community, who understand the Chesnara acquisition model and are mindful of our good reputation with the regulator, ensure we are aware of most viable opportunities in the UK and many opportunities in Europe.

We assess the financial impact of potential acquisition opportunities by estimating the impact on three financial measures namely; the cash flow of the Group, the incremental embedded value and the internal rate of return. The financial measures are assessed under best estimate and stress scenarios.

The measures are considered by the Board and Audit & Risk Committee, in the context of other non-financial measures including the level of risk, the degree of strategic fit and the opportunity of alternative acquisitions.

We engage specialists to support stringent due diligence procedures and the actual acquisition process.

Risks associated with the strategic objective

The risk of not effectively delivering this objective is two-fold. Firstly, there is the risk that Chesnara makes no further acquisitions and secondly there is the risk that we make an inappropriate acquisition that adversely impacts the financial strength of the Group. The general increase in market activity together with the momentum created by the Protection Life acquisition suggests that the risk of no further value adding acquisitions has actually reduced somewhat over the past year. The Protection Life deal does not mean that other opportunities cannot be fully progressed should they become available.

During recent years and through the Protection Life assessment process, we have enhanced our financial projection modelling capabilities which improves the quality of financial information available to the Board. This strongly mitigates the risk of inappropriate opportunities being pursued. In addition, the increased financial strength of the Group means that any perceived risk that pressure to do a deal could result in a departure from the stringent assessment criteria will have reduced.

Acquisition Outlook

We continue to see a reasonable flow of possible acquisition opportunities and assess them appropriately. The general market background is positive with, in particular, the now firm implementation date for Solvency II, leading portfolio holders and owners to review their strategic options.

MAINTAIN STRONG SOLVENCY POSITION - UK AND SWEDEN

Objectives

One of the Group's key strategic objectives is to maintain a strong, but not excessive, solvency position. This brings a number of benefits, including supporting:

· one of our key financial management objectives of safeguarding policyholder interests.

· delivering to the dividend expectations of our shareholders.

· potential acquisition opportunities.

· our ability to absorb volatility created by external economic conditions.

We have continued to demonstrate our commitment to maintaining a strong solvency position, with Group solvency being 194% at 31 December 2013.

Highlights

· Group solvency continues to be strong at 194% (2012: 244%). This is stated after a proposed final dividend of £13.4m.

· The acquisition of Protection Life has had an expected adverse impact on our Group Solvency position due to it being purchased with a net worth equivalent to 100% of its regulatory capital requirements.

Regulatory capital at 31 December 2013

	2013				2012
	Minimum resource requirement £m	Target resource requirement £m	Capital resources £m	Solvency ratio over minimum %	Minimum resource requirement £m	Target resource requirement £m	Capital resources £m	Solvency ratio over minimum %
Group	81.9	81.9	158.7	194	62.9	62.9	153.3	244
CA plc	44.1	67.2	96.4	218	50.0	74.7	99.3	199
PL	25.2	37.8	39.2	156	27.6	41.4	53.3	193
Movestic	11.2	16.8	34.8	311	11.6	17.4	32.5	280

Notes:

· The percentages in the table above represent the excess of the capital resources over the minimum regulatory capital resources requirement.

· The target capital requirements stated above are based on the Board's internal minimum targets, and are set as follows:

o Group - 100% of minimum regulatory capital resources requirement

o CA plc - 162.5% of the minimum long-term insurance capital requirement plus 100% of the resilience capital requirement

o PL - 150% of the minimum long-term insurance capital requirement

o Movestic - 150% of the capital resources requirement

· Information in relation to PL for 2012 has been provided for illustrative purposes. Capital resources have reduced compared with 2012 as a result of distributions that were made to the previous owners prior to purchase by Chesnara.

Group solvency (IGD)

The IGD represents the solvency of the Group, and is calculated using requirements imposed by the PRA. The IGD ratio at 31 December 2013 is 194% (2012: 244%) with the surplus having moved from £90.4m to £76.8m. IGD is stated after foreseeable dividends of £13.4m (2012: £12.9m). The movement in IGD this year is a function of the following key items:

· The purchase of Protection Life, which has had a negative impact on IGD as a result of it needing to be recapitalised immediately on acquisition as a result of it being purchased with a net worth equivalent to 100% of its solvency requirement. An element of this dynamic is expected to reverse on successful completion of the Part VII transfer of the PL business into CA plc, which is expected to complete in 2014.

· The Group surplus in the year. As reported in the 2013 Report & Accounts the Group Regulatory surplus in 2013 has been strong. This has resulted in a significant benefit to the IGD, outweighing the impact of the 2013 total dividend of £20.6m (interim dividend of £7.2m plus the proposed final 2013 dividend of £13.4m).

Solo solvency

The Board sets internal solvency targets for each of its regulated subsidiaries, which have remained unchanged when compared with the prior year. The table above shows that the solvency positions of each regulated subsidiary continue to exceed the internal targets imposed by the Board:

· CA plc solvency has moved from 199% to 218%. This is stated after proposed dividends of £48.0m (2012: £40.0m), thereby showing that strong solvency is still being achieved whilst delivering strong cash flows to the Chesnara parent company.

· Protection Life solvencyis 156% at 31 December 2013. The reduction when compared to the prior year is because prior to Protection Life being purchased dividends were paid to its previous owners such that it left net worth in the company equivalent to 100% of its solvency requirement. Post acquisition this was immediately increased to 150% by way of a capital injection of £13.1m by Chesnara plc. The Part VII transfer of Protection Life into CA plc is planned to take place during 2014 and this is expected to deliver capital efficiencies that will be reflected in the 2014 IGD. No dividends are proposed to be paid by Protection Life this year.

· Movestic had a solvency ratio of 311% at 31 December 2013. Whilst it has a very strong solvency ratio, Movestic does not currently pay dividends to Chesnara due to an additional liquidity constraint that is imposed by the Swedish FI.

Solvency II

The introduction of Solvency II will change the capital requirements of both the Group and its regulated subsidiaries. The final impact of Solvency II continues to be uncertain although we expect the Group impact to be manageable. Solvency II may also result in the Board re-assessing the internal targets imposed on each regulated entity.

ADOPT GOOD REGULATORY PRACTICE AT ALL TIMES - UK AND SWEDEN

Chesnara continues to operate to high regulatory standards in both its day to day operations and its acquisition activity.

· Regulation and Legal

As ever in this highly regulated industry there have been a number of new and ongoing initiatives that have led to various levels of attention and challenge. It is pleasing to report that none of these have given rise to significant issues. The commentary below sets out a list of the key activities during the year.

· FSA

The FSA disbanded in April and was replaced by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). As a dual regulated business we maintain our commitment to maintaining a compliant operating model and a good relationship with both our regulators.

· PRA

The PRA, a subsidiary of the Bank of England, focuses on prudential supervision. To assist their thematic supervisory work we have responded in a timely manner to a small number of requests for generic information, for example on asset valuation methodologies.

· FCA

The FCA's focus is conduct and consumer protection. We are currently addressing rule changes on preparing product information, including new guidance to calculate inflation-adjusted illustrations for personal pensions and lower growth rates for life and pension illustrations, for implementation in April 2014.

· Solvency II

With an implementation date of January 2016 now certain, planning, preparation and delivery has been re-energised. By January 2016 we will have the required models, data, processes, governance and reporting in place to be Solvency II compliant.

· ABI Retirement Code

During 2013 there was increasing scrutiny of the annuity market and we have continued to comply with the ABI retirement code to ensure that pension policyholders are provided with timely and clear information regarding the options available to them in the annuity market prior to vesting their pension. In his Budget announcement on 19 March, the Chancellor of the Exchequer announced significant changes which will affect pensions and the annuity market. CA plc does not have a significant exposure to annuities (having around 6,000 such arrangements) and has not sought to write such business for a number of years. Although we do have far more pensions policies (around 169,000) we do not expect any immediate and significant change to affect this book or the value of it.

· Treating Customers Fairly (TCF)

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

· Complaints

There has been a general downward trend in the overall volume of complaints received although we continue to receive a steady number of complaints from Complaint Management Companies in respect of endowment policies surrendered or lapsed many years ago. The Financial Ombudsman Service continues to agree with our decision on the majority of complaints referred to them for adjudication.

· Policyholder Investment Funds

Through the auspices of the CA plc Investment Committee we have continued our oversight of policyholder funds through regular meetings with the investment managers. With them we continue to review the funds to ensure the underlying investment mix is the most appropriate for policyholders.

SWEDEN

· Solvency II

Continued commitment to this project means that our progress remains in line with our plans. As the implementation date has, as widely expected, been postponed to 2016 this has given us the opportunity to review necessary progress, whilst bearing in mind that interim measures will be introduced. Therefore, we are continuing to develop the key aspects of the prospective regulations as they stand.

· Customer information

Movestic's legal and marketing departments have conducted a review of all the information sent to customers of savings products. This has led to more comprehensible and uniform information, which at the same time fulfils all legal requirements.

· Pensions portability

The debate on the proposal to increase portability of pensions is intense in Sweden. As Movestic offers full right to transfer already, the risk for us can be described as the risk of no change. An increased right to transfer would be beneficial to Movestic as a part of the market that is now closed would become possible to approach.

FINANCIAL REVIEW

The Group's key financial performance indicators as at 31 December 2013 and for the year ended on that date demonstrate the financial performance and strength of the Group as a whole. A summary of these, coupled with some further analysis on each KPI, is shown below:

Summary of each KPI

IFRS pre-tax profit £60.6m (2012: £19.7m)

What is it?

The presentation of the results in accordance with International Financial Reporting Standards (IFRS) aims to smooth the recognition of profit arising from written business over the life of insurance and investment contracts.

Why is it important?

For businesses in run-off the reported profit is closely aligned with, and a strong indicator of, the emergence of surplus arising within the long-term insurance funds of those businesses. The emergence of surplus supports the payments of dividends from the regulated insurance businesses to Chesnara plc, which in turn enables the payment of dividends to our shareholders. IFRS pre-tax profit is a strong indicator of how we are performing against our stated strategic objectives to "maximise value from the in-force book" and "maintain a strong solvency position".

Highlights

· IFRS pre-tax profit of £60.6m shows a 208% improvement compared with the prior year of £19.7m.

· IFRS pre-tax profit is stated after a gain arising on the purchase of Protection Life of £2.8m.

· Profits from the core CA closed book remain significant, and have increased compared with the prior year (2013: £25.0m; 2012: £18.5m). The increase is predominantly due to investment market movements, with the core underlying product based surplus remaining resilient to book run-off. The CA surplus also reflects the impact of actuarial assumption changes, the key ones being a surplus arising from weakening mortality assumptions offset by a strengthening of our expense assumptions.

· The 2013 result includes a £36.4m profit from the S&P business. This compares favourably with the profit for 2012 of £14.6m, largely as a result of a reduction on the cost of guarantees driven by favourable investment market movements.

· There was a £1.2m improvement in the Movestic result when compared with the prior year.

Risks

The IFRS profit can be affected by a number of our principal risks and uncertainties as set out in the financial statements. In particular, strong equity and property markets in 2013 coupled with positive yields on fixed interest securities have contributed to a strong IFRS pre-tax profit in the year. The corollary to this is that deteriorating markets can have a material negative impact on the IFRS pre-tax result.

Net cash generation £36.7m (2012: £36.1m)

What is it?

Net cash generation is a measure of how much distributable cash the subsidiaries have generated in the period. The dominating aspect of cash generation is the change in amounts freely transferable from the operating businesses, taking into account target statutory solvency requirements which are determined by the boards of the respective businesses. It follows that cash generation is not only influenced by the level of surplus arising but also by the level of target solvency capital.

Why is it important?

Cash generation is a key measure, because it is the net cash flows to Chesnara from its Life and Pensions businesses which support Chesnara's dividend capacity. Cash generation can be a strong indicator of how we are performing against our stated objective of maximising value from the in-force book, although this KPI can also be negatively affected by our stated objective of maintaining a strong solvency position.

Highlights

· At £23.6m cash generation in CA continues to be strong (2012: £15.0m).

· S&P has contributed £28.9m of operational cash generation in 2013 compared with £19.5m for 2012.

· PL has utilised cash of £11.5m. This is net of a £13.1m injection as a result of the business being purchased with net worth below the Board's stated target resources of 150% of the capital requirement. A large portion of this is expected to reverse following the planned Part VII transfer into CA plc during 2014.

· Movestic has required no capital support during the year (2012: £nil).

· Chesnara cash generation includes acquisition expenses of £2.4m as a result of acquiring PL during the year.

Risks

The ability of the underlying regulated subsidiaries within the Group to generate cash is affected by a number of our principal risks and uncertainties as set out in the financial statements. Whilst cash generation is a function of the regulatory surplus, as opposed to the IFRS surplus, they are closely aligned, and therefore factors such as yields on fixed interest securities and equity and property performance contribute significantly to the level of cash generation within the Group. In addition to this, regulatory change, such as the introduction of Solvency II can also materially affect the ability of the regulated subsidiaries to generate cash.

EEV earnings, net of tax £82.7m (2012: £31.2m), excluding modelling adjustments of £4.1m in 2013 (2012: £3.6m)

What is it?

In recognition of the longer-term nature of the Group's insurance and investment contracts, supplementary information is presented in accordance with European Embedded Value 'EEV' principles.

The principal underlying components of the EEV result are:

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

· Value added by the writing of new business.

· Variations in actual experience from that assumed in the opening valuation.

· The impact of restating assumptions underlying the determination of expected cash flows.

Why is it important?

By recognising the net present value of expected future cash flows arising from the contracts (in-force value), a different perspective is provided in the performance of the Group and on the valuation of the business. EEV earnings are an important KPI as they provide a longer-term measure of the value generated during a period.

The EEV earnings of the Group can be a strong indicator of how we have delivered to our strategic objectives, in particular the new business profits generated from "enhancing our value through new business in selected markets", coupled with "maximising our value from the in-force book".

Highlights

· Significant economic profit of £71.1m (2012: £21.5m).

· Decrease in operating profit to £6.6m (2012: £14.6m).

· Movestic has generated a £15.0m EEV profit, which includes the adverse impact of a further strengthening of lapse assumptions during the year.

· Movestic has generated a new business contribution of £7.2m in the year (2012: £2.6m).

· One off profit arising on acquisition of Protection Life amounting to £12.3m.

Risks

The EEV earnings of the Group can be affected by a number of factors, including those highlighted within our principle risks and uncertainties as set out in the financial statements. In addition to the factors that affect the IFRS pre-tax profit and cash generation of the Group, the EEV earnings can be more sensitive to other factors such as the expense base and persistency assumptions. This is primarily due to the fact that assumption changes in EEV affect our long-term view of the future cash flows arising from our books of business.

EEV £376.4m (2012: £311.1m)

What is it?

The European Embedded Value (EEV) of a life insurance company is the present value of future profits, plus adjusted net asset value. It is a construct from the field of actuarial science which allows insurance companies to be valued.

Why is it important?

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

The EEV development of the Chesnara Group over time can be a strong indicator of how we have delivered to our strategic objectives, in particular the value created from acquiring life and pensions businesses and enhancing our value through new business in selected markets.

Highlights

· £85.4m increase in EEV before recognition of dividend payments. This is driven by strong investment market performance during the year contributing to the result, coupled with a gain of £12.3m arising on the acquisition of PL.

· Model enhancements generated a £4.1m increase in EEV in the year (2012: £3.6m). These related entirely to the Movestic business.

· A slight weakening of Swedish Krona against Sterling has contributed to a £1.4m decrease in embedded value in the year.

· Good balance of EEV across the operating segments.

· Good product diversification within the value in-force.

Risks

The Embedded Value of the Group is affected by economic factors such as equity and property markets and yields on fixed interest securities. In addition to this, whilst the other KPIs (which are all "performance measures") remain relatively insensitive to exchange rate movements (largely due to the proportion of IFRS pre-tax profit generated by Movestic compared with the other UK businesses) the EEV of the Group can also be materially affected by exchange rate fluctuations between Swedish Krona and Sterling. For example a 10% weakening of exchange rates between Swedish Krona and Sterling would reduce the EEV of the Group by 3%, based on the composition of the Group's EEV at 31 December 2013.

Further analysis of each KPI

IFRS PRE-TAX PROFIT £60.6m (2012: £19.7m)

Executive summary

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

Stable core

At the heart of surplus, and hence cash generation, is the CA business which is in run-off. During 2013 this has been supplemented as a result of the purchase of the Protection Life business, which, whilst not contributing significantly to the 2013 result as a function of the timing of the purchase, is a complementary addition to the stable core of the UK business.

The requirement of the CA and PL books are to provide a predictable and stable platform for the financial model and dividend strategy. As a closed book, the key is to sustain this income source as effectively as possible. The IFRS results during the year support this objective, with product-based deductions from CA of £28.7m continuing to emerge in a predictable fashion and at a level that compares favourably with 2012 (£26.3m). This level of product-based deductions has underpinned CA's ability to generate a significant level of IFRS pre-tax profit at £25.0m (2012: £18.5m). Assets under management within the CA segment have grown by 6.0%, from £1,638m to £1,736m, in the year. The PL segment, having only been owned for a month, contributed a modest IFRS surplus of £0.2m during 2013.

Variable element

The S&P component brings an element of earnings volatility to the Group, with the results being particularly sensitive to investment market movements. This is illustrated by a material reduction in the reserve for costs of guarantees since the start of the year, giving rise to a £28.5m economic benefit to the result during the year, £8.5m of which was driven by investment market movements, with £20.0m arising from changes to the yield curve. For 2012 this same dynamic gave rise to a £2.5m surplus contribution, with investment market movements contributing £9.0m, offset by £6.5m negative movements as a result of changes in the yield curve. Product based deductions continue to remain strong, at £17.1m (2012: £16.9m).

Growth operation

Movestic has posted an IFRS profit of £2.6m during the year (2012: £1.4m), a pleasing result showing that the results continue to trend in the right direction. The long-term financial model is based on growth, with levels of new business being targeted to more than offset the impact of policy attrition, leading to a general increase in assets under management and, hence management fee income. There has been an increase in funds under management of 24.1% (on constant exchange rates) since 31 December 2012. The Movestic result in 2013 is stated after an adverse DAC asset adjustment of £3.0m, predominantly arising from refinements to the DAC amortisation model that were made during the year. The impact on the Group IFRS results of this adjustment is muted as a large proportion of the adjustment (£2.6m) relates to DAC on policies that were in force on acquisition, and this is not recognised in the Group IFRS balance sheet.

Further detail of the results of the Movestic segment can be found in the 2013 IFRS Financial Statements.

IFRS results

The financial dynamics of Chesnara, as described above, are reflected in the following IFRS results:

Year ended 31 December	2013 £m	2012 £m	Note
CA	25.0	18.5
S&P	36.4	14.6	2
PL	0.2	-
Movestic	2.6	1.4
Chesnara	(4.9)	(5.8)	3
Consolidation adjustments	(1.5)	(4.2)
Total profit before tax and exceptional items	57.8	24.5
Profit arising from PL acquisition	2.8	-	1
Exceptional tax item	-	(4.8)	4
Total profit before tax	60.6	19.7
Tax	(11.2)	8.2	4
Total profit after tax	49.4	27.9

Note 1 - The Group profit before tax is stated after recognition of a £2.8m gain arising as a result of the purchase of Protection Life. More detail over how the gain was calculated has been provided in Note 7 to the IFRS Financial Statements.

Note 2 - The S&P results for the year include a surplus £28.5m arising from the reduction in reserves held for products with guarantees. The reduction is driven by favourable asset growth and bond yield movements.

Note 3 - The Chesnara result represents holding company expenses. For 2013 this includes the impact of £1.6m of costs expensed during the year that were incurred in relation to the purchase of Protection Life.

Note 4 - The tax charge for 2013 is not affected by any significant one-off items. An exceptional item of £4.8m was reported in 2012 relating to the reclassification of policyholder tax liabilities within the S&P segment has been charged to IFRS profits. There is a corresponding deferred tax release of £4.8m included in the tax item above. The net of tax impact of these adjustments, which were made to align the treatment within the S&P segment with that within the CA segment, is accordingly £nil.

Consolidation adjustments

The adjustments arising on consolidation are analysed below:

Year ended 31 December	2013 £m	2012 £m	Note
CA - Amortisation of AVIF	(2.2)	(2.8)
S&P - Amortisation of AVIF	(0.8)	(0.8)
PL - Amortisation of AVIF	(0.2)	-
Movestic:
Amortisation of AVIF	(4.4)	(4.0)
Write back of DAC	6.1	3.4	1
Total	1.7	(0.6)

Total	(1.5)	(4.2)

Note 1 - Included within consolidation adjustments is an item in relation to Movestic that reverses the amortisation charge on DAC relating to policies that were written prior to Chesnara ownership. This adjustment has increased in the year due to the additional charge that was booked in the year as a result of the refinements made to the DAC amortisation model. See Movestic section below for further detail.

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

A slight increase in product-based deductions, the core source of IFRS earnings, together with the impact of investment markets has contributed to an increase in the overall CA IFRS result as compared with the prior year. There are a number of complex aspects to the IFRS result but the primary drivers of this increase is the impact of market movements compared with the prior year, as illustrated below:

Profit before tax movement, year ended 31 December 2012 to year ended 31 December 2013

	£m	Note
Actual 2012	18.5
Other effects due to investment market movements	5.7	3
Product based deductions	2.4	1
Complaint costs	0.8
Other	(0.3)
Gains and interest on retained surplus	(1.9)	2
Operating assumption changes	(0.2)
Actual 2013	25.0

Note 1 - Product-based deductions continue to remain strong and are a core source of profit. The deductions during 2013 exceeded 2012 by £2.4m primarily driven by higher policyholder tax deductions.

Note 2 - Gains and interest on the retained surplus has fallen when compared with 2012, driven by a fall in bond values during the year.

Note 3 - The impact of market movements on the result during 2013 is £5.7m higher than it was during 2012. This is primarily driven by asset mismatching contributing a positive impact of £4.0m during the year, in contrast with this same dynamic having a negative effect of circa £1.0m during 2012.

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

Pre-tax IFRS profit	2013 £m	2012 £m	Note
Product-based deductions	28.7	26.3	1
Administration expenses	(7.0)	(7.6)	1
Gains and interest on retained surplus	3.5	5.4
Operating assumption changes	(1.7)	(1.5)	2
Other effects due to market movements	3.3	(2.4)
Complaint costs	(1.5)	(2.3)	3
Other	(0.3)	0.6
Total	25.0	18.5

Note 1 - Product-based deductions and returns on retained surplus remain significantly in excess of recurring administration expenses. The total level of product-based deductions has increased slightly when compared with the prior year despite the run-off of the book.

Note 2 - Operating assumption changes contain a number of items relating to the impact of certain assumption changes that were made during the year. In particular this includes a £7.5m strain arising from strengthening our expense assumptions following a management review of likely future expenses, offset by the positive effect of a £4.0m surplus arising from weakening our mortality assumptions, which has reduced the reserves held on our annuity business.

Note 3 - During the year ended 31 December 2012 complaint costs included the impact of the strengthening of the mortgage endowment mis-selling reserve. Some further strengthening has been made during 2013.

S&P

The S&P pre-tax profit has increased significantly compared with the prior year:

Profit before tax movement, year ended 31 December 2012 to year ended 31 December 2013

	£m	Note
Actual 2012	14.6
Change in Cost of Guarantees	27.1	3
Change in sterling and expense reserves	1.5
Admin expenses	1.1
Product based deductions	0.2
Other	(1.4)
Income on with profit shareholder funds	(6.7)
Actual 2013	36.4

S&P posted a pre-tax IFRS profit of £36.4m for year, the key components of the result being:

Pre-tax IFRS profit	2013 £m	2012 £m	Note
Product based deductions	17.1	16.9	1
Administration expenses	(9.9)	(11.0)	1
Income on with-profits shareholder funds	(0.4)	6.3	2
Change in cost of guarantees in with-profit funds:			3
Investment market movements	8.6	9.0
Change in yield curve	19.9	(6.5)
Lapse experience	(3.7)	(3.3)
Other	(0.4)	(1.9)
Total	24.4	(2.7)
Change in sterling and expense reserves	5.4	3.9	4
Other	(0.2)	1.2
Total	36.4	14.6

Note 1 - Product-based deductions have held up well as the book runs off. These are supported by assets under management, which have increased from £1,089m to £1,113m in the year, driven by strong investment markets. Product deductions exceed administration expenses by £7.2m and £5.9m in 2013 and 2012 respectively.

Note 2 - The income on with-profits shareholder funds is driven by investment market performance. The 2013 result includes the impact of the reduction in bond values that has been witnessed during the year which did not occur during 2012.

Note 3 - During the year the impact of movements in reserves for the cost of guarantees was positive, resulting in a £24.4m benefit to the IFRS result (2012: £2.7m loss). The key drivers of this benefit in 2013 were a combination of increases in bond yields and increases in equity values during the year. Included within the change in the costs of guarantees is a lapse experience loss of £3.7m, driven by observed lapses being slightly less than assumed at the start of the year.

Note 4 - Sterling and expense reserves are sensitive to both the expense base and to investment market movements. As investment markets improve, the level of sterling reserves (which provide against situations where future policy-based revenue does not cover future administration costs) reduces. The profit of £5.4m in the year is predominantly driven by investment market movements.

The purchase of PL was completed on 28 November 2013 and therefore the contribution to the Group IFRS profit, being £0.2m in 2012, is small.

As referred to above the acquisition of PL resulted in a one-off gain on acquisition of £2.8m.

Movestic

Pre-tax IFRS profit	2013 £m	2012 £m	Note
Pensions and Savings, before impact of DAC model change	2.2	(0.3)	1
Risk and Health	2.2	0.9	2
Other	1.2	0.8	3
Total profit before impact of DAC model change	5.6	1.4
Impact of DAC model change	(3.0)	-	4
Total profit before tax	2.6	1.4

Note 1 - The Pensions and Savings business model is directly dependent upon fees and rebates earned on funds under management (FUM). The average FUM has increased during the year resulting in a £2.8m (13.5%) increase in fee and rebate income. This is partly offset by a £1.4m (7.7%) increase in expenses and brokerage fees. Reinsurance financing costs have also made a positive contribution to the year on year improvement, having reduced by £1.2m in the year.

Note 2 - The Risk and Health business, although not the core target growth operation, is significant to the Movestic financial and operating model. Unlike the longer-term Pension and Savings business the Risk and Health business tends to be cash generative in the short-term, thereby providing a source of internal funding. The Risk and Health business is operationally significant due to the size of the book, there being 363,000 short-term policies in force as at 31 December 2013 (2012: 404,000), which generated £39.3m of gross annual premiums in the year (2012: £36.0m). The Risk & Health business uses reinsurance arrangements which contain profit share elements. During the year the results benefited from profit share income of £1.2m. This was principally as a result of the strong technical profit in Modernac, Movestic's associate.

Note 3 - The "Other" component includes the results of the associate, Modernac, Movestic investment income and the impact of fair value adjustments to the Financial Reinsurance liability. The Modernac results have remained consistent year on year, at £1.3m. The financial reinsurance fair value adjustment for the year has generated a £0.9m loss compared with a £0.6m loss for 2012. All of these movements are predominately a consequence of investment market conditions.

Note 4 - During 2013 a review of the amortisation model that was used for spreading the costs of acquiring new policies was performed. As a result of this review the model was updated to provide more granular information and has resulted in the requirement, for certain policies underwritten in certain years, to shorten the period over which these costs are spread. This has resulted in a one-off accelerated DAC charge of £3.0m. A large proportion of this DAC amortisation charge related to polices that were in force when Movestic was purchased by Chesnara, and therefore the Group IFRS result only reflects £0.3m of this charge, this being the element of the charge that relates to policies that were written post acquisition. This is because the DAC at acquisition was written off as part of the acquisition accounting process, having been replaced by an intangible AVIF asset.

Cash generation £36.7m (2012: £36.1m)

The Group's cash flows are generated principally from the interest earned on capital, the release of excess capital as the life funds run down, policyholder charges and management fees earned on assets under management.

The information below illustrates that gross and net cash generation within the Group continues to be robust. Key aspects underpinning the outcome are:

Highlights

· Gross cash generation in the UK run-off businesses has increased by £15.7m in the year compared with 2012, driven by more favourable investment markets driving the surplus.

· Net cash generation has benefitted from a one-off release from Save & Prosper. This is off-set by the adverse impact of restricted surplus in the SPP with-profit fund (see note 3).

· As expected the acquisition of Protection Life has had a short-term adverse impact on net cash generation as a result of a day one capital injection being required to increase the capital resources to 150% of the minimum regulatory capital requirement. As can be seen from the table below, £1.6m of cash has been generated by PL since acquisition to off-set this.

· The pause in Movestic funding has continued, with no additional funding being required in 2013 (2012: £nil).

The Group's closed life funds provide predictable fund maturity and liability profiles, creating stable long-term cash flows for distribution to shareholders and for repayment of outstanding debt. Cash flow generation will ultimately naturally decline over time as the UK businesses run off. Despite this natural downward pressure there was an increase in cash generation in 2013 when compared with 2012.

Although investment returns are less predictable, a significant portion of the investment risk is borne by policyholders. However, the S&P segment continues to demonstrate short-term volatility. This arises from the impact of investment market movements and the cost to shareholders of guarantees within the S&P with profits funds. Although the short-term measure of this cost follows the fortunes of investment markets, we proactively manage the risk taking a longer-term perspective.

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

Year ended 31 December Cash generated from/(utilised by):	2013 £m	2012 £m	Note
CA
Surplus and profits arising in the period	20.4	13.4
Change in target capital requirement	3.2	1.7

S&P
Surplus and profits arising in the period	25.1	14.4
Change in target capital requirement	4.3	5.4
(Decrease) in policyholder funds cover for target capital requirement	(0.5)	(0.3)

PL
Surplus and profits arising in the period	0.2	-
Change in target capital requirement	1.4	-

Movestic
Additional capital contributions	-	-

Chesnara
Cash utilised by operations	(4.4)	(0.6)
Total gross cash generation	49.7	34.0
	-
Items affecting ability to distribute cash
Synergistic effects of Part VII transfer	-	7.0	1
PL capital injection	(13.1)	-	2
Release of capital from S&P WP fund	15.5	-	3
Restricted surplus in S&P WP fund	(15.4)	(4.9)	3
Net cash generation available for distribution	36.7	36.1	4

Items affecting the cash available for distribution:

Note 1 - As a result of the S&P Part VII transfer in 2011 we were able to de-regulate the S&P companies in 2012 thereby releasing £7m of capital.

Note 2 - PL was acquired at a solvency level lower than the target requirement. An immediate capital injection was made which has an impact on net cash available for distribution.

Note 3 - An element of the statutory surplus in the year emerges in the S&P WP fund. In the absence of management action the majority of the surplus is not available for distribution and the net cash generated recognises this restriction. Periodically Chesnara, with regulatory approval, can apply a waiver to release some of the previously restricted surplus within S&P. This process was undertaken during 2013 resulting in a £15.5m capital release.

Note 4 - The net cash generation KPI is a useful indicator of the dividend paying capacity of the Group's regulated subsidiaries. This is monitored closely by Management as cash generated by the Group's regulated subsidiaries is used by the Chesnara parent Company for corporate transactions such as the servicing of debt, payments of dividends and the funding of future acquisitions. It should be noted that this KPI is quite distinct from the Group's Cash Flow Statement as included in the Group's IFRS Financial Statements, which is intended to reflect the movement in cash held by Chesnara and its subsidiaries but does not reflect that most of the subsidiary cash balances are held in regulated insurance funds and are therefore not available for use by the Parent Company.

EEV earnings, excluding modelling adjustments £82.7m profit (2012: £31.2m)

EEV result

Summary

The headline EEV result has improved significantly during the year. The improvement relates directly to investment market conditions. The results benefit from both economic experience and assumption profits, which are driven predominately from equity market growth and an increase in the yield curve.

The EEV operating profit of covered business of the Group has reduced from £19.0m in 2012 to £8.9m in 2013. The reduction is primarily due to the 2012 comparatives including some £13m due to positive assumption changes relating to broker and fund manager rebates in Movestic that have not been replicated to the same degree during 2013. Excluding this there has been an underlying increase from £6m to £8.9m.

A significant proportion of the operating profit is also directly the result of investment market movements. The return on shareholder net worth loss of £0.3m reflects a reduction in bond capital values. During 2012 reducing bond yields contributed to a corresponding £7.9m profit.

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

Profit after tax movement

Year ended 31 December 2012 to year ended 31 December 2013

	£m
Actual 2012	31.2
CA	11.4
S&P	27.0
PL	0.1
Movestic	2.5
Chesnara	0.6
Profit on purchase of PL	12.3
Tax	(2.4)
Actual 2013	82.7

Analysis of the EEV result in the year by business segment

	2013 £m	2012 £m
CA	24.5	13.1
S&P	42.7	15.7
PL	0.1	-
Movestic	15.5	13.0
Chesnara	(5.1)	(5.7)
Profit before tax and gain on acquisition	77.7	36.1
Gain on acquisition of Protection Life	12.3	-
Profit before tax	90.0	36.1
Tax	(7.3)	(4.9)
Profit after tax	82.7	31.2

Analysis of the EEV result in the year by earnings source

	2013 £m	2012 £m
New business contribution	7.9	2.9
Return from in-force business
Expected return	5.5	5.8
Experience variances	5.8	0.4
Operating assumption changes	(10.0)	2.0
Return on shareholder net worth	(0.3)	7.9
Operating profit of covered business	8.9	19.0
Variation from longer term investment return	54.7	28.0
Effect of economic assumption changes	16.4	(6.5)
Profit on covered business before tax and gain on acquisition	80.0	40.5
Tax	(7.6)	(6.0)
Profit on covered business after tax and before gain on acquisition	72.4	34.5
Gain on acquisition of Protection Life	12.3	-
Uncovered business and other group activities	(2.3)	(4.4)
Tax on uncovered business	0.3	1.1
Profit after tax	82.7	31.2

Economic conditions

As indicated above, the EEV result is sensitive to economic conditions. Economic experience and assumption changes contributed a profit of £71.1m in the year compared with a profit of £21.5m for 2012. The results are sensitive to both equity markets and bond yields (further sensitivity analysis is provided in Note 3 of EEV Supplementary Information below). Economic assumption changes are dominated by bond yield movements, which following a period of decline during 2012, have increased relatively sharply during 2013. The "variation from longer term investment return" profit is predominantly due to continued equity market growth. The impact of these effects on each operating segment is illustrated below:

Economic experience and assumption changes	2013 £m	2012 £m
CA	18.7	4.7
S&P	33.9	8.3
PL	-	-
Movestic	18.4	8.5
Total	71.1	21.5

The S&P profit in 2013 includes the impact of a reduction in the estimate of costs on products with guarantees of some £21.0m, coupled with the positive impact of bond yield increases across the rest of the book.

As can be seen above the CA segment has benefitted from positive economic conditions, with profits improving by £14.0m compared with 2012. In particular favourable tax deductions and movements in tax liabilities that are a direct result of investment market performance have significantly contributed to the result economic experience in the year. Off-setting this are adverse economic assumption changes of £3.6m.

The Movestic business is sensitive to movements in equity markets due to its core income stream being dependent upon management charges levied on funds under management, which are primarily equity-based. Of the £18.4m economic profit, £20.8m relates to equity growth in the year. Off-setting against this is an adverse economic assumption change of c £2.4m. This is driven by a number of factors, including the effect of inflation on future expenses.

New business contribution

The new business contribution relates primarily to the Movestic Pensions and Savings business. Movestic also writes Risk and Health policies, but due to its more short-term nature the Risk and Health business is reported as uncovered business and hence does not contribute to the new business result. The Movestic contribution is £7.2m, of which £2.7m relates to the value of premium increments received on existing policies. Profits on "new contract" business of £4.5m, compared with the 2012 equivalent of £0.2m. The recent recovery is due to a 61.9% increase in new business volumes following the rectification of the 2012 servicing issues that arose from a 2011 systems migration.

Experience variances

	2013 £m	2012 £m
CA	7.6	5.2
S&P	4.7	3.1
PL	-	-
Movestic	(6.5)	(7.9)
Total	5.8	0.4

The CA favourable variances relate to policy persistency and mortality experience being better than assumed. The S&P favourable variances in 2013 relate principally to policyholder tax deductions and better than assumed expense and lapse experience.

The Movestic experience variance includes expense and commission overruns of some £2.7m coupled with the net adverse impact of a number of other experience variances such as changes to rebate levels, changes in investment mix and changes to certain policyholder funding structures. Off-setting this is a small positive persistency profit of £0.5m, which compares favourably with the 2012 loss of £6.0m. This would be expected given that persistency assumptions were further strengthened during the first half of 2013, the impact of which is included in the operating assumption changes.

Operating assumption changes

	2013 £m	2012 £m
CA	(4.3)	(0.3)
S&P	4.5	(2.9)
PL	-	-
Movestic	(10.2)	5.2
Total	(10.0)	2.0

The CA segment operating assumption change loss of £4.7m is predominantly driven by the positive effect of lapse and mortality assumptions being weakened during the year resulting in a profit of £5.5m, offset by a £10.0m adverse impact due to expense assumptions being strengthened, of which £7.5m arises as a result of further assessment of potential future administration expenses.

The S&P segment includes an operating assumption change profit of £4.4m arising from changes to expense assumptions. This is driven by reduced forecast governance overhead costs as a result of reduced property spend coupled with a reduction in salary spend. The 2012 result reflected a loss of £3.7m following a change in lapse assumptions. This has not been repeated this year.

Movestic has reported an operating assumption change loss of £10.2m, compared with a £5.2m positive operating assumption change profit in 2012. The loss in the year includes the impact of the aforementioned persistency assumption strengthening, contributing an adverse variance of some £6.0m. In addition, increases in maintenance expense assumptions have resulted in a further negative assumption change loss of £2.6m. During 2012 the Movestic long-term persistency assumptions were strengthened, with a total adverse impact of £7.9m. This was more than offset by positive assumption changes relating to broker and fund manager rebates totalling some £13.0m.

Gain on acquisition of Protection Life

The EEV results for the year includes the impact of one-off gain of £12.3m arising from the purchase of Protection Life. Further detail is provided in Note 9 to the EEV supplementary information.

Uncovered business and other group activities

	2013 £m	2012 £m
Chesnara	(5.0)	(5.7)
Movestic	2.7	1.3
Total	(2.3)	(4.4)

The result includes Chesnara parent company costs relating to corporate governance and business development, not attributable to the covered business. The 2013 expense is reflective of the steady state cost base coupled with the costs incurred associated with the purchase of PL, which amounted to £2.4m, £1.6m of which has been reported as an expenses, with the remainder relating to loan arrangement fees, which are being spread over the life of the loan. The 2012 comparison included a £2.5m one-off increase in a provision to cover future contractual property costs associated with the Group Head Office.

The Movestic result is impacted by:

i) Risk and Health results: This business is less long-term in nature and hence is not modelled as covered business. Profit of £2.2m is £1.3m higher than the prior year profit of £0.9m.

ii) Profit from the Modernac associate, which at £0.9m for 2013 has decreased slightly compared with a profit of £1.2m for 2012.

European Embedded Value £376.4m (2012: £311.1m)

EEV movement 31 December 2012 to 31 December 2013:

	£m
EEV actual 2012	311.1
Net of tax profit arising in the year*	70.4
Exceptional surplus on acquisition	12.3
Effect of modelling adjustments	4.1
Foreign exchange reserve movement	(1.4)
Dividend paid	(20.1)
EEV Actual 2013	376.4

EEV movement 31 December 2011 to 31 December 2012:

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

* stated before exceptional items

Summary

The EEV of the Chesnara Group represents the present value of the estimated future profits of the Group plus an adjusted net asset value. Movements between different periods are a function of the following components:

· Net of tax profit arising in the period, pre exceptional items;

· Exceptional items, such as:

o the surplus arising on the acquisition of Protection Life; and

o Modelling adjustments;

· Foreign exchange movements arising from retranslating the EEV of Movestic into Sterling; and

· Dividends that are paid in the year.

More detail behind each of these components has been provided below:

Net of tax profit

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

Exceptional surplus on acquisition

The purchase of Protection Life has resulted in a surplus arising on acquisition of £12.3m. The surplus has arisen because the EEV of Protection Life at the acquisition date amounted to £51.6m, which is £12.3m higher than the purchase price of £39.3m.

Effect of modelling adjustments

· Year ended 31 December 2013

Modelling adjustments during the year have reduced when compared with those included in the prior year.

Positive modelling adjustments this year of £4.1m relate entirely to the Movestic business. These have arisen due to refinements being made to the way in which modelling of commission is performed, which is now performed at a more granular level.

· Year ended 31 December 2012

The modelling adjustments that were reported during 2012 included more materially individual items, contributing to an increase in EEV of £3.6m, comprising:

Movestic

As a result of a review of the model during 2012 the following adjustments were reflected in the EEV at 31 December 2012:

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

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

The CA and CWA EEV models previously assumed a single average rate of investment return for all durations as opposed to the use of a full yield curve. As at 31 December 2012 the models were enhanced to recognise differing rates of return across the different durations of the yield curve, resulting in a net of tax increase of £12.6m.

Foreign exchange reserve movements

The £1.4m foreign exchange reserve movement during 2013 has arisen as a result of a slight weakening of the Swedish Krona against Sterling by 0.6% since the end of 2012.

Dividends paid

Dividends of £20.1m were paid during 2013, being the final dividend from 2012 of £12.9m and the interim dividend from 2013 of £7.2m.

Analysis of EEV

The information below, provides some further analysis of the EEV of the Group, both in terms of the split between different operating segments and also the split between the adjusted shareholder net worth and the value of the in force (VIF) business. The adjusted shareholder net worth represents the IFRS net worth of the Group, but adjusted for items that are measured differently under EEV measurement rules and the VIF represents Management's best estimate of the present value of the future profits that will arise out of each book of business.

EEV - Value in force (VIF) and adjusted shareholder net worth (SNW) (£m at year end)

	2011	2012	2013
VIF	199.6	210.0	262.2
SNW	94.9	101.1	114.2
Total EEV	294.5	311.1	376.4

Analysis of VIF at 31 December 2013 - £262.2m

	£m
Movestic	139.0
CA	67.2
S&P	30.5
PL	25.5
Total	262.2

Analysis of EEV at 31 December 2013 - £376.4m

	£m
Movestic	117.3
CA	126.1
S&P	106.5
PL	64.7
Other Group Activities	(38.2)
Total	376.4

In the above segmental analysis any outstanding debt in relation to the S&P and PL acquisitions is included in "Other Group Activities".

Highlights

· There is a good balance in EEV across the core business segments, with the UK businesses representing the majority (79.0%) of the total EEV, which includes the supplementary addition of the Protection Life business during the year. The value in-force component is dominated by the Swedish business which represents 53.0% of the total Group VIF.

· The Group EEV includes £64.7m in relation to Protection Life. Off-setting this is the reduction in the EEV in "Other Group Activities", primarily due to the purchase price and one-off capital injection relating to this acquisition.

· There is a significant level of product diversification within the VIF. When adjusted to recognise the impact of the S&P cost of guarantees which are predominantly pension contract related, 61.8% of the total product level value in-force relates to pension contracts, 24.5% to protection business and 10.9% to endowments.

Analysis of VIF by policy type

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

31 December 2013	Number of policies					Value of in-force business
	CA	S&P	PL	Movestic	Total	CA	S&P	PL	Movestic	Total
	000's	000's	000's	000's	000's	£m	£m	£m	£m	£m
Endowment	34	4	-	11	49	24.1	2.9	-	8.0	35.0
Protection	40	4	146	-	190	46.2	3.9	36.0	-	86.1
Annuities	6	-	-	-	6	4.0	1.1	-	-	5.1
Pensions	44	123	-	82	249	29.7	44.6	-	140.0	214.3
Other	3	11	-	-	14	3.9	4.9	-	-	8.8
Total at product level	126	143	146	93	508	107.9	57.4	36.0	148.0	349.3
Valuation adjustments:
Holding company expenses						(6.5)	(3.4)	-	(8.9)	(18.8)
Other						(16.5)	(21.2)	-	-	(37.7)
Cost of capital/frictional costs						(1.0)	(2.3)	(4.0)	(0.1)	(7.4)
Value in-force pre-tax						83.9	30.5	32.0	139.0	285.4
Taxation						(16.7)	-	(6.5)	-	(23.2)
Value in-force post-tax						67.2	30.5	25.5	139.0	262.2

31 December 2012	Number of policies					Value of in-force business
	CA	S&P	PL	Movestic	Total	CA	S&P	PL	Movestic	Total
	000's	000's	000's	000's	000's	£m	£m	£m	£m	£m
Endowment	39	5	-	12	56	27.7	3.8	-	8.1	39.6
Protection	43	5	-	-	48	49.2	3.7	-	-	52.9
Annuities	6	-	-	-	6	7.8	0.9	-	-	8.7
Pensions	46	128	-	78	252	33.6	55.0	-	124.2	212.8
Other	3	12	-	-	15	3.2	3.3	-	-	6.5
Total at product level	137	150	-	90	377	121.5	66.7	-	132.3	320.5
Valuation adjustments:
Holding company expenses						(7.0)	(3.9)	-	(7.7)	(18.6)
Other						(28.6)	(41.8)	-	-	(70.4)
Cost of capital/frictional costs						(1.1)	(2.4)	-	(0.1)	(3.6)
Value in-force pre-tax						84.8	18.6	-	124.5	227.9
Taxation						(17.8)	-	-	-	(17.8)
Value in-force post-tax						67.0	18.6	-	124.5	210.1

The value-in-force represents the discounted value of the future surpluses arising from the insurance and investment contracts in force at each respective year end. The future surpluses are calculated by using realistic assumptions for each component of the cash flows.

Holding company expenses are apportioned across the segments pro-rata to the total product-based VIF.

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

Taxation in the value in force is modelled on a combined CA and S&P basis and, in the analysis above, is attributed wholly to the CA segment.

FINANCIAL MANAGEMENT

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

The below illustrates the aims, approach and outcomes from the financial management framework:

OBJECTIVES

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

1. Maintain solvency targets

2. Meet the dividend expectations of shareholders

3. Optimise the gearing ratio to ensure an efficient capital base

4. Ensure there is sufficient liquidity to meet obligations to policyholders, debt financiers and creditors

5. Maintain the Group as a going concern.

how we deliver to our objectives

In order to meet our obligations we employ and undertake a number of methods. These are centred on:

1. Monitor and control risk & solvency

2. Project key financial variables

3. Responsible investment management

outcomes

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

1. SOLVENCY - Group Solvency Ratio of 194%

2. SHAREHOLDER RETURNS - 2013 TSR 79%; 2013 dividend yield 5.6% (based on share price as at 31 December 2013 of 321.75p and full year 2013 dividend of 17.88p).

3. CAPITAL STRUCTURE - Gearing ratio of 29.6% following acquisition of PL. (This does not include the financial reinsurance that is held within the Swedish business).

4. LIQUIDITY AND POLICYHOLDER RETURNS - Competitive fund performance; Policyholders' realistic expectations maintained.

5. MAINTAIN THE GROUP AS A GOING CONCERN - Group remains a going concern

How we Deliver our Financial Management Objectives

1. Monitor & Control RISK & SoLVENCY

The Board sets internal solvency targets that are based on solvency requirements imposed by our regulators. The targets are set with the intention of balancing the requirements of both our shareholders and policyholders.

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

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

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

These calculations are monitored continuously.

2. LONGER-TERM PROJECTIONS

Long term projections are performed covering, as a minimum:

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

(ii) Chesnara holding company cash flows;

(iii) Regulatory solvency and capital resources and requirements; and

(iv) European embedded value.

The projections are prepared for a base case, using latest board-approved assumptions, and for various individual and multiple economic and non-economic sensitivities.

In addition:

Financial condition reports are prepared on an annual basis which includes assessments of the ability of the business to withstand key adverse events, including increased rates of policy lapse, expense overruns and unfavourable market conditions.

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

3. RESPONSIBLE INVESTMENT Management

Investment management

We aim to promote customer retention by pursuing good relative investment performance across both our UK and Swedish businesses.

We use third party investment managers in both the UK and Sweden. They are charged with operating within pre-determined guidelines which are set having regard to the nature of the fund and to contractual obligations to policyholders. For the with-profits funds these are also in accordance with the published Principles and Practices of Financial Management. In Sweden a larger number of fund managers are used, which are subject to very stringent initial selection and ongoing monitoring criteria.

A conservative approach to the investment of shareholders' funds is also adopted within the Group.

OUTCOMES FROM IMPLEMENTING OUR FINANCIAL MANAGEMENT OBJECTIVES

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

1. Solvency

The solvency and regulatory capital of the Group and its regulated subsidiaries is monitored continually. Further detail of the year end solvency positions has been summarised in the Business Review section of these financial statements.

2. Shareholder returns

The Board's primary aim is to provide an attractive dividend flow to its shareholders. With Movestic in its growth phase, shareholder dividend flows are currently generated by the UK run-off businesses within CA plc, by way of the emergence of surpluses in, and transfer of surpluses from, its long-term insurance funds to shareholder funds and by the return on shareholder net assets.

Dividend flows from CA plc to Chesnara are utilised in the first instance for the repayment and servicing of debt, coupled with bearing 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.

Returns to shareholders can be assessed by reference to many measures including the actual share price, the yields on the shares and the comparison of total market capital to embedded value. Looking back over a four year period the EEV per share has increased from 258.7p at 31 December 2009 to 327.7p at 31 December 2013, which compares with the share price increasing from 191.1p to 321.8p over the same period. This shows that the share price, when stated as a percentage of EEV, has increased from 73.9% at 31 December 2009 to 98.2% at 31 December 2013. Full year dividends over this same period have increased from 16.4p per share in 2010 to 17.88p per share in 2013.

Throughout 2013 and up to 25 March 2014 there has been a general appreciation in the share price, having increased by 55% from 193.0p per share at 1 January 2013 to 300.0p per share at 25 March 2014. The combined impact of the share price growth throughout 2013 and the continuing attractive dividends means shareholders have achieved strong total shareholder return.

3. Capital structure

The Group's UK operations are ordinarily financed through retained earnings and through the current emergence of surplus in the UK life businesses.

These flows are used:

(i) to repay our debt obligations;

(ii) to support dividend distributions to shareholders; and

(iii) to support the medium-term requirements of Movestic to meet regulatory solvency capital requirements as it expands.

The acquisition of S&P in December 2010 for £63.5m was accomplished by way of debt: equity financing broadly in a ratio of 2:1. This introduced a modest level of gearing to the structure of Group financing.

The acquisition of PL in November 2013 for £39.3m was funded using a combination of debt and existing cash resources. The process for raising the debt to fund the purchase of PL also gave rise to a restructuring of the existing facilities that were initially arrange to fund the purchase of S&P. The result is that, at 31 December 2013 bank borrowings amounted to £73.0m, which is being repaid over a five year term.

The purchase of Movestic was financed by internal cash resources. On an ongoing basis the Movestic business is financed by a combination of external financial reinsurance arrangements and capital contributions from Chesnara.

With respect to acquisitions the Group seeks to finance these through a suitable mix of debt and equity, within the constraints imposed by the operation of regulatory rules over the level of debt finance which may be borne by Insurance Groups without breaching solvency requirements.

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

4. Liquidity and policyholder returns

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

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

5. Maintain the Group as a going concern

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

The information set out in 'Maintain strong solvency position' above indicates a strong solvency position as at 31 December 2013 as measured at both the individual regulated life company levels in both the UK and Sweden and at the Group level. In addition, in respect of the UK business, the financial condition report and reverse stress testing assessments indicate that it is able to withstand the impact of adverse scenarios, including the effect of significant investment market falls, while the business's outsourcing arrangements protect it from significant expense overruns.

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

Our expectation is that, notwithstanding the risks set out above, the Group will continue to generate surplus in its UK long-term businesses sufficient to meet its debt obligations as they fall due, to continue to pursue an attractive dividend policy and to meet the short-term financing requirements of Movestic. The Director's Report on pages 85 and 86 of the 2013 Report & Accounts provides confirmation that the IFRS Financial Statements have been prepared on the Going Concern basis.

CONSOLIDATED FINANCIAL STATEMENTS - IFRS BASIS

Consolidated Statement of Comprehensive Income

Year ended 31 December	2013	2012
	£000	£000
Insurance premium revenue	109,938	115,520
Insurance premium ceded to reinsurers	(35,469)	(35,336)
Net insurance premium revenue	74,469	80,184
Fee and commission income	69,990	66,658
Net investment return	567,463	332,053
Total revenue net of reinsurance payable	711,922	478,895
Other operating income	22,270	19,645
Total income net of investment return	734,192	498,540
Insurance contract claims and benefits incurred
Claims and benefits paid to insurance contract holders	(281,800)	(272,479)
Net increase in insurance contract provisions	(62,249)	(20,732)
Reinsurers' share of claims and benefits	57,004	47,865
Net insurance contract claims and benefits	(287,045)	(245,346)
Change in investment contract liabilities	(320,132)	(156,663)
Reinsurers' share of investment contract liabilities	5,568	2,810
Net change in investment contract liabilities	(314,564)	(153,853)
Fees, commission and other acquisition costs	(19,450)	(17,967)
Administrative expenses	(38,761)	(37,029)
Other operating expenses
Charge for amortisation of acquired value of in-force business	(7,530)	(7,863)
Charge for amortisation of acquired value of customer relationships	(301)	(391)
Other	(6,483)	(9,205)
Total expenses net of change in insurance contract provisions and investment contract liabilities	(674,134)	(471,654)
Total income less expenses	60,058	26,886
Share of profit of associate	1,252	1,244
Profit recognised on business combination	2,807	-
Exceptional item	-	(4,778)
Financing costs	(3,527)	(3,670)
Profit before income taxes	60,590	19,682
Income tax (expense)/credit
Before exceptional item	(11,227)	3,481
Exceptional item	-	4,778
After exceptional item	(11,227)	8,259

Profit for the year	49,363	27,941
Foreign exchange translation differences arising on the revaluation of foreign operations	(516)	741
Total comprehensive income for the year	48,847	28,682
Basic earnings per share (based on profit for the year)	42.98p	24.33p
Diluted earnings per share (based on profit for the year)	42.98p	24.33p

Consolidated Balance Sheet

31 December	2013	2012
	£000	£000
Assets
Intangible assets
Deferred acquisition costs	28,162	22,555
Acquired value of in-force business	88,615	76,118
Acquired value of customer relationships	1,583	1,884
Software assets	5,004	5,712
Property and equipment	673	369
Investment in associates	4,088	2,902
Investment properties	20,387	100,167
Deferred tax assets	-	2,295
Reinsurers' share of insurance contract provisions	379,894	278,692
Amounts deposited with reinsurers	34,293	30,245
Financial assets
Equity securities at fair value through income	479,617	427,303
Holdings in collective investment schemes at fair value through income	3,440,992	3,009,799
Debt securities at fair value through income	370,666	363,377
Policyholders' funds held by the Group	130,237	61,171
Insurance and other receivables	46,382	24,313
Prepayments	4,889	3,160
Derivative financial instruments	2,956	3,095
Total financial assets	4,475,739	3,892,218
Reinsurers' share of accrued policyholder claims	11,399	4,489
Income taxes	2,608	4,299
Cash and cash equivalents	184,263	228,676
Total assets	5,236,708	4,650,621
Liabilities
Insurance contract provisions	2,362,063	2,207,078
Other provisions	5,348	5,161
Financial liabilities
Investment contracts at fair value through income	2,283,403	2,022,314
Liabilities relating to policyholders' funds held by the Group	130,237	61,171
Borrowings	94,377	48,324
Derivative financial instruments	387	286
Total financial liabilities	2,508,404	2,132,095
Deferred tax liabilities	11,007	5,894
Reinsurance payables	11,539	16,610
Payables related to direct insurance and investment contracts	47,137	38,894
Deferred income	7,865	8,884
Income taxes	8,012	-
Other payables	27,104	17,057
Bank overdrafts	1,127	602
Total liabilities	4,989,606	4,432,275
Net assets	247,102	218,346
Shareholders' equity
Share capital	42,024	42,024
Share premium	42,526	42,523
Treasury shares	(212)	(217)
Other reserves	7,203	7,719
Retained earnings	155,561	126,297
Total shareholders' equity	247,102	218,346

Consolidated Statement of Cash Flows

Year ended 31 December	2013	2012
	£000	£000
Profit for the year	49,363	27,941
Adjustments for:
Depreciation of property and equipment	177	128
Amortisation of deferred acquisition costs	9,386	7,657
Amortisation of acquired value of in-force business	7,530	7,864
Amortisation of acquired value of customer relationships	301	391
Amortisation of software assets	2,580	2,188
Tax paid /(recovered)	11,227	(8,259)
Interest receivable	(19,256)	(25,961)
Dividends receivable	(19,049)	(46,774)
Interest expense	3,527	3,670
Change in fair value of investment properties	6,197	5,650
Fair value gains on financial assets	(523,938)	(254,457)
Profits on sale of property and equipment	(10)	(2)
Profit arising on business combination	(2,807)	-
Share of profit of associate	(1,252)	(1,244)
Interest received	18,701	26,357
Dividends received	19,252	46,738
Increase in intangible assets related to insurance and investment contracts	(19,397)	(10,255)
Changes in operating assets and liabilities:
Decrease in financial assets	46,539	145,971
Increase in reinsurers share of insurance contract provisions	(14,596)	(14,138)
Increase in amounts deposited with reinsurers	(4,048)	(2,214)
(Increase)/decrease in insurance and other receivables	(5,267)	402
(Increase)/decrease in prepayments	(1,792)	96
Increase in insurance contract provisions	51,570	15,271
Increase in investment contract liabilities	351,630	140,360
(Decrease)/increase in provisions	(1,829)	2,336
(Decrease)/increase in reinsurance payables	(5,182)	88
Increase/(decrease) in payables related to direct insurance and investment contracts	2,110	(1,795)
Increase/(decrease) in other payables	3,690	(3,251)
Cash (utilised by)/generated from operations	(34,643)	64,758
Income tax received/(paid)	1,405	(1,152)
Net cash (utilised by)/generated from operating activities	(33,238)	63,606
Cash flows from investing activities
Business combinations	(31,924)	-
Development of software	(1,882)	(1,094)
Purchases of property and equipment	(485)	(109)
Net cash utilised by investing activities	(34,291)	(1,203)
Cash flows from financing activities
Proceeds from issue of share capital	3	-
Proceeds from/(repayment of) borrowings	46,728	(6,406)
Sale treasury shares	5	-
Dividends paid	(20,099)	(19,525)
Interest paid	(3,975)	(3,949)
Net cash generated by/(utilised by) financing activities	22,662	(29,880)
Net (decrease)/increase in cash and cash equivalents	(44,867)	32,523
Cash and cash equivalents at beginning of year	228,074	195,086
Effect of exchange rate changes on cash and cash equivalents	(71)	465
Cash and cash equivalents at end of the year	183,136	228,074

Consolidated Statement of Changes in Equity

Year ended 31 December 2013
	Share capital	Share premium	Other reserves	Treasury shares	Retained earnings	Total
	£000	£000	£000	£000	£000	£000
Equity shareholders' funds at 1 January 2013	42,024	42,523	7,719	(217)	126,297	218,346
Profit for the year	-	-	-	-	49,363	49.363
Dividends paid	-	-	-	-	(20,099)	(20,099)
Foreign exchange translation differences	-	-	(516)	-	-	(516)
Sale of treasury shares	-	3	-	5	-	8
Equity shareholders' funds at 31 December 2013	42,024	42,526	7,203	(212)	155,561	247,102

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

Notes to the consolidated financial statements - IFRS Basis

1. Basis of presentation

The preliminary announcement is based on the Group's financial statements for the year ended 31 December 2013, which are prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union ('Adopted IFRSs') as adopted by the EU.

The financial information contained in the preliminary announcement does not constitute the company's consolidated statutory financial statements for the years ended 31 December 2013 or 2012, but is derived from those financial statements. Financial Statements for the year ended 31 December 2012 have been delivered to the Registrar of Companies and those for the year ended 31 December 2013 will be delivered following the company's annual general meeting. The auditors have reported on those financial statements; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under s498 (2) or (3) Companies Act 2006.

2. Significant accounting policies

The accounting policies applied by the Group in determining the IFRS basis results in this report are the same as those previously applied in the Group's consolidated financial statements for the year ended 31 December 2012 except for the adoption of the amendments to IFRS 7 'Disclosures - Transfers of Financial Assets' and IFRS 13 'Fair Value Measurement'. The impact of these new standards is not material.

3. Business Combinations

On 28 November 2013, Chesnara plc acquired the entire issued share capital (100%) of Protection Life Company Limited (previously Direct Line Life Insurance Company Limited) from Direct Line Insurance Group plc for a total consideration of £39,300,000, paid in cash. The Protection Life purchase supports one of our stated strategic aims of acquiring life and pensions businesses.

Protection Life is a UK-based life insurance company. It became substantially closed to new business on 5 July 2011 and has been focused since then on managing the existing portfolio in line with the run-off plan agreed at the time with the then FSA. Prior to closure to new business, Protection Life predominantly offered non-linked products including mortgage life cover, fixed term life cover (both with and without critical illness cover) and over 50's life cover to UK customers distributed under both its own brand and also in recent years, but before the closure to new business, on a white label basis.

The acquisition of this shareholding has given rise to a profit on acquisition of £2.8m calculated as follows:

	Book value	Provisional fair value adjustments	Fair value
	£000	£000	£000
Assets
Intangible assets
Acquired value of in-force business	-	20,211	20,211
Deferred tax asset	15	-	15
Reinsurers' share of insurance contract provisions	93,826	-	93,826
Financial assets:
Debt securities at fair value through income	24,940	-	24,940
Insurance and other receivables	13,254	-	13,254
Prepayments	4	-	4
Total financial assets	38,198	-	38,198
Reinsurers' share of accrued policyholder claims	5,284	-	5,284
Cash and cash equivalents	7,375	-	7,375
Total assets	144,698	20,211	164,909
Liabilities
Insurance contract provisions	103,917	-	103,917
Other provisions	2,000	-	2,000
Reinsurance payables	14	-	14
Payables related to direct insurance contracts	6,163	-	6,163
Deferred tax	-	4,042	4,042
Income taxes	512	-	512
Other payables	6,154	-	6,154
Total liabilities	118,760	4,042	122,802
Net assets	25,938	16,169	42,107

Net assets acquired			42,107
Total consideration, paid in cash			(39,300)

Profit arising on business combination			2,807

The assets and liabilities 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 IFRS 3, Business Combinations.

Acquired receivables: Within the net assets acquired are receivable balances totalling £112.4m, which are held at fair value. For all receivables other than reinsurers' share of insurance contract provisions the gross contractual amounts receivable are equal to fair value. The reinsurers' share of insurance contract provisions receivable balance of £93.0m is discounted as a result of the long-term nature of this asset. Gross contractual amounts receivable are estimated as being £255.0m.

Acquired value of in-force business: The acquisition has resulted in the recognition of net of tax intangible asset amounting to £16.2m, which represents the present value of the future post-tax cash flows expected to arise from policies that were in force at the point of acquisition. The asset has been valued using a discounted cash flow model that projects the future surpluses that are expected to arise from the business. The model factors in a number of variables, of which the most influential are; the policyholders' ages, mortality rates, expected policy lapses, expenses that are expected to be incurred to manage the policies and future investment growth, as well as the discount rate that has been applied. This asset will be amortised over its expected useful life.

Gain on acquisition: As shown above a gain of £2.8m has been recognised on acquisition. Under IFRS 3, a gain on acquisition is defined as being a "bargain purchase". In the opinion of the Directors a gain on acquisition arises as a result of the following key factors:

- The previous owners of Protection Life, Direct Line Group (DLG) are a predominantly general insurance group. Protection Life is therefore, in the context of the previous owners, a small non-core business that does not fit into the wider Direct Line Group strategy. DLG Management's areas of expertise are focused on general insurance as opposed to life insurance;

- A consequence of the above is that the implementation of Solvency II to a non-core element of the Direct Line Group could be both time consuming and expensive, especially given that Management's areas of expertise are more focused on general insurance rather than life insurance. Applying Solvency II to Protection Life could be a management distraction that is alleviated as a result of a disposal; and

- The IFRS valuation of insurance contract liabilities at acquisition is based on expense assumptions that are applicable to the Chesnara Group. Future expenses under Chesnara ownership are expected to be lower than under the previous owners, and therefore the price that DLG was willing to sell for could feasibly be reduced as a result of this dynamic.

Acquisition-related costs: The costs in respect of the transaction amounted to £2.4m. £1.6m of these costs have been included in Administration Expenses within the Consolidated Statement of Comprehensive Income. The remainder of the costs are loan arrangement fees, which have been netted off against the proceeds of the loan used to fund the acquisition, and will be reflected in the Consolidated Statement of Comprehensive Income as in interest cost as the loan runs its course, using an Effective Interest Rate model.

Results of Protection Life: The results of PL have been included in the consolidated financial statements of the Group with effect from 28 November 2013, and have contributed total net revenue of £1.0m over this period, whilst contributing £0.2m profit to the overall consolidated profit before tax, before the amortisation of the AVIF intangible asset. Had PL been consolidated from 1 January 2013 the Consolidated Statement of Comprehensive Income would have included net revenue of £17.0m, and would have contributed £5.3m profit before tax to the overall consolidated profit before tax.

4. Exceptional item

On 1 January 2012 S&P policyholder liabilities to taxation were, with effect from 1 January 2012, re-classified within the Consolidated Balance Sheet from deferred tax liabilities to insurance contract provisions. The purpose of this was to align the classification with that adopted by the CA operating segment. As a consequence of this there were:

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

(ii) in the 2012 Consolidated Statement of Comprehensive Income a pre-tax charge of £4.8m and a deferred tax release to income tax of £4.8m, both of these amounts being presented as exceptional items, by virtue of their size and incidence. The net-of-tax result in the Consolidated Statement of Comprehensive Income attributable to these exceptional items is, accordingly, £nil.

5. Operating segments

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

The segments of the Group as at 31 December 2013 comprise:

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

S&P: This segment, which was acquired on 20 December 2010, comprises the business of Save & Prosper Insurance Limited and its subsidiary Save & Prosper Pensions Limited. It is responsible for conducting both unit-linked and non-linked business, including a with-profits portfolio, which carries significant additional market risk, as described in Note 6 'Management of financial risk'. On 31 December 2011 the whole of the business of this segment was transferred to Countrywide Assured plc under the provisions of Part VII of the Financial Services and Markets Act 2000.

PL: This segment represents the business of Protection Life, which was purchased on 28 November 2013. PL is included within the Group's UK business.

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

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

Other than the addition of the PL segment as a result of the purchase of Protection Life Company Limited during the year, there were no changes to the basis of segmentation during the year ended 31 December 2013.

The accounting policies of the segments are the same as those for the Group as a whole. Any transactions between the business segments are on normal commercial terms in normal market conditions. The Group evaluates performance of operating segments on the basis of the profit before tax attributable to shareholders and on the total assets and liabilities of the reporting segments and the Group. There were no changes to the measurement basis for segment profit during the year ended 31 December 2013.

(i) Segmental income statement for the year ended 31 December 2013

	CA	S&P	PL	UK Total	Movestic	Other Group Activities	Total
	£000	£000	£000	£000	£000	£000	£000
Net insurance premium revenue	49,331	7,325	1,183	57,839	16,630	-	74,469
Fee and commission income	31,893	2,499	-	34,392	35,598	-	69,990
Net investment return	198,807	152,413	(143)	351,077	216,182	204	567,463
Total revenue (net of reinsurance payable)	280,031	162,237	1,040	443,308	268,410	204	711,922
Other operating income	6,484	11,761	-	18,245	4,025	-	22,270
Segmental income	286,515	173,998	1,040	461,553	272,435	204	734,192
Net insurance contract claims and benefits incurred	(159,179)	(120,333)	(249)	(279,761)	(7,284)	-	(287,045)
Net change in investment contract liabilities	(92,878)	(6,163)	-	(99,041)	(215,523)	-	(314,564)
Fees, commission and other acquisition costs	(738)	(32)	(92)	(862)	(18,588)	-	(19,450)
Administrative expenses
Amortisation charge on software assets	-	-	-	-	(2,188)	-	(2,188)
Depreciation charge on property and equipment	(22)	-	-	(22)	(187)	-	(209)
Other	(7,663)	(9,878)	(114)	(17,655)	(14,870)	(3,839)	(36,364)
Other operating expenses
Charge for amortisation of acquired value of in-force business	(2,358)	(774)	(169)	(3,301)	(4,229)	-	(7,530)
Charge for amortisation of acquired value of customer relationships	-	-	-	-	(301)	-	(301)
Other	(924)	(1,143)	(391)	(2,458)	(4,085)	60	(6,483)
Segmental expenses	(263,762)	(138,323)	(1,015)	(403,100)	(267,255)	(3,779)	(674,134)
Segmental income less expenses	22,753	35,675	25	58,453	5,180	(3,575)	60,058
Share of profit from associates	-	-	-	-	1,252	-	1,252
Profit arising on business combinations	-	-	-	-	-	2,807	2,807
Financing costs	-	(4)	-	(4)	(2,140)	(1,383)	(3,527)
Profit/(loss) before tax	22,753	35,671	25	58,449	4,292	(2,151)	60,590
Income tax credit/(expense)				(11,604)	(423)	800	(11,227)
Profit/(loss) after tax				46,845	3,869	(1,351)	49,363

(ii) Segmental balance sheet as at 31 December 2013

	CA	S&P	PL	Movestic	Other Group Activities	Total
	£000	£000	£000	£000	£000	£000
Total assets	1,899,700	1,263,269	181,059	1,853,374	40,319	5,237,721
Total liabilities	(1,824,706)	(1,169,406)	(125,783)	(1,791,943)	(78,781)	(4,990,619)
Net assets/(liabilities)	74,994	93,863	55,276	61,431	(38,462)	247,102
Investment in associates	-	-	-	4,088	-	4,088
Additions to non-current assets	-	-	20,211	17,787	-	37,998

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

	CA	S&P	UK Total	Movestic	Other Group Activities	Total
	£000	£000	£000	£000	£000	£000
Net insurance premium revenue	54,785	8,987	63,772	16,412	-	80,184
Fee and commission income	35,191	2,776	37,967	28,691	-	66,658
Net investment return	128,009	105,936	233,945	97,846	262	332,053
Total revenue (net of reinsurance payable)	217,985	117,699	335,684	142,949	262	478,895
Other operating income	3,484	11,114	14,598	5,047	-	19,645
Segmental income	221,469	128,813	350,282	147,996	262	498,540
Net insurance contract claims and benefits incurred	(140,502)	(97,787)	(238,289)	(7,057)	-	(245,346)
Net change in investment contract liabilities	(52,679)	(4,134)	(56,813)	(97,040)	-	(153,853)
Fees, commission and other acquisition costs	(947)	(62)	(1,009)	(16,958)	-	(17,967)
Administrative expenses
Amortisation charge on software assets	-	-	-	(2,188)	-	(2,188)
Depreciation charge on property and equipment	(22)	-	(22)	(187)	-	(209)
Other	(8,105)	(11,000)	(19,105)	(13,053)	(2,474)	(34,632)
Other operating expenses
Charge for amortisation of acquired value of in-force business	(2,892)	(852)	(3,744)	(4,119)	-	(7,863)
Charge for amortisation of acquired value of customer relationships	-	-	-	(391)	-	(391)
Other	(625)	(1,212)	(1,837)	(5,046)	(2,322)	(9,205)
Segmental expenses	(205,772)	(115,047)	(320,819)	(146,039)	(4,796)	(471,654)
Segmental income less expenses	15,697	13,766	29,463	1,957	(4,534)	26,886
Share of profit from associates	-	-	-	1,244	-	1,244
Exceptional item	-	(4,778)	(4,778)	-	-	(4,778)
Financing costs	-	(1)	(1)	(2,451)	(1,218)	(3,670)
Profit/(loss) before tax	15,697	8,987	24,684	750	(5,752)	19,682
Income tax credit/(expense)
Income tax credit/(expense) - before exceptional item			2,384	(323)	1,420	3,481
Exceptional item			4,778	-	-	4,778
After exceptional item			7,162	(323)	1,420	8,259

Profit/(loss) after tax			31,846	427	(4,332)	27,941

(iv) Segmental balance sheet as at 31 December 2012

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

6. Borrowings

31 December
	2013 £000	2012 £000
Bank loan	73,040	29,662
Amount due in relation to financial reinsurance	21,337	18,662
Total	94,377	48,324

Current	13,967	12,218
Non-current	80,410	36,106
Total	94,377	48,324

The bank loan subsisting at 31 December 2013, comprises the following:

· on 7 October 2013 tranche one of a new facility was drawn down, amounting to £30.0m. This facility is unsecured and is repayable in five increasing annual instalments on the anniversary of the draw down date. The outstanding principal on the loan bears interest at a rate of 2.25 percentage points above the London Inter-Bank Offer Rate and is repayable over a period which varies between one and six months at the option of the borrower.

· on 27 November 2013 tranche two of the new loan facility was drawn down, amounting to £31.0m. As with tranche one, this facility is unsecured and is repayable in five increasing annual instalments on the anniversary of the draw down date. The outstanding principal on the loan bears interest at a rate of 2.25 percentage points above the London Inter-Bank Offer Rate and is repayable over a period which varies between one and six months at the option of the borrower.

· on 27 November 2013 a short-term loan of £12.8m was drawn down. This is repayable in full on 27 May 2015. The outstanding principal on the loan bears interest at a rate of 2.75 percentage points above the London Inter-Bank Offer Rate.

The fair value of the bank loan at 31 December 2013 was £73,800,000 (31 December 2012: £30,000,000).

The fair value of amounts due in relation to financial reinsurance was £21,657,269 (31 December 2012: £20,197,549). The fair value of other borrowings is not materially different from their carrying value.

Bank loans are presented net of unamortised arrangement fees. Arrangement fees are recognised in profit or loss using the effective interest rate method.

7. Earnings per share

Year ended 31 December	2013	2012

Profit for the year attributable to shareholders (£000)	49,363	27,941
Weighted average number of ordinary shares	114,851,282	114,848,651
Basic earnings per share	42.98p	24.33p
Diluted earnings per share	42.98p	24.33p

The weighted average number of ordinary shares in respect of the years ended 31 December 2013 and 31 December 2012 is based upon 115,047,662 shares in issue less 196,380 (2012: 199,011) own shares held in treasury.

There were no share options outstanding during the year ended 31 December 2012 or during the year ended 31 December 2013. Accordingly, there is no dilution of the average number of ordinary shares in issue in respect of these periods.

8. Retained earnings

Year ended 31 December
	2013 £000	2012 £000
Retained earnings attributable to equity holders of the parent company comprise:
Balance at 1 January	126,297	117,881
Profit for the year	49,363	27,941
Dividends
Final approved and paid for 2011	-	(12,519)
Interim approved and paid for 2012	-	(7,006)
Final approved and paid for 2012	(12,921)	-
Interim approved and paid for 2013	(7,178)	-
Balance at 31 December	155,561	126,297

The interim dividend in respect of 2012, approved and paid in 2012 was paid at the rate of 6.10p per share. The final dividend in respect of 2012, approved and paid in 2013, was paid at the rate of 11.25p per share so that the total dividend paid to the equity shareholders of the Parent Company in respect of the year ended 31 December 2012 was made at the rate of 18.05p per share.

The interim dividend in respect of 2013, approved and paid in 2013, was paid at the rate of 6.25p per share to equity shareholders of the Parent Company registered at the close of business on 13 September 2013, the dividend record date.

A final dividend of 11.63p per share in respect of the year ended 31 December 2013 payable on 22 May 2014 to equity shareholders of the Parent Company registered at the close of business on 11 April 2014, the dividend record date, was approved by the Directors after the balance sheet date. The resulting total final dividend of £13.4m 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 2013 and 31 December 2012:

Year ended 31 December
	2013 P	2012 p
Interim - approved and paid	6.25	6.10
Final - proposed/paid	11.63	11.25
Total	17.88	17.35

SUPPLEMENTARY INFORMATION - EUROPEAN EMBEDDED VALUE BASIS

Summarised EEV consolidated income statement

31 December
	2013	2012
	£000	£000
Operating profit of covered business	8,901	19,032
Other operational result	(2,276)	(4,446)
Operating profit	6,625	14,586
Variation from longer-term investment return	54,646	28,035
Effect of economic assumption changes	16,447	(6,504)
Profit before tax and before exceptional item	77,178	36,117
Exceptional items
Profit recognised on business combination	12,283	-
Effect of modelling adjustments	4,073	3,574
Profit before tax	94,074	39,691
Tax	(7,307)	(4,862)
Profit for the period attributable to the equity holders of the parent company	86,767	34,829
Earnings per share
Based on profit for the year	75.55p	30.33p
Diluted profit per share
Based on profit for the year	75.55p	30.33p

Summarised EEV consolidated balance sheet

31 December
	2013	2012
Assets	£000	£000
Value of in-force business	262,161	210,080
Deferred acquisition costs arising on unmodelled business	487	497
Acquired value of customer relationships	419	562
Property and equipment	673	369
Investment in associate	4,088	2,902
Deferred tax asset	509	1,280
Reinsurers' share of insurance contract provisions	328,810	235,782
Amounts deposited with reinsurers	33,102	28,941
Investment properties	20,387	100,167
Financial assets
Equity securities at fair value through income	479,617	427,303
Holdings in collective investment schemes at fair value through income	3,440,992	3,009,799
Debt securities at fair value through income	370,666	363,377
Insurance and other receivables	46,382	24,313
Prepayments	4,889	3,160
Policyholders' funds held by the Group	130,237	61,171
Derivative financial instruments	2,956	3,095
Total financial assets	4,475,739	3,892,218
Reinsurers' share of accrued policy claims	11,399	4,489
Income taxes	2,608	8,649
Cash and cash equivalents	184,263	228,676
Total assets	5,324,645	4,714,612

Liabilities
Insurance contract provisions	2,323,643	2,171,259
Other provisions	5,348	5,161
Financial liabilities
Investment contracts at fair value through income	2,293,836	2,033,131
Borrowings	100,290	55,373
Derivative financial instruments	387	286
Liabilities relating to policyholders' funds held by the Group	130,237	61,171
Total financial liabilities	2,524,750	2,149,961
Reinsurance payables	11,154	16,183
Payables related to direct insurance and investment contracts	47,137	38,894
Income taxes	8,012	4,350
Other payables	27,104	17,057
Bank overdraft	1,127	602
Total liabilities	4,948,275	4,403,467
Net assets	376,370	311,145

Equity
Share capital	42,024	42,024
Share premium	42,526	42,523
Treasury shares	(212)	(217)
Foreign exchange reserve	13,927	15,378
Other reserves	50	50
Retained earnings	278,055	211,387
Total shareholders' equity	376,370	311,145

Notes to the EEV Supplementary Information

1 Basis of preparation

The EEV Supplementary Information is supplementary to the Group's primary financial statements which have been prepared in accordance with International Financial Reporting Standards ('IFRS'), as adopted by the EU. The EEV Supplementary Information has 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, using the methodology and assumptions set out on pages 182 to 187 of the Chesnara 2013 Annual Report & Accounts. 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 5 to the IFRS basis Financial Statements referred to above. The PL business was acquired on 28 November 2013: accordingly, the results relating thereto, as reflected in segmental analysis are for a period of 34 days. Prior year information in respect of the financial position as at 31 December 2012 and for the year then ended is designated as £nil in respect of the PL business, while other prior year data are designated as not applicable ('n/a').

2 Summarised statement of changes in equity and analysis of profit

(a) Changes in equity may be summarised as:

Statement of changes in equity

Year ended 31 December	2013		2012
	£000		£000
Shareholders' equity at beginning of the year		311,145		294,489
Profit for the year attributable to shareholders before modelling adjustments	82,694		31,255
Effect of modelling adjustments	4,073		3,574
Profit for the year		86,767		34,829
Issue of new shares
Share premium		3		-
Sale of treasury shares		5		-
Foreign exchange reserve movement		(1,451)		1,352
Dividends paid		(20,099)		(19,525)
Shareholders' equity at end of the year		376,370		311,145

Effect of modelling adjustments

Year ended 31 December 2013

Modelling adjustments during the year have reduced when compared with those included in the prior year.

Positive modelling adjustments this period of £4.1m relate entirely to the Movestic business. These have arisen due to refinements being made to the way in which modelling of commission is performed, which is now performed at a more granular level.

Year ended 31 December 2012

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

Movestic

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

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

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

The CA and CWA EEV models previously assumed a single average rate of investment return for all durations as opposed to the use of a full yield curve. This approximation was reported in the EEV assumptions section 4(a) of the Supplementary Information within the Interim Financial Statements for the Six Months Ended 30 June 2012. As at 31 December 2012 the models were enhanced to recognise differing rates of return across the different durations of the yield curve resulting in a net of tax increase of £12.6m.

The PL EEV model assumes a single average rate of investment return for all durations as opposed to the use of a full yield curve.

The effect of modelling adjustments is classified as an exceptional item in the consolidated income statement and is presented after operating profit.

(b) The profit/(loss) for the year before modelling adjustments is analysed as:

Year ended 31 December 2013	CA	S&P	PL	UK Total	Movestic	Other Group Activities	Total
	£000	£000	£000	£000	£000	£000	£000
Covered business
New business contribution	704	13	-	717	7,196	-	7,913
Return from in-force business
Expected return	1,389	151	61	1,601	3,929	-	5,530
Experience variances	7,590	4,695	-	12,285	(6,490)	-	5,795
Operating assumption changes	(4,295)	4,458	-	163	(10,233)	-	(10,070)
Return on shareholder net worth	185	(452)	-	(267)	-	-	(267)
Operating profit of covered business	5,573	8,865	61	14,499	(5,598)	-	8,901
Variation from longer-term investment return	22,394	11,414	-	33,808	20,838	-	54,646
Effect of economic assumption changes	(3,596)	22,463	-	18,867	(2,420)	-	16,447
Profit of covered business before tax	24,371	42,742	61	67,174	12,820	-	79,994
Tax thereon				(7,639)	-	-	(7,639)
Profit of covered business after tax				59,535	12,820	-	72,355
Results of non-covered business and of other group companies
Profit/(loss) before tax				-	2,677	(4,953)	(2,276)
Exceptional profit arising on purchase of Protection Life				-	-	12,283	12,283
Tax				-	(468)	800	332
Profit/(loss) after tax				59,535	15,029	8,130	82,694

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

The results of the non-covered business and of other group companies before tax and before exceptional item are presented as 'other operational result' in the consolidated income statement.

3 Sensitivities to alternative assumptions

The following tables show the sensitivity of the embedded value as reported at 31 December 2013, and of the new business contribution of Movestic, to variations in the assumptions adopted in the calculation of the embedded value. Sensitivity analysis is not provided in respect of the new business contribution of CA for the year ended 31 December 2013 as the reported level of new business contribution is not considered to be material (see Note 3(a)).

	Embedded Value						New business contribution
	UK business					Swedish business	Swedish business
	CA Pre-tax	S&P Pre-tax	PL Pre-tax	Tax	UK Post-tax	Post-tax
	£m	£m	£m	£m	£m	£m	£m
Published value as at 31 December 2013	147.9	106.5	64.8	(21.9)	297.3	115.4	5.2

Changes in embedded value/new business contribution arising from:
Economic sensitivities
100 basis point increase in yield curve	(4.3)	12.7	(3.3)	(2.1)	3.0	0.7	(0.2)
100 basis point reduction in yield curve	4.9	(12.6)	3.6	0.6	(3.5)	(0.6)	0.2
10% decrease in equity and property values	(12.1)	(12.5)	-	4.3	(20.3)	(11.7)	(0.1)
Operating sensitivities
10% decrease in maintenance expenses	2.6	4.5	1.3	(0.8)	7.6	6.3	0.7
10% decrease in lapse rates	2.3	(0.3)	0.4	(0.2)	2.2	8.7	1.3
5% decrease in mortality/morbidity rates:
Assurances	0.8	0.7	1.5	(0.5)	2.5	0.1	-
Annuities	(1.7)	(0.3)	n/a	-	(2.0)	n/a	n/a
Reduction in the required capital to statutory minimum	0.4	0.7	1.3	(0.3)	2.1	0.0	-

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

Economic sensitivities

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

(ii) 100 basis point reduction in the yield curve: The reference rate is reduced by 1% (with a minimum of zero to avoid negative yields where relevant) and the rate of future inflation has also been reduced by 1% so that real yields remain constant; and

(iii) 10% decrease in the equity and property values. This gives rise to a situation where, for example, a Managed Fund unit liability with a 60% equity holding would reduce by 6% in value.

Operating sensitivities

(i) 10% decrease in maintenance expenses, giving rise to, for example, a base assumption of £20 per policy pa reducing to £18 per policy pa;

(ii) 10% decrease in persistency rates giving rise to, for example, a base assumption of 10% of policy base lapsing pa reducing to 9% pa;

(iii) 5% decrease in mortality/morbidity rates giving rise to, for example, a base assumption of 95% of the parameters in a selected mortality/morbidity table reducing to 90.25% of the parameters in the same table, assuming no changes are made to policyholder charges or any other management actions; and

(iv) the sensitivity to the reduction in the required capital to the statutory minimum shows the effect of reducing the required capital from that defined in Note 3(b) to the minimum requirement prescribed by regulation.

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

4 Earnings per share

Year ended 31 December
	2013	2012
	p	p

Basic earnings per share
Based on profit for the year	75.55	30.33
Based on profit for the year before exceptional item	72.00	27.21
Diluted earnings per share
Based on profit for the year	75.55	30.33
Based on profit for the year before exceptional item	72.00	27.21

This information is provided by RNS

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