Chesnara Regulatory News (CSN)

31 Mar 2010 07:00

Chesnara plc

Successful year for Chesnara underpins continued dividend growth.

31 March 2010

Chesnara today reported final results for the year ended 31 December 2009.These are the first set of results which include the effect of the acquisition,and financial performance, of Moderna F¶rs¤kringar Liv AB ('Moderna') which wasacquired on 23rd July 2009. The Group remains committed to offeringshareholders an attractive long-term income stream arising from the profits ofits life assurance businesses.

* Profit (on IFRS basis) before tax for the year ended 31 December up 97% to

£44.7m (including profit of £25.1m arising on the acquisition of Moderna)

and up 4.8% to £23.8m (excluding the profit arising on acquisition and operational result of the Swedish Business) (2008: £22.7m) * Earnings per share (on IFRS basis) of 45.26p (2008: 19.24p) * On EEV basis pre-tax profit for the year of £78.2m (including the

exceptional profit of £54.2m arising on the acquisition of Moderna) and

£24.0m (excluding the exceptional profit arising on the acquisition of

Moderna) (2008: £14.8m).

* Shareholder equity on EEV basis (pre proposed interim dividend payment) now

£262.6m - £2.59p per share (2008: £182.7m - £1.80p per share)

* Group solvency ratio remains strong, after utilising £20m from existing

cash resources to purchase Moderna, at 316% post dividend (2008: 358%). UK

life company solvency ratio strong at 197% (2008: 177%). Swedish business

solvency ratio healthy at 302% (2008 illustrative: 168%) * Final dividend increased to 10.3p (2008:10.05p). Total dividend for the year increased by 2.6% to 15.95p (2008:15.55p) * Completed acquisition of further 42% stake in AkademikerR¥dgivning I Sverige AB, an IFA, in late 2009 - now own 91% of the business * Completed acquisition of operations and certain assets of Aspis

F¶rs¤kringar Liv AB ('Aspis'), a relatively small Swedish life and health

insurer, in February 2010 * Board remains confident about future dividend flows * Continue to examine value adding acquisition opportunities

Graham Kettleborough, Chief Executive, said:

'We entered 2010 with a somewhat different shape to our business. Theresilience of our underlying UK business has enabled us to deliver strongresults whilst also providing the capital to acquire Moderna. This acquisition,secured at a significant discount to its embedded value, brings an immediateuplift to shareholder value. In addition, our recent acquisition of theoperations of Aspis brings new capabilities, opportunities for operationalsynergies and enables Moderna to offer a fully rounded product range to theSwedish market. Overall our business remains strong and the improved investmentmarket conditions have helped to underpin our results. On the acquisition front we are seeing a reasonable flow of opportunities butwill continue to be selective and only pursue opportunities which will deliveran acceptable value uplift or support our future dividend paying capability. The Board is pleased to recommend an increase in the final dividend to 10.3pper share. This gives rise to a total dividend for the year of 15.95p per sharewhich represents a 2.6% increase.'

The Board approved this statement on 30 March 2010.

EnquiriesGraham KettleboroughChief Executive, Chesnara plc 07799 407519Michael HenmanCubitt Consulting 0207 367 5100 Notes to editors:

Chesnara plc, which listed on the London Stock Exchange in May 2004, is theowner of Countrywide Assured plc ("CA") and Moderna F¶rs¤kringar Liv AB("Moderna"). CA is a UK life assurance subsidiary that is substantially closed tonew business. In June 2005 Chesnara acquired a further closed life insurancecompany - City of Westminster Assurance ("CWA") - for £47.8m. With effect from30 June 2006, CWA's policies and assets were transferred into CA plc.Moderna, a life assurance company which focuses on pensions and savings, wasacquired on 23 July 2009 for £20m. The company, which was launched in 2002,continues to write new business and grow its strong position in the Swedish

unit-linked market. Moderna's market presence was increased through the acquisition of a controlling stake in AkademikerR¥dgivning I Sverige AB, an IFA, in late 2009 and the purchase of the policyholders, personnel, intellectual property and systems of Aspis F¶rs¤krings Liv AB, a life and health insurer, in February 2010.

Note on terminology

This document refers throughout to the 'UK Business' and the 'Swedish Business'. As explained in Note 4 to the IFRS financial statements following, these are the business segments of the Group, comprising, for the UK Business, Countrywide Assured Life Assurance Holdings Limited and its subsidiary

companies and, for the Swedish Business, Moderna F¶rs¤kringar Liv AB and its subsidiary and associated companies.

FINANCIAL HIGHLIGHTS Year ended 31 December IFRS basis 2009 2008 Operating profit/(loss) UK Business 24.7 23.6 Swedish Business (2.1) - Other group activities (2.3) (0.1)

Profit arising on acquisition of Swedish Business 25.1 -

--------- --------- 45.4 23.5 Financing costs (0.7) (0.8) --------- --------- Profit before income taxes £44.7m £22.7m ========= ========= Basic earnings per share 45.26p 19.24p Dividend per share 15.95p 15.55p Shareholders' net equity £159.8m £126.4m ========= =========

European Embedded Value basis (EEV)

Operating profit UK Business 22.0 25.5 Swedish Business (2.9) - Other group activities 0.9 0.4 --------- --------- 20.0 25.9

Investment variances and economic assumption changes

UK Business (6.1) (9.9) Swedish Business 10.1 - --------- ---------

Profit before tax and before exceptional item 24.0 16.0 Exceptional item Profit on acquisition of Swedish Business 54.2 -

--------- --------- Profit before tax 78.2 16.0 Tax 12.1 (1.2) --------- --------- Profit for the period £90.3m £14.8m ========= =========

Shareholders' equity on EEV basis

Embedded value UK Business 157.8 154.3 Swedish Business 91.5 - --------- ---------

Embedded value of covered business 249.3 154.3 Acquired embedded value financed by debt (4.2)

(8.4)

Shareholders' equity in other Group companies 17.5 36.8

--------- --------- £262.6m £182.7m ========= ========= EEV per share 258.7p 180.0p UKbusiness Life annual premium income (AP) £85.5m

£92.6m

Life single premium income (SP) £23.3m

£23.9m

Life annualised premium income (AP + 1/10 SP) £87.8m £95.0m Swedish business New business premium income (AP + 1/10 SP) £49.9m

£77.7m

Total premium income (AP + SP) £269.4m

£245.3m

In contrast with the IFRS basis of reporting, the EEV basis recognises thediscounted value of the expected future cash flows, arising from the long-termbusiness contracts in force at the year end, as a component of shareholderequity. Accordingly, the EEV result recognises, within profit, the movement inthis component.The Swedish Business was acquired on 23 July 2009. Accordingly, certain of thepremium income amounts shown above relate to the pre-acquisition period and arepresented here for illustrative purposes.CHAIRMAN'S STATEMENTI am pleased to present the sixth annual financial statements of Chesnara plc('Chesnara'). With recovery in global investment markets and the acquisition ofModerna F¶rs¤kringar Liv AB ('Moderna') mid way through the year, 2009 has seentwo major developments in the current and future trading prospects and in thefinancial strength of the Group. In the light of continuing economicuncertainty, it is pleasing that our results continue to show a high degree ofresilience, allowing us to maintain a reliable and progressive dividend policy,while being in a good position to pursue further value-enhancing acquisitionsas they arise. Review of the BusinessOn 23 July 2009, Chesnara completed the acquisition of Moderna, an open Swedishlife assurance and pensions company specialising in unit-linked pensionsbusiness written predominantly through independent financial advisers. Itcurrently manages a portfolio of some 75,000 life assurance and pensionspolicies and it is expected that its embedded value will increase over time asfurther new business is written. Moderna's prospects were subsequently enhancedby the acquisition of a further 42% share in AkademikerR¥dgivning i Sverige AB(leading to 91% ownership), an IFA trading in a specialist area of the market.In early 2010, we also completed the acquisition of the operations and certainassets of Aspis F¶rs¤krings Liv AB, a Swedish life risk and health insurer.These acquisitions widen the scope of Moderna's activities and underpin itsability to offer a fully-rounded proposition to the Swedish market.Moderna was acquired for £20m, from existing cash resources, at a significantdiscount of 73% to its embedded value, which gave rise to an accretion to Groupembedded value of £54.2m. On the IFRS basis of reporting, we have recognised aprofit on acquisition of £25.1m.Global investment market influences have also had a significant impact on theGroup's results, with the leading UK market indices, for example, posting gainsof between 22% and 24% over the whole of 2009. While the low interest rateenvironment dampened returns on the Group's shareholder funds, this was morethan offset by the favourable impact of rising equity markets on the Group'sembedded value. This leads to higher current and prospective deductions fromunit-linked funds under management, with the UK Business's embedded valuebenefiting to the extent of £6.0m and the Swedish Business's embedded valuebenefiting to the extent of £7.5m in the post-acquisition period.On the EEV basis of reporting, excluding the profit of £54.2m arising on theacquisition of Moderna, we have made pre-tax profits of £24.0m for the yearended 31 December 2009, including £8.8m post-acquisition pre-tax profitsattributable to Moderna, compared with £16.0m for the year ended 31 December2008. Apart from the impact of rising equity markets, other key factorsunderlying the EEV result are:

In respect of the UK Business:

(i) £7.4m expected return from the unwind of the discount rate;

(ii) £6.8m benefit from continuing favourable persistency experience; and

(iii) £1.3m release from a unit pricing remedial provision no longer required,

offset by

(iv) a £5.6m reduction in pre-tax embedded value earnings arising from a change inthe basis of tax on overseas dividends: while this gives rise to lowerdeductions from policyholder unit-linked funds, there is a broadly offsettingrelease from the estimate of future tax payable, resulting in a credit to tax.The EEV tax movement also benefited from a writeback, in excess of £4m, inrespect of a tax provision relating to 2007 within the UK Business. As to theunderlying persistency assumptions for the UK Business, we have been cautiousin the extent to which we have adjusted these while the prospects for the UKeconomy and household budgets remain uncertain.

In respect of the Swedish Business:

(i) a £0.7m contribution from new business;

(ii) £1.7m expected return from the unwind of the discount rate;

(iii) a £2.6m favourable investment mix effect, driven also by rising equity markets;

(iv) £1.5m profit arising from life risk and health insurance business and from other business activities; and

(v) other experience effects, including mortality profits, in excess of £2.5m,

offset by

(vi) a £7.8m adverse persistency effect, largely arising from the resetting of theassumptions relating to future persistency rates: this cautious approachreflects the continuing uncertain state of the Swedish economy and its impacton the savings market.On the IFRS basis, we have posted a pre-tax profit of £44.7m for the year ended31 December 2009. Adjusting for the effects of the Swedish Business, includingthe profit of £25.1m arising on acquisition, the profit before tax fromcontinuing UK Business and Group activities was £23.8m, compared with £22.7m inrespect of the year ended 31 December 2008. Besides favourable investmentmarket effects, this result also includes, with respect to the UK Business, netmortality and morbidity profits of some £2.1m and the impact of the release toincome of £1.3m from the unit-pricing remedial provision, the establishment ofwhich we first reported in respect of the results for the year ended 31December 2007. The Swedish Business posted a post-acquisition loss of £2.6m,which is in line with expectations as the business continues to build scaleand, when profits from an increasing base of in-force investment contractsoutweighs the front-end strain of writing new business, it is expected to beprofitable, on the IFRS basis within two to three years.

Shareholder Value and Returns to Shareholders

Total shareholder equity on the EEV basis, pre appropriation of £10.5m for thefinal 2009 dividend, is £262.6m (258.7p per share), compared with £182.7m(180.0p per share) as at 31 December 2008. The significant uplift reflectsprincipally the positive impact of acquiring the Swedish Business at a discountof 73% to its embedded value, together with a strong core trading result inboth the UK and Swedish Businesses, driven by the recovery in global investmentmarkets. In addition, the weakening of sterling against the Swedish Krona,between the acquisition date and the end of 2009, gave rise to a further £5.5maccretion in embedded value through the recognition of foreign exchangetranslation gains.

The capacity of the Group to pursue its dividend policy relies on the continuing emergence of surplus in the UK Business and in the ability to distribute that surplus which, in turn, depends on the regulatory solvency position of the UK Business. I am pleased to report that the UK Business's solvency ratio, post proposed dividends, at 197% (177% as at 31 December 2008) remains in excess of the target of 150% set by the Board of the Life subsidiary.

The Group's dividend policy now has to take account of the competing need forfunds of the developing Swedish Business which, in turn, depends on theunderlying regulatory solvency ratio of the Swedish Life Business. This was302% as at 31 December 2009 which is comfortably in excess of the target of150% set by the Moderna Board. The combined Group post dividend solvency ratioremains at a healthy 316% as at 31 December 2009 (31 December 2008: 358%).Based on the strength of our results and of our capital solvency ratios, theBoard has decided to recommend a final dividend of 10.3p per share (2008 finaldividend: 10.05p per share), giving rise to total dividends of 15.95p per sharefor 2009, which represents a 2.6% increase over total dividends of 15.55p pershare for 2008. At the recent trading range of 200p and 220p per share, thisrepresents a yield to shareholders of between 7.3% and 8.0%.

Outlook

We enter 2010 with a somewhat different shape to our business than we entered2009. The purchase of Moderna and subsequent investments in Sweden have broughta new dimension to the Group. We fully expect that these investments willdeliver further value to shareholders in excess of the significant value theacquisition has already delivered.The fall-out from the credit crunch and the prospect of Solvency II in 2012have led to an increase in the flow of available acquisition opportunities.However, we continue to be selective and will only pursue opportunities whichdemonstrate the capability of prolonging our dividend and/or of delivering asignificant value uplift for shareholders.

We wish to welcome our new colleagues in Sweden to the Group and thank all our employees for the dedication and commitment they continue to demonstrate.

Peter MasonChairman30 March 2010

OPERATING AND FINANCIAL REVIEW

Basis of Accounting

The Group reports in accordance with International Financial ReportingStandards ('IFRS'). IFRS essentially permits the 'grandfathering' of theprinciples and bases used to measure profit arising on long-term insurancecontracts under previously-adopted UK and Swedish GAAP, where the contractscontain significant insurance risk. Profits on contracts where no significantinsurance risk subsists are measured using the principles of IAS 39 FinancialInstruments: Recognition and Measurement.The Group continues to provide financial information supplementary to the IFRSbasis. With effect from reporting periods commencing on 1 January 2006, theGroup adopted European Embedded Value ('EEV') principles as the basis forproviding this supplementary information. EEV methodology aims to measure theunderlying embedded value of the Group's life assurance, pensions and annuitybusinesses and provides a framework which is intended to improve thecomparability and transparency of embedded value reporting across Europe. Wehave decided to defer compliance with the European Insurance CFO Forum MarketConsistent Embedded Value (MCEV) Principles (copyright © Stichting CFO ForumFoundation 2008) until 2011. IFRS Result

The IFRS result for the year ended 31 December 2009 comprises:

Year ended 31 December 2009 Year ended 31 December 2008 Pre-tax Tax Post-tax Pre-tax Tax Post-tax £000 £000 £000 £000 £000 £000 Profit arising on acquisition 25,056 of Swedish - 25,056 - - -Business UK Business 24,784 948 25,732 23,614 (2,856) 20,758result Swedish (2,626) (148) (2,774) - - -Business result Other group (2,473) 392 (2,081) (887) 146 (741)activities --------- --------- --------- --------- --------- --------- Total result 44,741 1,192 45,933 22,727 (2,710) 20,017 --------- --------- --------- --------- Non-controlling interest 7 - Total result --------- ---------attributable to shareholders 45,940 20,017 --------- --------- Total result excluding Swedish 23,757 1,340 25,097 22,727 (2,710) 20,017Business items* --------- ---------- --------- --------- --------- ----------

*Includes adjustment for £1,446,000 expenses, included in Other Group Activities, incurred during 2009 in connection with the acquisition of the Swedish Business.

The profit of £25.1m arising on the acquisition of the Swedish Business represents the excess of the £45.1m fair value of net assets acquired over the purchase consideration of £20.0m.

The result for the UK Business continues to be dominated by the strongemergence of surplus from the underlying life and pensions contracts, which arein run off. Key influences which have maintained the pre-tax result above the2008 level are:

(i) the impact of a significant appreciation in the value of fixed interest securities over the year, which has contributed some £2.4m;

(ii) favourable net mortality/ morbidity experience of £2.1m; and

(iii) the release back to income of £1.3m from a unit-pricing provision, based on experience of redress and complaints levels during the year.

The effect of these positive influences was dampened somewhat by lower returns on shareholder funds due to the low interest rate environment.

The Swedish Business incurred a small, but expected, loss over the 23-weekpost-acquisition period. It is expected to incur trading losses for a furtherthree years, as it continues to build scale and until realised profits from anincreasing base of in-force investment contracts outweigh the front-end strainof writing new business.The result of other group activities, which principally relates to theoperations of the parent company, include £1.4m of expenses incurred inconnection with the acquisition of the Swedish Business: this accounts for theincrease in the level of loss over 2008. Other significant factors were arecovery of £0.3m in respect of a cash deposit with Kaupthing, Singer &Friedlander, previously written off, and financing costs on bank borrowingswhich were £0.2m lower than expected, both offset by lower returns on investedcash deposits.The recognition for total tax in the Group for the year ended 31 December 2009is, unusually, a credit of £1.2m, whereas a net charge would normally beexpected. This situation arises from the writeback, in excess of £4m, of aprovision for current tax in the UK Business in respect of 2007. The provisionhad been established, because of uncertainty surrounding the interpretation oftax legislation pertaining to that year, which was clarified as a result of the2007 tax computation being submitted to, and accepted, by HMRC.

EEV Result

Supplementary information prepared in accordance with EEV principles and setlater is presented to provide alternative information to that presented underIFRS. EEV principles assist in identifying the value being generated by the UKand Swedish Life Businesses. The result determined under this method representsprincipally the movement in the UK and Swedish Businesses' embedded value,before transfers made to the parent company and ignoring any capital movements.Through including the in-force value of insurance and investment contracts, EEVrecognises the discounted profit stream expected to arise from those contracts.The principal underlying components of the EEV result are the expected returnfrom existing business, in both the UK and Swedish businesses, being the unwindof the rate used to discount the related cash flows, and the value added by thewriting of new business in the Swedish Business. Adjustments are made to theresult for variations in actual experience from that assumed for each componentof policy cash flows arising in the period and for the impact of restatingassumptions for each component of the prospective cash flows.

The following is a summarised statement of the EEV result:

Year ended 31 December 2009 Year ended 31 December 2008 Swedish UK Swedish UKbusiness Business Total Business Business Total £000 £000 £000 £000 £000 £000 Operating profit 22,000 (2,880) 19,120 25,521 - 25,521 Variation from longer-term investment return 6,206 7,544 13,750 (16,831) - (16,831) Economic assumption changes (12,286) 2,556 (9,730) 6,951 - 6,951 --------- --------- --------- --------- --------- --------- Profit on covered business before tax 15,920 7,220 23,140 15,641 - 15,641 Tax thereon 11,893 - 11,893 (1,376) - (1,376) --------- --------- --------- --------- --------- --------- Profit on covered business after tax 27,813 7,220 35,033 14,265 - 14,265 --------- --------- --------- --------- Results of non-covered business and of other Group companies profit before tax and exceptional items 868 385 Exceptional profit arising on acquisition of Swedish Business 54,187 - Tax 177 176 ---------- --------- Profit after tax 90,265 14,826 Non-controlling interest 7 - --------- --------- Profit after tax attributable to shareholders 90,272 14,826 ========= =========

The profit of £54.2m arising on the acquisition of the Swedish Business is theexcess of the embedded value of Moderna at the acquisition date over thepurchase consideration of £20m. This represents a discount of 73% to Moderna'sembedded value at the acquisition date.The dominating feature underlying the EEV result of both the UK Business and ofthe Swedish Business for the 23-week post-acquisition period was the recoveryin global investment markets. The leading UK equity indices, for example,posted gains of between 22% and 24% over 2009. The favourable impact of globalinvestment market growth is reflected through higher current and prospectivedeductions from unit-linked funds under management, with the UK and SwedishBusinesses benefiting to the extent of £6m and £7.5m respectively. Othersignificant influences underlying EEV earnings for the year are:

In respect of the UK Business:

(i) £7.4m expected return from the unwind of the discount rate;

(ii)£6.8m continuing favourable persistency experience; and

(iii)£1.3m release from a unit-pricing remedial provision no longer required,

offset by

(iv) £5.6m reduction to income arising from a lower estimate of future deductions from policyholder linked funds in respect of tax on overseas dividends.

The treatment of tax on overseas dividends follows legislative change and isoffset by a corresponding credit to tax in the overall prospective future taxcharge, so that the effect on net-of-tax EEV is, broadly, neutral. Other itemswhich have contributed to the significant tax credit attributed to the UKBusiness are (i) the writeback of an amount in excess of £4m in respect of the2007 current tax provision, as explained under 'IFRS Result' above and (ii)improvements to the underlying modelling processes.

In respect of the Swedish Business:

(i) £0.7m contribution from new business;

(ii) £1.7m expected return from the unwind of the discount rate;

(iii)£2.6m favourable investment mix effects, also driven by the recovery in equity markets;

(iv) £1.5m profit in respect of business not modelled for EEV purposes and inrespect of other activities of the Swedish Business: this relates principallyto the life risk and health insurance business, which is not modelled; and

(v)underlying experience effects, including mortality profits, in excess of £2.5m,

offset by

(vi) £7.8m adverse persistency effects: this reflects deteriorating experience overthe second half of 2009 and includes £7.1m in respect of the assumption forfuture lapses. It has been decided to adopt a prudent approach in view of theuncertain state of the Swedish economy and its impact on the savings market.

Overall, the embedded value has proved resilient in the face of a difficult trading environment. As this is likely to be subject to continuing volatility, attention is drawn to the sensitivity of the EEV to various factors as set out

in Note 7 to the EEV Supplementary Information.

Shareholders' Equity and Embedded Value of Covered Business - EEV Basis

The consolidated balance sheet prepared in accordance with EEV principles maybe summarised as: 31 December 2009 UK Swedish Other Group Business Business Activities Total £000 £000 £000 £000 Value of in-force business 85,559 112,753 - 198,312 Other net assets 68,098 (22,323) 18,498 64,273 --------- --------- --------- ---------- 153,657 90,430 18,498 262,585 ========= ========= ========= ========= Represented by: Embedded value ('EV') of 157,854 91,478 regulated entities - 249,332 Less: amount financed by (4,197) - borrowings - (4,197) --------- --------- --------- ---------- EV of regulated entities 153,657 91,478 attributable to shareholders - 245,135 Net equity of other Group - (1,048) companies 18,498 17,450 --------- --------- --------- --------- Shareholders' equity 153,657 90,430 18,498 262,585 ========= ========= ========= ========= 31 December 2008 UK Swedish Other Group Business Business Activities Total £000 £000 £000 £000 Value of in-force business 84,940 - - 84,940 Other net assets 61,031 - 36,737 97,768 --------- ---------- --------- ---------- 145,971 - 36,737 182,708 ========= ========= ========= ======== Represented by: Embedded value ('EV') of 154,329 - - 154,329regulated entities Less: amount financed by (8,358) - borrowings - (8,358) --------- --------- --------- --------- EV of regulated entities 145,971 - attributable to shareholders - 145,971 Net equity of other Group - - companies 36,737 36,737 --------- --------- ---------- ---------- Shareholders' equity 145,971 - 36,737 182,708 ========= ========= ========== =========

The tables below set out the components of the value of in-force business by major product line at each period end:

Year ended 31 December 2009 Year ended 31 December 2008 UK Swedish UK Swedish Business Business Total Business Business Total Number of policies 000 000 000 000 000 000 Endowment 55 15 70 62 - 62 Protection 58 - 58 64 - 64 Annuities 5 - 5 5 - 5 Pensions 51 70 121 53 - 53 Other 7 - 7 8 - 8 ---------- ----------- --------- ---------- --------- ---------- Total 176 85 261 192 - 192 ---------- --------- --------- --------- --------- --------- Year ended 31 December 2009 Year ended 31 December 2008 UK Swedish UK Swedish business Business Total Business Business Total Value of in-force £m £m £m £m £m £m Endowment 40.2 15.2 55.4 53.8 - 53.8 Protection 48.1 - 48.1 51.2 - 51.2 Annuities 3.9 - 3.9 4.5 - 4.5 Pensions 36.2 98.6 134.8 33.5 - 33.5 Other 0.7 - 0.7 - - - --------- --------- --------- --------- --------- --------- Total at product level 129.1 113.8 242.9 143.0 - 143.0 Valuation adjustments Holding company expenses (9.8) - (9.8) (8.7) - (8.7) Other (26.5) - (26.5) (26.3) - (26.3) Cost of capital (0.8) (1.0) (1.8) (5.1) - (5.1) --------- --------- --------- --------- --------- --------- Value in-force pre-tax 92.0 112.8 204.8 102.9 - 102.9 Taxation (6.4) - (6.4) (18.0) - (18.0) --------- --------- --------- --------- --------- --------- Value in-force post-tax 85.6 112.8 198.4 84.9 - 84.9 ======== ========= ========= ========= ========= ==========

The value-in-force represents the discounted value of the future surplusesarising from the insurance and investment contracts in force at each respectiveperiod end. The future surpluses are calculated by using realistic assumptionsfor each component of the cash flow.

'Other' valuation adjustments in the UK Business principally comprise expenses of managing policies which are not attributed at product level.

The movement on Group EEV in respect of the year ended 31 December 2009, beforerecognition of the final dividend of £10.5m in respect of 2009 (year ended 31December 2008: £10.2m) may be summarised as: Year ended 31 December 2009 Year ended 31 December 2008 £000 £000 £000 £000 Beginning of year 182,708 187,315 Profit arising on acquisition of Swedish Business 54,187 - UK Business result Pre-tax 16,257 15,641 Tax 11,799 (1,376) --------- --------- Post-tax 28,056 14,265 Other group operations (653) 561 Swedish Business result Pre-tax 8,836 - Tax (161) - --------- --------- Post-tax 8,675 - Foreign exchange gain 5,539 - Dividends paid during the year (15,934) (16,054) Reduction in equity following share buy-back operation - (3,379) Non-controlling interest 7 - --------- ---------- End of year 262,585 182,708 ========= ========= The results attributable to the UK and Swedish Businesses shown above comprisethe results of the covered business, non-covered business and of other Groupcompanies within the respective business, whereas the results attributed to theUK Business and Swedish Business in the 'EEV Result' section shown above relatesolely to the covered business.

Returns to Shareholders

Returns to shareholders are underpinned by the emergence of surplus in, andtransfer of surplus from, the UK life business' long-term insurance fund toshareholder funds and by the return on shareholder net assets representingshareholder net equity. These realisations are utilised in the first instancefor the repayment and servicing of the bank loan on the basis set out in Note6. The surplus arises from the realisation of in-force value of the UKBusiness, which is in run-off. The return on shareholder net assets isdetermined by the Group's investment policy. Shareholder funds bear centralcorporate governance costs which cannot be fairly attributed to the long-terminsurance funds and which arise largely in connection with Chesnara'sobligations as a listed company.The acquisition of the Swedish Business in July 2009 has had a twofold impacton the prospect for shareholder returns. First, as the business was acquired ata significant discount of 73% to its embedded value, there was an immediateaccretion of £54.2m to shareholder net equity as measured on the EuropeanEmbedded Value basis. Secondly, in contrast to the UK Business, which is inrun-off, the Swedish Business is open and now offers a growth element to totalshareholder return. The Swedish Business is expected to become cash generativeand, therefore, to have the ability to support the Group's dividend capacitywithin three to four years.The Board's primary aim is to continue to provide a reliable and progressivedividend flow to shareholders within the context of the emergence of surplus inthe UK life business: in the absence of further acquisitions there is also theprospect of a return of capital to shareholders.Between the beginning of 2009 up until the acquisition of the Swedish Businesstowards the end of July 2009, the shares generally traded in a range of between120p and 150p per share. With total proposed dividends in respect of the yearended 31 December 2009 at 15.95p per share, this implied a yield of between10.6% and 13.3%. The shares may also be characterised as having traded at adiscount to Group embedded value of £182.7m, as reported on the EEV basis as at31 December 2008, within a range of 16.7% to 33%.The share price performanceover this period is largely attributable to an overhang from the investmentmarket turbulence experienced towards the end of 2008, in combination withadverse market sentiment towards financial institutions.Following the acquisition of the Swedish Business up until mid November 2009,the share price strengthened, generally trading in a range of between 150p and185p per share: this improving trend was helped, in part, by general investmentmarket recovery. Notwithstanding this, the shares traded in this period at adiscount of between 20% and 35% of embedded value, as adjusted for the extentof value accretion we had signalled to the market arising on the acquisition ofthe Swedish business.Between mid November 2009 and early March 2010, the share price hasstrengthened considerably, generally trading in a range of between 185p and210p per share. This implies a yield, based on total 2009 proposed dividends,of between 7.6% and 8.6%, with the shares trading at a discount of between 19%and 28% to embedded value of £262.6m, as now reported at 31 December 2009. Theimprovement follows our interim management statement issued on 19 November2009, which set out the full extent of the accretive impact of the acquisitionof the Swedish Business, while also pointing to an improvement in thefundamentals underpinning the UK Business.

Solvency and Regulatory Capital

Regulatory Capital Resources and Requirements

The regulatory capital of both the UK and Swedish Businesses is calculated byreference to regulations established and amended from time to time by the FSAin the UK and by Finansinspektionen in Sweden. The rules are designed to ensurethat companies have sufficient assets to meet their liabilities in specifiedadverse circumstances. As such, there is, in the UK a restriction on the fulltransfer of surplus from the long-term business fund to shareholder funds ofCA, and on the full distribution of reserves from CA to Chesnara and, inSweden, on distributions from shareholder funds.Within the UK, the regulations include minimum standards for assessing thevalue of liabilities, including making an appropriate allowance for defaultrisk on corporate bonds held to match liabilities when assessing the valuationdiscount rates used for valuing these liabilities. Market turmoil in 2008 ledto significant widening of spreads on corporate bonds above gilts, throughchanged assessment of default risk and liquidity issues, and therefore, withthe widening spreads, this issue was of concern to the industry. CA continuesto maintain a prudent approach of limiting the assumed liquidity premium incorporate bonds to a maximum of 50bps as at 31 December 2009 (31 December 2008:50bps). Additionally, the CA Board continues to maintain their stance thatpermissive changes to regulations introduced in 2006, in FSA policy statementPS06/14, that would allow a reduction in liabilities are not appropriate for CAat this time.The following summarises the capital resources and requirements of CA for UKregulatory purposes, after making provision for dividend payments from CA toChesnara, which were approved after the respective period ends: 31 December 2009 2008 £m £m

Available capital resources ('CR') 43.6 43.0

--------- ----------

Long-term insurance capital requirement ('LTICR') 19.8 22.5 Resilience capital requirement ('RCR') 2.3 1.8 --------- ---------- Total capital resources requirement ('CRR') 22.1 24.3

---------- ---------

Target capital requirement cover 32.0 35.6

--------- ---------- Ratio of available CR to CRR 197% 177% ---------- ---------- Excess of CR over target requirement £11.6m £7.4m ---------- ----------

The CA Board, as a matter of policy, continues to target CR cover for total CRRat a minimum level of 150% of the LTICR and 100% of the RCR. To the extent thatthe target capital requirement cover of £32.0m as at 31 December 2009 fallsshort of the £40m share capital component of CR, so it follows that £8.0m ofthe reported excess of CR over target requirement is not available fordistribution to shareholders except by way of a capital reduction.It can be seen from this information that Chesnara, which relies on dividenddistributions from its life company, is currently in a favourable position toservice its loan commitments and to continue to pursue a progressive dividendpolicy.The Swedish Business, in contrast to the UK Business, and being open to newbusiness, is, in the short to medium term, a net consumer of capital. The ratioof capital resources to capital resource requirements is a key indicator of thecapital health of the business as it expands and provides the context in whichfurther capital contributions are made by the parent company to finance thatexpansion in a predictable and orderly manner.The following summarises the capital resources and requirements of Moderna forSwedish regulatory purposes: 31 December 2009 2008 £m £m Available capital resources (CR) represented by: - Share capital 1.1 1.1 - Additional equity contributions 33.6 24.2 - Accumulated deficit (10.2) (12.6) ---------- --------- 24.5 12.7 ---------- ---------

Regulatory capital resource requirement (CRR) 8.1 7.7

--------- --------- Target requirement 12.1 11.5 --------- --------- Ratio of CR to CRR 302% 165% --------- ---------

Excess of CR over target requirements £12.4m £1.2m

--------- --------- The information as at 31 December 2008 relates to the pre-acquisition periodand is provided for illustrative purposes. The fall in the accumulated deficitover the year was impacted by a pre-acquisition restatement of the period forthe straight-line amortisation of deferred acquisition costs from 10 to 17years, such costs being an admissible asset for Swedish regulatory purposes.Equity contributions were enhanced by an additional £2.1m funding by the parentcompany in the post-acquisition period.The Moderna Board sets a minimum target of 150% of the regulatory capitalrequirement. Swedish solvency regulation requires that a certain proportion ofassets, to be fully admissible, are to be held in the form of cash. Theoperation of this requirement may, from time to time, act as the operativeconstraint in determining the level of additional funding requirements, therebycausing the solvency ratio to rise above what it would otherwise have been, hadthe form of assets matching capital resources not been a constraint.

Insurance Groups Directive

In accordance with the EU Insurance Groups Directive, the Group calculates theexcess of the aggregate of regulatory capital employed over the aggregateminimum solvency requirement imposed by local regulators for all of theconstituent members of the Group, all of which are based in Europe. Thefollowing sets out these calculations after the recognition of final dividendsfor the respective financial year, but approved by the Board and paid to Groupshareholders after the respective dates: 31 December 2009 2008 £m £m

Available group capital resources 99.7 86.9 Group regulatory capital requirement (31.6) (24.3) --------- ---------- Excess 68.1 62.6 --------- -------- Cover 316% 358% --------- ---------

The regulatory requirement is that available group capital resources should be at least 100% of the capital requirement.

Individual Capital Assessments

The FSA Prudential Sourcebooks require UK insurance companies to make their ownassessment of its capital needs to a required standard (a 99.5% probability ofbeing able to meet liabilities to policyholders after one year). In the lightof scrutiny of this assessment, the FSA may impose its own additionalindividual capital guidance. The Individual Capital Assessment is based on arealistic liability assessment, rather than on the statutory mathematicalreserves, and involves stress testing the resultant realistic balance sheet forthe impact of adverse events, including such market effects as significantfalls in equity values, interest rate increases and decreases, bond defaultsand further widening of bond spreads.CA completed a further full annual assessment during 2009 as a result of whichit was concluded that the effective current and medium-term capital requirementconstraints on distributions to Chesnara will continue to be on the basis setout under 'Regulatory capital resources and requirements' above. Thisassessment is subject to quarterly high-level updates until the next fullannual assessment.We are currently developing the Swedish Business's ability to produce similarassessments, so that the determination of risk-based capital is more clearlyaligned with UK best practice. In the meantime, the Swedish Business, inaccordance with local regulatory requirements, continues to make quarterlyassessments of the risk-based capital requirements of its business: theseindicate that capital resources currently provide a comfortable margin overcapital resource requirements.

Capital Structure, Treasury Policy and Liquidity

The Group's UK operations are ordinarily financed through retained earnings andthrough the current emergence of surplus in the UK Life Business. The SwedishBusiness is financed by a combination of financial reinsurance arrangements andcapital contributions from Chesnara. There is, otherwise, no further relianceon debt financing within the Group, with the last tranche of our borrowings, topart finance the acquisition of CWA in 2005, due to be repaid in June 2010.Cash available for more than twelve months in the UK is normally transferred tofund managers for longer-term investment.The Board continues to have a conservative approach to the investment ofshareholders' funds in the Life businesses, which underpins our strong solvencyposition. For the UK Business, where the greater part of shareholders' fundssubsist, this approach targets the investment of 100% of available funds incash and fixed interest securities. In the light of recent volatility infinancial markets, particular attention is given to the mix and spread of theseinvestments to ensure that we are not unduly exposed to particular sectors andthat our counterparty limits are strictly adhered to. Current economicconditions heighten the risk of corporate bond default and observations on thisare made in the 'Going Concern' section below.

The profile and mix of investment asset holdings between fixed interest stocks and cash on deposit in the UK is such that realisations to support dividend distributions can be made in an orderly and efficient way.

Other factors which may place a demand on capital resources in the futureinclude the costs of unavoidable large scale systems development such as thosewhich may be involved with changing regulatory requirements and the requirementto finance further possible acquisitions. To the extent that ongoingadministration of the UK Life Business is performed within the terms of itsthird party outsourcing agreements, the Group is sheltered, to a degree, fromthese development costs as they are likely to be on a shared basis.To the extent that the Group proposes to acquire life businesses in the future,it is intended that this could be done through a suitable combination of equityand debt financing and, to a lesser degree, from internal resources. This wouldbe done, however, within the constraints of the operation of regulatory rulesregarding the level of debt finance which may be borne by Insurance Groups.

Cash Flows

The Group's longer-term cash flow cycle continues to be characterised by thestrong inflow to shareholders' funds of transfers from the long-term insurancefund of the UK Business, which are supported by the emergence of surplus withinthat fund. These flows are used (i) to support dividend distributions toshareholders; (ii) to repay our debt obligations as set out in Note 6 and (iii)to support the medium-term requirements of the Swedish Business to meetregulatory solvency capital requirements as it expands.

Going Concern

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

The information set out in 'Solvency and Regulatory Capital' above indicates astrong solvency position as at 31 December 2009 as measured at both theindividual regulated life company levels in both the UK and Sweden and at theGroup level. In addition, in respect of the UK Life Business, a FinancialCondition Report and a detailed annual Individual Capital Assessment have beenprepared, as also set out above. These include assessments of the ability ofthe business to withstand key events, including those which may now become moresignificantly adverse in the current financial and economic environment, beingan increased rate of policy lapse, expense overruns and unfavourable investmentmarket conditions. The assessments indicate that the UK Business is able towithstand the impact of these adverse scenarios, including the effect ofcontinuing significant investment market falls, while the business'soutsourcing arrangements protect it from significant expense overruns. As alsoindicated above, the current assessment of the risk-based capital requirementsof the Swedish Business indicates a comfortable excess of capital resourcesover those requirements.Notwithstanding that the Group is well capitalised, the current financial andeconomic environment presents some specific threats to its short-term cash flowposition and it is appropriate to assess these. In the first instance, theGroup does not rely on the renewal or extension of bank facilities to continuetrading - indeed, as indicated, its normal operations are cash generative. TheGroup does, however, rely on cash flow from the maturity or sale of fixedinterest securities which match its obligations to its Guaranteed Bondpolicyholders: in the current economic environment there is clearly acontinuing higher risk of bond default, particularly in respect of financialinstitutions. In order to manage this risk we ensure that our bond portfolio isactively monitored and well diversified. Further, this risk abated through 2009as our underlying bond obligations to policyholders continued to mature. Othersignificant counterparty default risk relates to our principal reassurerGuardian Assurance ('Guardian'). We monitor Guardian's financial position andare satisfied that any associated credit default risk is low.Our expectation is that, notwithstanding the risks set out above, the Groupwill continue to generate surplus in its UK long-term business sufficient tomeet its debt obligations as they fall due, to continue to pursue a reliableand progressive dividend policy and to meet the medium-term financingrequirements of the Swedish Business, which is expected to becomecash-generative within three to four years. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2009 Year ended 31 December 2009 2008 Note £000 £000 Insurance premium revenue 100,105 94,274

Insurance premium ceded to reinsurers (24,997) (17,193)

--------- --------- Net insurance premium revenue 75,108 77,081 Fee and commission income Insurance contracts 35,864 35,289 Investment contracts 15,256 9,305 Net investment return 326,680 (222,742) --------- ---------

Total revenue (net of reinsurance

payable) 452,908 (101,067) Other operating income 4,689 1,314 --------- ---------- Total income 457,597 (99,753) --------- ----------

Insurance contract claims and benefits incurred Claims and benefits paid to insurance contract holders (129,557) (131,829) Net (increase)/decrease in insurance contract provisions (127,840) 180,265 Reinsurers' share of claims and

benefits 47,897 (8,736) --------- ---------

Net insurance contract claims and

benefits (209,500) 39,700 --------- ---------

Change in investment contract liabilities (199,748) 108,516 Reinsurers' share of investment

contract liabilities 4,710 (4,743) --------- ---------

Net change in investment contract

liabilities (195,038) 103,773 --------- ---------

Fees, commission and other acquisition

costs (5,167) (1,377) Administrative expenses (18,245) (13,633) Other operating expenses Charge for amortisation of acquired value of in-force business (6,953) (3,578) Charge for amortisation of acquired value of customer relationships (188) -

Other (2,195) (1,653) --------- --------- Total expenses (437,286) 123,232 --------- --------- Total income less expenses 20,311 23,479

Share of profit from associates 39 - Profit recognised on acquisition of subsidiary 3 25,056 - ---------- --------- Operating profit 45,406 23,479 Financing costs (665) (752) --------- --------- Profit before income taxes 44,741 22,727 Income tax credit/(expense) 5 1,192 (2,710) --------- ---------- Profit for the year 45,933 20,017 --------- ---------- Attributable to: Shareholders 4 45,940 20,017 Non-controlling interest (7) - --------- --------- 45,933 20,017 Foreign exchange translation

differences arising on the revaluation

of foreign operations 3,381 - --------- ---------

Total comprehensive income for the year 49,314 20,017

========= ======== Attributable to: Shareholders 49,321 20,017 Non-controlling interest (7) - --------- --------- 49,314 20,017 ========= =========

Basic earnings per share (based on profit for the year attributable to

shareholders) 9 45.26p 19.24p ========= =========

Diluted earnings per share (based on profit for the year attributable to

shareholders) 9 45.26p 19.24p ========= =========

CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2009

31 December 2009 2008 Note £000 £000 Assets Intangible assets Deferred acquisition costs 9,327 8,590 Acquired value of in-force business Insurance contracts 14,937 16,866 Investment contracts 71,526 11,610

Acquired value of customer relationships 2,682 - Internally-developed software 4,060 -

Property and equipment 491 - Investment in associates 1,051 - Investment properties 3,355 3,432

Reinsurers' share of insurance contract provisions 236,866 182,693 Amounts deposited with reinsurers 27,056 22,181 Financial assets Equity securities at fair value through income 454,970 363,879 Holdings in collective investment schemes at fair value through income 1,612,861 576,502

Debt securities at fair value through income 247,836 279,104

Policyholders' funds held by the Group 41,107 -

Insurance and other receivables 19,822 11,056 Prepayments 3,784 1,600 Derivative financial instruments 7,964 5,570 ---------- --------- Total financial assets 2,388,344 1,237,711 --------- ---------

Reinsurers' share of accrued policyholder

claims 4,728 4,100 Income taxes 395 - Cash and cash equivalents 155,241 192,381 --------- ---------- Total assets 2,920,059 1,679,564 --------- --------- Liabilities Bank overdrafts 2,312 1,094

Insurance contract provisions 1,077,033 923,506 Financial liabilities Investment contracts at fair value through income 1,529,221 558,542 Liabilities relating to policyholders' funds held by the Group 41,107 - Borrowings 6 28,996 8,358 Derivative financial instruments 54 70 --------- --------- Total financial liabilities 1,599,378 566,970 --------- --------- Provisions 1,452 3,397 Deferred tax liabilities 10,366 10,798 Reinsurance payables 15,039 1,397

Payables related to direct insurance and

investment contracts 30,433 23,891 Deferred income 13,132 14,575 Income taxes 1,313 1,074 Other payables 9,833 6,494 --------- --------- Total liabilities 2,760,291 1,553,196 --------- --------- Net assets 4 159,768 126,368 ========= ========= Shareholders' equity Share capital 7 41,501 41,501 Share premium 20,458 20,458 Treasury shares (3,379) (3,379) Other reserves 3,431 50 Retained earnings 8 97,744 67,738 ---------- ---------- Total shareholders' equity 159,755 126,368 Non-controlling interest 13 - --------- ---------- Total equity 159,768 126,368 ========= =========

CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2009

Year ended 31 December 2009 2008 £000 £000 Profit for the year 45,940 20,017 Adjustments for:

Depreciation of property and equipment 65 -

Amortisation of deferred acquisition costs 2,080 952 Amortisation of acquired value of in-force business 6,953 3,577 Amortisation of acquired value of customer relationships 188 - Amortisation of internally-developed software 414 - Tax (recovery)/expense (1,192) 2,710 Interest receivable (17,959) (24,398) Dividends receivable (24,048) (35,781) Interest expense 665 752

Change in fair value of investment properties 77 324 Fair value (gains)/ losses on financial assets (284,739) 247,210 Loss on sale of property and equipment 21 - Profit arising on acquisition of subsidiary company (25,056) - Share of profit of associate net of impairment 122 -

Interest received 20,893 22,150 Dividends received 23,304 39,278

Increase in intangible assets related to insurance and investment contracts (3,157) - Changes in operating assets and liabilities (Increase)/decrease in financial assets (58,028) 38,166 (Increase)/decrease in reinsurers share of insurance contract provisions (27,211) 30,221 (Increase)/decrease in amounts deposited with reinsurers (4,875) 5,377 (Increase)/decrease in insurance and other receivables (4,671) 194 (Increase)/decrease in prepayments (1,293) 1,316 Increase/(decrease) in insurance contract provisions 120,648

(187,342)

Increase/(decrease) in investment contract

liabilities 219,609 (167,961) Decrease in provisions (2,229) (178) Increase/(decrease) in reinsurance payables 3,629

(225)

Increase in payables related to direct insurance and investment contracts 3,604 1,032 Decrease in other payables (970)

(2,728)

---------- ---------- Cash utilised by operations (7,216) (5,337) Income tax paid (2,371) (2,921) --------- --------- Net cash utilised by operating activities (9,587) (8,258) ========= =========

Cash flows from investing activities Acquisition of subsidiary net of cash acquired (5,944) -

Investment in associates (334) - Development of software (918) -

Purchases of property and equipment (180) - ----------- ---------- Net cash utilised by investing activities (7,376) -

========== ==========

Cash flows from financing activities

Repayment of borrowings (5,759) (4,200) ---------- ---------- Dividends paid (15,934) (16,054) Interest paid (821) (720) Purchase of treasury shares - (3,379) ---------- ---------- Net cash utilised by financing activities (22,514) (24,353) ========== ========== Net decrease in cash and cash equivalents (39,477)

(32,611)

Cash and cash equivalents at beginning of the year 191,287 223,898 Effect of exchange rate changes on cash and cash

equivalents 1,119 - ---------- ----------

Cash and cash equivalents at end of the year 152,929 191,287

========== ========== CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2009 Year ended 31 December 2009 Share Share Other Treasury Retained capital premium reserves Shares earnings Total £000 £000 £000 £000 £000 £000 Equity shareholders' funds at 1 January 2009 41,501 20,458 50 (3,379) 67,738 126,368 Purchase of treasury shares - - - - - - Profit for the year attributable to shareholders - - - - 45,940 45,940 Dividends paid - - - - (15,934) (15,934) Foreign exchange translation reserve - - 3,381 - - 3,381 ---------- ---------- ----------- ---------- ------------ ----------- Equity shareholders' funds at 31 December 2009 41,501 20,458 3,431 (3,379) 97,744 159,755 ========== ========== ========== ========== ========= ========== Year ended 31 December 2008 Share Share Other Treasury Retained capital premium reserves Shares earnings Total £000 £000 £000 £000 £000 £000 Equity shareholders' funds at 1 January 2008 41,501 20,458 50 - 63,775 125,784 Purchase of treasury shares - - - (3,379) - (3,379) Profit for the year attributable to shareholders - - - - 20,017 20,017 Dividends paid - - - - (16,054) (16,054) ---------- --------- --------- --------- --------- ---------- Equity shareholders' funds at 31 December 2008 41,501 20,458 50 (3,379) 67,738 126,368 ========= ========= ========= ========= ========= ========= NOTES

1 Significant accounting policies

(a) Statement of compliance

The preliminary announcement is based on the Group's financial statements for the year ended 31 December 2009, which are prepared in accordance with International Financial Reporting Standards as adopted by the EU.

The Group has applied, for the first time, IFRS 8 Operating Segments,Amendments to IFRS7 Financial Instruments: Disclosures and Amendments to IAS 1Presentation of Financial Statements: A Revised Presentation, which becameeffective during the reporting period. The Group has also elected to earlyadopt IFRS 3 (revised 2008): Business Combinations and IAS 27 (revised 2008):Consolidated and Separate Financial Statements which came into effect foraccounting periods beginning after 1 July 2009. Their application has not ledto any changes in group accounting policies, but has given rise to extensiveadditional disclosures.At the date of authorisation of these financial statements, the followingStandards, which are applicable to the Group and which have not been applied inthese financial statements, were in issue, but were not yet effective, and insome cases had not yet been adopted by the EU:

- IFRS 9 Financial Instruments

- IAS 24 (revised) Related Party Disclosures

- Improvements to IFRSs 2009

The Directors anticipate that the application of these Standards in future periods will have no material impact on the financial statements of the Group.

(b) Basis of consolidation

The consolidated financial statements incorporate the financial statements ofthe Company and of entities controlled by the company (its subsidiaries), madeup to 31 December each year. Control is achieved where the Company has thepower to govern the financial and operating policies of an investee entity soas to obtain benefits from its activities..Non-controlling interests in the net assets of consolidated subsidiaries areidentified separately from the Group's equity therein. Non-controllinginterests consist of the amount of those interests at the date of the originalbusiness combination (see below) and the non-controlling interest's share ofchanges in equity since the date of the combination. Losses applicable to thenon-controlling interest in excess of the non-controlling interest's interestin the subsidiary's equity are allocated against the interests of the Groupexcept to the extent that the non-controlling interest has a binding obligationand is able to make an additional investment to cover the losses.The results of subsidiaries acquired or disposed of during the year areincluded in the consolidated statement of comprehensive income from theeffective date of acquisition or up to the effective date of disposal. Wherenecessary, adjustments are made to the financial statements of subsidiaries tobring the accounting policies used into line with those used by the Group.

All intra-group transactions, balances, income and expenses are eliminated on consolidation.

(c) Basis of preparationGeneralThe Consolidated financial statements have been prepared on a going concernbasis. The Directors believe that they have a reasonable expectation that theGroup has adequate resources to continue in operational existence for theforeseeable future. In making this assessment, the Directors have taken intoconsideration the points as set out in the Operating and Financial Review inthe section headed 'Going Concern'.The financial statements are presented in pounds sterling, rounded to thenearest thousand and are prepared on the historical cost basis except that thefollowing assets and liabilities are stated at their fair value: derivativefinancial instruments, financial instruments at fair value through income,investment property and investment contract liabilities at fair value throughincome.Assets and liabilities are presented on a current and non-current basis in thenotes to the financial statements. If assets are expected to be recovered andliabilities expected to be settled within a year, they are classified ascurrent. If they are expected to be recovered or settled in more than one year,they are classified as non-current.The preparation of financial statements in conformity with IFRSs requiresmanagement to make judgements, estimates and assumptions that affect theapplication of policies and reported amounts of assets and liabilities, incomeand expenses. The estimates and associated assumptions are based on historicalexperience and various other factors that are believed to be reasonable underthe circumstances, the results of which form the basis of making the judgementsabout carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates.The estimates and underlying assumptions are reviewed on an ongoing basis.Revisions to accounting estimates are recognised in the year in which theestimate is revised if the revision affects only that year, or in the year ofthe revision and future years if the revision affects both current and futureyears.

The accounting policies set out below have been applied consistently to all years presented in these consolidated financial statements.

Life business demerger and acquisition by Chesnara plc: reverse acquisition accounting

On 24 May 2004, Chesnara plc acquired the whole of the issued ordinary sharecapital of Countrywide Assured Life Holdings Limited ('CALH') from Countrywideplc ('Countrywide'), which had, itself, acquired the whole of the issuedordinary share capital of CALH on 22 May 2004 from Countrywide Assured Groupplc ('CAG'). These arrangements were effected to secure the demerger from CAGof CALH, which, together with its subsidiary companies, comprised the lifebusiness of CAG.On the acquisition of CALH, Chesnara plc issued, as fully paid, 2.5p ordinaryshares to the shareholders of Countrywide ('the Countrywide shareholders') asrecorded on the shareholders register on 21 May 2004, pro rata to their holdingin Countrywide, such that they received one ordinary share in Chesnara plc forevery two ordinary shares held in Countrywide. On 25 May 2004, the existingordinary shares of 2.5p in Chesnara plc were consolidated into ordinary sharesof 5p each on the basis of one new share for every two old shares, so that, ineffect, the Countrywide shareholders received one ordinary 5p share in Chesnaraplc for every four ordinary shares held in Countrywide.In substance, the transactions described above represent a continuation of thebusiness of CALH. Chesnara plc, a company with net assets of £2 prior to itsacquisition of CALH, was used as a vehicle effectively to secure a listing forthe business of CALH on the London Stock Exchange, and, prior to itsacquisition of CALH, such net assets did not comprise an integrated set ofactivities and assets which were capable of generating revenue or of providinga return to investors. Chesnara plc, at the date of its acquisition of CALH,did not, therefore, comprise a business as defined in IFRS 3 BusinessCombinations. However the consolidated financial statements of Chesnara plchave been prepared based on the reverse acquisition method as set out in IFRS3, as the Directors consider that this is the fairest way of presenting thefinancial position, results of operations and cash flows of the combinedentities. Accordingly CALH is deemed to be the effective acquirer of Chesnaraplc and the consolidated financial statements have been prepared as acontinuation of the consolidated financial statements of CALH and itssubsidiaries.The fair value of the identifiable net assets and of the equity instruments ofChesnara plc before its deemed acquisition by CALH are negligible and thedeemed consideration, based on the fair value of the equity instruments deemedto have been issued by CALH to the shareholders of Chesnara plc, is alsonegligible and is taken as £nil. Accordingly, the application of the purchasemethod of accounting for the deemed acquisition of Chesnara plc by CALH doesnot give rise to any goodwill or negative goodwill in the consolidatedfinancial statements.

(d) Business combinations

The Group uses the purchase method of accounting to account for the acquisitionof subsidiaries. The cost of an acquisition is measured as the fair value ofthe assets given, equity instruments issued and liabilities incurred or assumedat the date of exchange. Expenses directly attributable to the acquisition areexpensed as incurred. The acquiree's identifiable assets, liabilities, andcontingent liabilities, which meet the conditions for recognition under IFRS3are measured initially at their fair values at the acquisition date. Gainsarising on a bargain purchase, where the net fair value of the identifiableassets, liabilities and contingent liabilities of the acquiree exceeds the costof acquisition, is recognised in profit or loss at the acquisition date.

The non-controlling interest in the acquiree is initially measured at the non-controlling interest's proportion of the net fair value of the assets, liabilities and contingent liabilities recognised.

(e) Investments in associates

An associate is an entity over which the Group is in a position to exercisesignificant influence, but not control or joint control, through participationin the financial and operating policy decisions of the investee. Significantinfluence is the power to participate in the financial and operating policydecisions of the investee, but is not control or joint control over thosepolicies.The results and assets and liabilities of associates are incorporated in thesefinancial statements using the equity method of accounting. Investments inassociates are carried in the balance sheet at cost as adjusted bypost-acquisition changes in the Group's share of the net assets of theassociate, less any impairment in the value of individual investments. Lossesof an associate in excess of the Group's interest in that associate arerecognised only to the extent that the Group has incurred legal or constructiveobligations or made payments on behalf of the associate.Where a Group company transacts with an associate of the Group, profits andlosses are eliminated to the extent of the Group's interest in the associate.Losses may provide evidence of an impairment of assets transferred, in whichcase appropriate provision is made for impairment.

(f) Foreign currencies

The individual financial statements of each Group company are presented in thecurrency of the primary economic environment in which it operates, being itsfunctional currency. For the purpose of these consolidated financialstatements, the results and financial position of each group company areexpressed in pounds sterling, which is the functional currency of the ParentCompany and the presentation currency of the consolidated financial statements.In preparing the financial statements of the individual companies, transactionsin currencies other than the entity's functional currency, being foreigncurrencies, are recorded at the rates of exchange prevailing on the dates ofthe transactions. At each balance sheet date, monetary assets and liabilitieswhich are denominated in foreign currencies are retranslated at the ratesprevailing on the balance sheet date. Non-monetary items carried at fair value,which are denominated in foreign currencies are translated at the ratesprevailing when the fair value was determined. Non-monetary items, which aremeasured in terms of historical cost in a foreign currency, are notretranslated. Exchange differences are recognised in profit or loss in theperiod in which they arise, except when they relate to items for which gainsand losses are recognised in equity.For the purpose of presenting consolidated financial statements, the assets andliabilities of the Group's foreign operations are translated at exchange ratesprevailing on the balance sheet date. Income and expense items are translatedat the average exchange rates for the period, unless exchange rates fluctuatesignificantly during the period, in which case the exchange rates at the datesof transactions are used. Exchange differences arising are classified as equityand are recognised in the Group's foreign currency translation reserve. Suchtranslation differences are recognised as income or as expense in the period inwhich the operation is disposed of.

Transactions relating to Business Combinations denominated in foreign currencies are translated into sterling at the exchange rates prevailing on the transaction date.

(g) Product classificationThe Group's products are classified at inception as either insurance orinvestment contracts for accounting purposes. Insurance contracts are contractswhich transfer significant insurance risk and remain as insurance contractsuntil all rights and obligations are extinguished or expire. They may alsotransfer financial risk. Investment contracts are contracts which carryfinancial risk, with no significant insurance risk. Where contracts containboth insurance and investment components and the investment components can bemeasured reliably, the contracts are unbundled and the components areseparately accounted for as insurance contracts and investment contractsrespectively.

In some insurance contracts and investment contracts the financial risk is borne by the policyholders. Such contracts are usually unit-linked contracts.

(h) Insurance contracts

There are fundamental differences as between the nature of the insurance contracts subsisting in the UK and Swedish businesses, including inter alia contract longevity.. As a consequence, the alignment of income and expense recognition with the underlying assumption of risk leads to the adoption of separate accounting policies appropriate to each business, as follows:

UKBusiness

(i) Premiums

Premiums are accounted for when due, or in the case of unit-linked insurancecontracts, when the liability is recognised, and exclude any taxes or dutiesbased on premiums. Outward reinsurance premiums are accounted for when due.

(ii) Claims and benefits

Claims are accounted for in the accounting period in which they are due ornotified. Surrenders are accounted for in the accounting period in which theyare paid. Claims include policyholder bonuses allocated in anticipation of abonus declaration. Reinsurance recoveries are accounted for in the same periodas the related claim.(iii) Acquisition costsAcquisition costs comprise all direct and indirect costs arising from theconclusion of insurance contracts. They are initial fees amortised at a ratebased on the pattern of anticipated margins in respect of the related policies.An explicit deferred acquisition cost asset is established in the balance sheetto the extent that acquisition costs exceed initial fees deducted. At 31December each year, such costs that are deferred to future years are reviewedto ensure they do not exceed available future margins.

Renewal commission and other direct and indirect acquisition costs arising on enhancements to existing contracts are expensed as incurred.

(iv) Measurement of insurance contract provisions

Insurance contract provisions are measured using accounting policies having regard to the principles laid down in Council Directive 2002/83/EC.

Unit-linked provisions are measured by reference to the value of the underlyingnet asset value of the Group's unitised investment funds, determined on a bidvalue basis, at the balance sheet date. Deferred tax on unrealised capitalgains is also reflected in the measurement of unit-linked provisions and is notdiscounted.

Insurance contract provisions are determined following an annual actuarial investigation of the long-term funds in accordance with regulatory requirements. The provisions are calculated on the basis of current information, using appropriate valuation methods as set out below.

For immediate annuities in payment the provision is calculated as thediscounted value of the expected future annuity payments under the policies,allowing for mortality, including projected improvements in future mortality,interest rates and expenses.For the other classes of non-linked business the provision is calculated on anet premium basis, being the level of premium consistent with a premium stream, the discounted value of which, at the outset of the policy, would be sufficientto cover exactly the discounted value of the original guaranteed benefits atmaturity, or at death if earlier, on the valuation basis. The provision is thencalculated by subtracting the present value of future net premiums from thepresent value of the benefits guaranteed at maturity, or death if earlier, as aresult of events up to the balance sheet date. Negative provisions do not ariseunder the net premium method, which makes no allowances for voluntarydiscontinuances by policyholders, and which only implicitly allows for futurepolicy maintenance costs.Insurance contract provisions are tested for adequacy by discounting currentestimates of all contractual cash flows and comparing this amount to thecarrying value of the provision and any related assets: this is known as theliability adequacy test. Where a shortfall is identified, an additionalprovision is made and the Group recognises the deficiency in income for theyear.For those classes of non-linked and unit-linked business where policyholdersparticipate in profits the liability is wholly reassured to Guardian Assuranceplc ('Guardian'), a subsidiary of Aegon NV. The liability is calculated on anet premium basis, but is then increased to the realistic liability as a resultof the liability adequacy test.

Insurance contract provisions can never be definitive as to their timing or the amount of claims and are therefore subject to subsequent reassessment on a regular basis.

Swedish Business - Life(i) Premiums

Premiums are accounted for when received, and exclude any taxes or duties based on premiums. Outward reinsurance premiums are accounted for when due.

(ii) Claims and benefits

Claims are accounted for in the accounting period in which they are due or notified. Reinsurance recoveries are accounted for in the same period as the related claim.

(iii) Acquisition costsAcquisition costs comprise expenditure incurred arising from the completion ofinsurance contracts. They are initial fees amortised at a rate based on thepattern of anticipated margins in respect of the related policies. An explicitdeferred acquisition cost asset is established in the balance sheet to theextent that acquisition costs exceed initial fees deducted. At the end of eachyear, such costs that are deferred to future years are reviewed to ensure theydo not exceed available future margins.

Renewal commission and other direct and indirect acquisition costs arising on enhancements to existing contracts are expensed as incurred.

(iv) Measurement of insurance contract provisions

Provision is made at the year-end for the estimated cost of claims incurred butnot settled at the balance sheet date, including the cost of claims incurredbut not yet reported. The estimated cost of claims includes expenses to beincurred in settling claims. Outstanding claim provisions are not discountedother than for income protection and waiver of premium benefits, where paymentsmay be made for a considerable period of time.

All reasonable steps are taken to ensure that there is appropriate information regarding claims exposures. However, given the uncertainty in establishing claims provisions, it is likely that the final outcome will prove to be different from the original liability established.

Insurance contract provisions are tested for adequacy by discounting currentestimates of all contractual cash flows and comparing this amount to thecarrying value of the provision and any related assets: this is known as theliability adequacy test. Where a shortfall is identified, an additionalprovision is made and the deficiency in income for the year is recognised.

Swedish Business - Non-life

(i) Premiums

Written premiums for non-life (general) insurance business comprise thepremiums on contracts incepting in the financial year. Written premiums arestated gross of commission payable to intermediaries and exclusive of taxes andduties paid on premiums.Unearned premiums are those proportions of the premium which relate to periodsof risk after the balance sheet date. Unearned premiums are calculated on astraight-line basis according to the duration of the policy underwritten.

(ii) Acquisition costs

Acquisition costs, which represent commission payable, incurred in writing written premiums, are deferred and amortised over the period in which the related premiums are earned.

(iii) ClaimsClaims incurred

Claims incurred comprise claims and related expenses paid in the year and changes in provisions for outstanding claims, including provisions for claims incurred but not yet reported and related expenses, together with any adjustments to claims from previous years.

Outstanding claims provisions

Provision is made at the year-end for the estimated cost of claims incurred butnot settled at the balance sheet date, including the cost of claims incurredbut not yet reported. The estimated cost of claims includes expenses to beincurred in settling claims. Outstanding claims provisions are notdiscounted. Provisions are calculated gross of any reinsurance recoveries.

All reasonable steps are taken to ensure that there is appropriate information regarding claims exposures. However, given the uncertainty in establishing claims provisions, it is likely that the final outcome will prove to be different from the original liability established.

(i) Investment contracts

(i) Amounts collected

Amounts collected on investment contracts, which primarily involve the transferof financial risk such as long-term savings contracts, are accounted for usingdeposit accounting, under which the amounts collected, less any initial feesdeducted, are credited directly to the balance sheet as an adjustment to theliability to the investor.

(ii) Amounts deposited with reinsurers

Amounts deposited with reinsurers under reinsurance arrangements, whichprimarily involve the transfer of financial risk, are entered directly to thebalance sheet as amounts deposited with reinsurers. These assets are designatedon initial recognition as at fair value through income.

(iii) Benefits

For investment contracts, benefits paid are not included in the income statement but are instead deducted from investment contract liabilities in the accounting period in which they are paid.

(iv) Acquisition costs

Acquisition costs relating to investment contracts comprise directlyattributable incremental acquisition costs, which vary with, and are relatedto, securing new contracts, and are recognised as an asset to the extent thatthey represent the contractual right to benefit from the provision ofinvestment management services. The asset is presented as a deferredacquisition cost asset and is amortised over the expected term of the contract,as the fees relating to the provision of the services are recognised. All othercosts are recognised as expenses when incurred.

(v) Liabilities

All investment contract liabilities are designated on initial recognition asheld at fair value through income. The Group has designated investment contractliabilities at fair value through income as this more closely reflects thebasis on which the businesses are managed.The financial liability in respect of unit-linked contracts is measured byreference to the value of the underlying net asset value of the unitisedinvestment funds, determined on a bid value, at the balance sheet date. For UKbusiness, deferred tax on unrealised capital gains and for Swedish business ayield tax in respect of an estimate of the investment return on the underlyinginvestments in the unitised funds are also reflected in the measurement of therespective unit-linked liabilities.In respect of UK business guaranteed income and guaranteed growth bondliabilities and other investment contract liabilities are managed together withrelated investment assets on a fair value basis as part of the documented riskmanagement strategy.

The fair value of other investment contracts is measured by discounting current estimates of all contractual cash flows that are expected to arise under contracts.

(j) Contracts with discretionary participation features (DPF)

A discretionary participation feature is a contractual right held by apolicyholder to receive, as a supplement to guaranteed minimum payments,additional payments that are likely to be a significant portion of the totalcontractual payments. All such contracts, which exist only within the UKbusiness, are wholly reinsured with Guardian and the amount or timing of theadditional payments are contractually at the discretion of the reinsurer andare contractually based on:

(i) the performance of a specified pool of contracts or a specified type of contract;

(ii) realised and/or unrealised investment returns on a specified pool of assets held by the reinsurer; or

(iii) the profit or loss of the reinsurer.

All contracts with discretionary participation features, whether classified as investment or insurance contracts, are accounted for as insurance contracts.

(k) Reinsurance

The Group cedes reinsurance in the normal course of business for the purpose ofavoiding the retention of undue concentration of risk on any one life,policyholder or loss event (for example multiple losses under a Group Lifecontract). Assets, liabilities and income and expense arising from cededreinsurance contracts are presented separately from the related assets,liabilities, income and expenses from the related insurance contracts becausethe reinsurance arrangements do not relieve the Group from its directobligations to its policyholders.Only rights under contracts that give rise to a significant transfer ofinsurance risk are accounted for as reinsurance assets, which comprise amountsdue from insurance companies for paid and unpaid losses and ceded life policybenefits. Rights under contracts that do not transfer significant insurancerisk are accounted for as financial instruments and are presented as amountsdeposited with reinsurers.The net premiums payable to a reinsurer may be more or less than thereinsurance assets recognised by the Group in respect of the reinsurance coverpurchased. Any gain or loss is recognised in the income statement in the periodin which the reinsurance premiums are payable.Rights under reinsurance contracts comprising the reinsurers' share ofinsurance contract provisions and accrued policyholder claims are estimated ina manner that is consistent with the measurement of the provisions held inrespect of the related insurance contracts and in accordance with the terms ofthe reinsurance contract. Such assets are deemed impaired if there is objectiveevidence, as a result of an event that occurred after its initial recognition,that the Group may not recover all amounts due and the event has a reliablymeasurable impact on the amounts that the Group will receive from thereinsurer. Impairment losses reduce the carrying value of the relatedreinsurance assets to their recoverable amount and are recognised as an expensein the income statement.The Group enters into certain financing arrangements, which are established inthe form of a reinsurance contract, but which are substantively in the form ofa financial instrument. Such arrangements are classified and presented asborrowings within financial liabilities.

(l) Fee and commission income

Fees charged for investment management services provided in connection withinvestment contracts are recognised as revenue as the services are provided.Initial fees which exceed the level of recurring fees and relate to the futureprovision of services are deferred and amortised over the anticipated period inwhich services will be provided.

Initial fees charged for investment management services provided in connection with insurance contracts are recognised as revenue when earned.

For both insurance and investment contracts, initial fees, annual managementcharges and contract administration charges are recognised as revenue on anaccruals basis. Surrender charges are recognised as a reduction to policyholderclaims and benefits incurred when the surrender benefits are paid.

Benefit-based fees comprising charges made to unit-linked insurance and investment funds for mortality and morbidity benefits are recognised as revenue on an accruals basis.

For insurance and investment contracts, commissions received or receivablewhich do not require the Group to render further services are recognised asrevenue by the Group on the effective commencement or renewal dates of therelated contract. However, when it is probable that the Group will be requiredto render further services during the life of the contract, the commission, orpart thereof, is deferred and recognised as revenue over the period in whichservices are rendered.(m) Investment income

Investment income comprises income from financial assets and rental income from investment properties.

Income from financial assets comprises dividend and interest income, net fairvalue gains and losses (both unrealised and realised) in respect of financialassets classified as fair value through income, and realised gains on financialassets classified as loans and receivables.Dividends are accrued on an ex-dividend basis. Interest received and receivablein respect of interest-bearing financial assets classified as fair valuethrough income is included in net fair value gains and losses. For loans andreceivables and cash and cash equivalents interest income is calculated usingthe effective interest method.Rental income from investment properties under operating leases is recognisedin the income statement on a straight-line basis over the term of each lease.Lease incentives are recognised in the income statement as an integral part

ofthe total lease income.(n) Expenses(i) Operating lease payments

Leases where a significant proportion of the risks and rewards of ownership isretained by the lessor are classified as operating leases. Payments made underoperating leases are recognised in the income statement on a straight-linebasis over the term of the lease. Lease incentives received are recognised inthe income statement as an integral part of the total lease expense.

(ii) Financing costs

Financing costs comprise interest payable on borrowings and on reinsurance claims deposits included within reinsurance payables, calculated using the effective interest rate method.

(o) Income taxes

Income tax on the profit or loss for the year comprises current and deferred tax and is recognised in the income statement. Tax that relates directly to transactions reflected within equity is also presented within equity.

(i) Current tax

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

(ii) Deferred tax

Deferred tax is provided using the balance sheet liability method, providingfor temporary differences between the carrying amounts of assets andliabilities for financial reporting purposes and the amounts used for taxationpurposes. The amount of deferred tax provided is based on the expected mannerof realisation or settlement of the carrying amount of assets and liabilities,using tax rates enacted or substantively enacted at the balance sheet date.A deferred tax asset is recognised only to the extent that it is probable thatfuture taxable profits will be available against which the asset can beutilised. Deferred tax assets are reduced to the extent that it is no longerprobable that the related tax benefit will be realised.

(iii) Policyholders' fund yield tax

Certain of the Group's policyholders within the Swedish Business are subject toa Swedish yield tax which is calculated based on an estimate of the investmentreturn on underlying investments within their unitised funds. The Group isunder an obligation to deduct the yield tax from the policyholders' unitisedfunds and to remit these deductions to the tax authorities. The deduction frompolicyholders' unitised funds is presented as management fee income with anequal charge reflected in the current tax charge.

(p) Acquired value of in-force business

Acquired in-force insurance and investment contracts arising from business combinations are measured at fair value at the time of acquisition.

The difference between the fair value of insurance contracts and the liabilitymeasured in accordance with the Group's accounting polices for the contracts isrecorded as acquired present value of in-force business. Present value ofin-force business is carried gross of tax and is amortised against income on atime profile which, it is intended, will broadly match the profile of theunderlying emergence of surplus as anticipated at the time of acquisition. Thepresent value of in-force insurance contracts is tested for recoverability/impairment as part of the liability adequacy test.The present value of in-force investment contracts is stated at cost lessaccumulated amortisation and impairment losses. The initial cost is deemed tobe the fair value of the contractual customer relationships acquired. Theacquired present value of the in-force investment contracts is carried gross oftax and is amortised against income on a time profile which, it is intended,will broadly match the profile of the underlying emergence of profit from thecontracts. The recoverable amount is estimated at each balance sheet date. Ifthe recoverable amount is less than the carrying amount, an impairment loss isrecognised in the income statement and the carrying amount is reduced to itsrecoverable amount.

(q) Acquired value of customer relationships

The acquired value of customer relationships arising from business combinations is measured at fair value at the time of acquisition.

This comprises the discounted cashflows relating to new insurance and investment contracts which are expected to arise from existing customer relationships. These are carried gross of tax, are amortised in accordance with the expected emergence of profit from the new contracts and are tested periodically for recoverability.

(r) Internally-developed software

An intangible asset in respect of internal development software costs is only recognised if all of the following conditions are met:

(i) an asset is created that can be identified;

(ii) it is probable that the asset created will generate future economic benefits; and

(iii) the development costs of the asset can be measured reliably.

Software development costs are amortised on a straight-line basis over theirestimated useful life, which typically varies between 3 and 5 years. Where nointernally-generated intangible asset can be recognised, developmentexpenditure is recognised as an expense in the period in which it is incurred.

(s) Property and equipment

Items of property and equipment are stated at cost less accumulated depreciation and impairment losses.

Depreciation is charged to the income statement on a straight-line basis over the estimated useful economic lives of the property and equipment on the following basis:

Computers and similar equipment 3 yearsFixtures and other equipment 5 years

Assets held under finance leases are depreciated over their useful economic lives on the same basis as owned assets, or where shorter, over the term of the relevant lease.

(t) Investment propertyInvestment properties are properties which are held either to earn rentalincome or for capital appreciation or for both. On initial recognitioninvestment properties are measured at cost including attributable transactioncosts, and are subsequently measured at fair value. Independent externalvaluers, having an appropriate recognised professional qualification and recentexperience in the location and category of property being valued, value theportfolio every twelve months.

The fair values reflect market values at the balance sheet date, being the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.

Any gain or loss arising from a change in fair value is recognised in the income statement. Rental income from investment property is accounted for as described in accounting policy (m).

(u) Financial assets

Financial assets are classified into different categories depending on the typeof asset and the purpose for which it is acquired. Currently two differentcategories of financial assets are used: 'financial assets at fair valuethrough income' and 'loans and receivables'. Financial assets classified as atfair value through income comprise financial assets designated as such oninitial recognition and derivative financial instruments. All financial assets held for investment purposes other than derivativefinancial instruments are designated as at fair value through income on initialrecognition since they are managed, and their performance is evaluated, on afair value basis in accordance with documented investment and risk managementstrategies. This designation is also applied to the Group's investmentcontracts, since the investment contract liabilities are managed together withthe investment assets on a fair value basis as part of the documented riskmanagement strategy.

Purchases and sales of 'regular way' financial assets are recognised on the trade date, which is when the Group commits to purchase, or sell, the assets.

All financial assets are initially measured at fair value plus, in the case offinancial assets not classified as at fair value through income, transactioncosts that are directly attributable to their acquisition.

Subsequent to initial recognition, financial assets classified as at fair value through income are measured at their fair value without any deduction for transaction costs that may be incurred on their disposal.

The fair values of financial assets quoted in an active market are their bid prices at the balance sheet date.

Financial assets classified as loans and receivables are stated at amortisedcost less impairment losses. A provision for the impairment of loans andreceivables is established when there is objective evidence that the Group willnot be able to collect all the amounts due according to the original contractterms after the date of the initial recognition of the asset and when theimpact on the estimated cash flows of the financial asset can be reliablymeasured.

Financial assets classified as prepayments are held at cost and are amortised over the relevant time period.

Financial assets at fair value through income are regularly reviewed for objective evidence of impairment. In determining whether objective evidence exists, the Group considers, among other factors, the financial stability of the counterparty, current market conditions and fair value volatility.

Financial assets are derecognised when contractual rights to receive cash flows from the financial assets expire, or where the financial assets have been transferred together with substantially all the risks and rewards of ownership.

Investments in subsidiaries are carried in the Company balance sheet at cost less impairment.

(v) Derivative financial instruments

Derivative financial instruments are recognised at fair value. The gain or loss on remeasurement to fair value is recognised immediately in profit or loss. Hedge accounting has not been applied.

The fair value of interest rate swaps is the estimated amount that the Groupwould receive or pay to terminate the swap at the balance sheet date, takinginto account current interest rates and the current creditworthiness of theswap counterparties. The fair value of forward exchange contracts is theirquoted market price at the balance sheet date, being the present value of thequoted forward price. Embedded derivatives which are not closely related to their host contracts andwhich meet the definition of a derivative are separated and fair valued throughincome.

(w) Policyholders' funds held by the group and liabilities relating to policyholders' funds held by the group

Policyholders' funds held by the Group and liabilities relating to policyholders' funds held by the Group are recognised at fair value.

Policyholders' funds held by the Group

The policyholders' funds held by the Group represent the assets associated withan Investment product in the Swedish business, where the assets are held onbehalf of the policyholder and where all the risks and rewards associated withthe assets are the policyholders' not the Group's.The policyholders' funds held by the Group are held for investment purposes onbehalf of the policyholders and are designated as at fair value through income.The fair values of the policyholders' funds held by the Group are theaccumulation of the bid prices of the underlying assets at the balance sheetdate. Transactions in these financial assets are recognised on the trade date,which is when the Group commits (on behalf of the policyholder) to purchase, orsell the assets.

Liabilities relating to policyholders' funds held by the Group

The liability relating to policyholders' funds held by the Group represents theliability that matches the asset Policyholders' Funds Held by the Group. Asstated previously, the risk and rewards associated with the investment product(and its underlying assets and matching liability) lie with the policyholdersnot the Group.

(x) Cash and cash equivalents

Cash and cash equivalents include cash in hand, deposits held at call with banks and other short-term highly liquid investments. Highly liquid is defined as realisable into cash within 90 days.

(y) Impairment

The carrying amounts of the Group's assets other than reinsurance assets (referto (k) above) and assets which are carried at fair value are reviewed at eachbalance sheet date to determine whether there is any indication of impairment.If any such indication exists, the assets' recoverable amount is estimated inorder to determine the extent of the impairment loss, if any. An impairmentloss is recognised whenever the carrying amount of an asset exceeds itsrecoverable amount and impairment losses are recognised in the incomestatement. The recoverable amount is the higher of fair value less costs tosell and value in use. In assessing value in use, the estimated future cashflows are discounted to their present value using a pre-tax discount rate thatreflects current market assessments of the time value of money.Impairment losses are reversed through the income statement if there is achange in the estimates used to determine the recoverable amount. Such lossesare reversed only to the extent that the assets' carrying amount does notexceed the carrying amount that would have been determined, net of depreciationor amortisation where applicable, if no impairment loss had been recognised.

(z) Provisions

Provisions are recognised when the Group has a present, legal or constructiveobligation as a result of past events such that it is probable that an outflowof economic benefits will be required to settle the obligation and a reliableestimate of the amount of the obligation can be made. Where the effect of thetime value of money is material, the amount of the provision is the presentvalue of the expenditures expected to be required to settle the obligation. TheGroup recognises provisions for onerous contracts when the expected benefits tobe derived from a contract are less than the unavoidable costs of meeting theobligations under the contract.

(aa) Borrowings

Borrowings are recognised initially at fair value, less transaction costs, andare subsequently measured at amortised cost using the effective interestmethod, with interest expense recognised in the income statement on aneffective yield basis. The effective interest method is a method of calculatingthe amortised cost of a financial liability and of allocating interest expenseover the relevant period. The effective interest rate is the rate that exactlydiscounts future cash payments through the expected life of the financialliability.(bb) Employee benefits(i) Pension obligationsUKBusinessGroup companies operate defined contribution pension schemes, which are fundedthrough payments to insurance companies, to which Group companies pay fixedcontributions. There are no legal or constructive obligations on Groupcompanies to pay further contributions if the fund does not hold sufficientassets to pay employee benefits relating to service in current and priorperiods. Accordingly, Group companies have no further payment obligations oncethe contributions have been paid. Contributions to defined contribution pensionschemes are recognised in the income statement when due.

Swedish Business

The Group participates in a combined defined benefit and defined contributionscheme for the benefit of its employees. However, the scheme is amulti-employer scheme, with the associated assets and liabilities maintained ona pooled basis. There is limited information available to the Group to allow itto account for the scheme as a defined benefit scheme and, in accordance withIAS19 Employee Benefits, it is, therefore, accounted for as a definedcontribution scheme. Contributions paid to the scheme are recognised in theincome statement when due.

(ii) Bonus plans

The Group recognises a liability and an expense for bonuses based on a formulathat takes into consideration the profit attributable to the Company'sshareholders after certain adjustments. The expense is recognised in the incomestatement on an accruals basis.

(cc) Share capital and shares held in treasury

(i) Share capital

Shares are classified as equity when there is no obligation to transfer cash orother assets. Incremental costs directly attributable to the issue of equityinstruments are shown in equity as a deduction from the proceeds, net of tax.Incremental costs directly attributable to the issue of equity instruments, asconsideration for the acquisition of a business, are included in the cost ofacquisition.(ii) Shares held in treasury

Where the Company purchases its own equity share capital, the considerationpaid, including directly attributable costs, is deducted from totalshareholders' equity and shown separately as 'treasury shares' until they arecancelled. Where such shares are subsequently sold, any consideration receivedis included within shareholders' equity.

(dd) Dividends

Dividend distributions to the Company's shareholders are recognised in the period in which the dividends are paid, and, for the final dividend, when approved by the Company's shareholders at the annual general meeting.

(ee) Other payables and payables related to direct insurance and investment contracts

Insurance and investment contract payables and other payables are recognisedwhen due and are measured on initial recognition at the fair value of theconsideration paid. Subsequent to initial recognition, payables are measured atamortised cost using the effective interest rate method.

2 Status of financial information

The financial information contained in this preliminary announcement does notconstitute the Company's consolidated statutory financial statements for theyears ended 31 December 2008 or 2009 but is derived from those financialstatements. The financial statements for the year ended 31 December 2009 willbe delivered following the Company's Annual General Meeting. The auditors havereported on those financial statements; their reports were unqualified and didnot contain statements under section 498(2) or (3) of the Companies Act 2006.

3 Acquisition of subsidiaries

Acquisition of Moderna F¶rs¤kringar Liv AB

On 23 July 2009, Chesnara plc acquired the entire issued share capital (100%)of Moderna F¶rs¤kringar Liv AB ('Moderna") from Moderna Finance AB for a totalconsideration of SEK 250m (£19,956,000), paid in cash.Moderna is a Stockholm-based insurance and investment company which specialisesin corporate and personal pension arrangements and life assurance policies.Primarily it aggregates client funds into a range of investment providers andprovides policy wrappers. It sells principally through the independentfinancial adviser channel and has, approximately, a 5.7% per cent market shareof the Swedish unit-linked pension market. It was established in 2000, with itsunit-linked business being launched in 2002. The business was acquired fromModerna Finance AB which is owned by Glitnir Bank in Iceland.

The acquisition of this shareholding has given rise to a profit on acquisition of £25,056,000 calculated as follows:

Fair value and accounting The estimated book and fair values of

policy

the assets and liabilities at the date of Book value adjustments Fair value acquisition were: £000 £000 £000 AssetsIntangible assets Value of in-force insurance contracts - 779 779 Value of in-force investment contracts -

59,746 59,746

Value of customer relationships - 2,352 2,352 Deferred acquisition costs 41,831 (41,831) -

Internally-developed software 3,313

- 3,313 Property and equipment 369 - 369 Investment in associates 781 - 781

Reinsurers' share of insurance contract provisions 25,713 - 25,713 Financial assets 749,279 - 749,279 Cash and cash equivalents 14,012 - 14,012 --------- --------- --------- Total assets 835,298 21,046 856,344 --------- --------- ---------- Liabilities Insurance contract provisions 30,642 - 30,642 Investment contracts 737,858 - 737,858 Borrowings 23,451 1,279 24,730 Provisions 265 - 265 Deferred tax liabilities 172 826 998 Reinsurance payables 9,324 - 9,324 Payables related to direct insuranceand investment contracts 2,732 - 2,732 Income taxes 2,193 - 2,193 Other payables 2,590 - 2,590 --------- ---------- ---------- Total liabilities 809,227 2,105 811,332 --------- --------- --------- Net assets 26,071 18,941 45,012 --------- --------- --------- Net assets acquired (100%) 45,012 Total consideration (19,956) ----------

Profit arising on acquisition of subsidiary

25,056 ========== The assets and liabilities as at the acquisition date in the table above arestated at their provisional fair values and may be amended for 12 months afterthe date of acquisition in accordance with paragraph 62 of IFRS 3, BusinessCombinations.

The results of Moderna have been included in the consolidated financial statements of the Group with effect from 23 July 2009, and have contributed revenue of £103.3 million over this period, whilst contributing £2.8 million loss to the overall consolidated profit before tax.

Had Moderna been consolidated from 1 January 2009 the consolidated statement ofcomprehensive income would have included revenue of £209.7 million, and havecontributed £0.3 million loss to the overall consolidated profit before tax.

Acquisition of AkademikerR¥dgivning i Sverige AB

On 23 November 2009, Moderna acquired 41% of the share capital in the associated company AkademikerR¥dgivning i Sverige AB ('AkademikerR¥dgivning') from Akademikertj¤nst I.A.S for a total consideration of SEK 3,550,000 (£ 311,321), payable in cash, resulting in 90% total ownership.

AkademikerR¥dgivning is an independent financial adviser of insurance andsavings products. The target customers are the members of one of the six Unionsof Academics that are also shareholders in the company. AkademikerR¥dgivningwas established in 2006, but started its operations in 2007 and is based inStockholm.Fair Value The estimated book and fair values and of the assets and liabilities at the date of

accounting acquisition were: Book Value Book Value policy 100% 41% adjustments Fair Value £000 £000 £000 £000Assets Intangible assets Other intangibles - - 348 348

Internally-developed software 82 33

- 33Property and equipment 55 23 - 23Financial assets 21 9 - 9Deferred tax asset 190 78 - 78

Cash and cash equivalents 42 17

- 17 --------- ---------- ---------- ----------Total assets 390 160 348 508 --------- ---------- ---------- -----------Liabilities Borrowings 228 93 - 93

Deferred tax liabilities - -

92 92Other payables 30 12 - 12 --------- --------- ---------- -----------

Total liabilities 258 105

92 197 --------- --------- --------- ----------Net assets 132 55 256 311 ========= ========= ========= =========

Net assets acquired (41%)

311 Total consideration (311) ---------Profit arising on acquisition of this holding

- ========= The assets and liabilities as at the acquisition date in the table above arestated at their provisional fair values and may be amended for 12 months afterthe date of acquisition in accordance with paragraph 62 of IFRS 3, BusinessCombinations.The results of AkadermikerR¥dgivning have been included in the consolidatedfinancial statements of the Group with effect from 23 November 2009, and havecontributed a £66,031 loss to the overall consolidated profit before tax. HadAkadermikerR¥dgivning been consolidated from 1 January 2009, the consolidatedstatement of comprehensive income would have included revenue of £217,127 and aloss of £585,597 On 31 December 2009 Moderna acquired an additional 1% of the share capital ofAkademikerR¥dgivning for a consideration of SEK 87,000 (£7,545), resulting in atotal ownership of 91%. The consideration paid represents the additional netassets acquired and no goodwill was recognized.

4 Operating segments

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

There were no changes to the basis of segmentation or the measurement basis for segment profit during the year ended 31 December 2009.

UKBusiness

This segment comprises the UK insurance and investment operation, CountrywideAssured Life Holdings Limited ('CAHL'), which holds the Group's UK insuranceand investment assets and liabilities, and is responsible for managing bothunit-linked and non-linked business.

Swedish Business

This segment comprises the Swedish insurance and investment operation, ModernaF¶rs¤kringar Liv AB ('Moderna'), which holds the Group's Swedish insurance andinvestment assets and liabilities, and is responsible for managing bothunit-linked and non-linked business.

Other Group Activities

The functions performed by the holding company, Chesnara plc, are defined underthe operating segment analysis as Other Group Activities. Also included thereinare consolidation and elimination adjustments.

Measurement basis

The accounting policies of the segments are the same as those for the Group asa whole. Any transactions between the business segments are on normalcommercial terms and market conditions. The Group evaluates performance ofoperating segments on the basis of the profit before tax attributable toshareholders and the total assets and liabilities of the reporting segments andthe Group.

(i) Segmental income statement for the year ended 31 December 2009

UK Swedish Other Group Business Business Activities Total £000 £000 £000 £000 Insurance premium revenue 88,469 11,636 - 100,105 Insurance premium ceded to reinsurers (15,831) (9,166) - (24,997) --------- ----------- ---------- --------- Net insurance premium revenue 72,638 2,470 - 75,108 Fee and commission income Insurance contracts 34,285 1,579 - 35,864 Investment contracts 8,258 6,998 - 15,256 Net investment return 233,926 92,239 515 326,680 --------- --------- ----------- ---------- Total revenue (net of reinsurance payable) 349,107 103,286 515 452,908 Other operating income 4,689 - - 4,689 ---------- ---------- ---------- --------- Segmental income 353,796 103,286 515 457,597 ---------- ---------- ---------- --------- Insurance contract claims and benefits incurred Claims and benefits paid to insurance contract holders (126,737) (2,820) - (129,557) Net (increase)/ decrease in insurance contract provisions (128,064) 224 - (127,840) Reinsurers' share of claims and benefits 45,630 2,267 - 47,897 ---------- ---------- ----------- ---------- Net insurance contract claims and benefits incurred (209,171) (329) - (209,500) ---------- ---------- ------------ ----------- Change in investment contract liabilities (107,524) (92,224) - (199,748) Reinsurers' share of investment contract liabilities 4,710 - - 4,710 ---------- ---------- ----------- ---------- Net change in investment contract liabilities (102,814) (92,224) - (195,038) ---------- --------- --------- ---------- Fees, commission and other acquisition costs (1,116) (4,051) - (5,167) Administrative expenses (9,806) (5,276) (3,163) (18,245) Other operating expenses Charge for amortisation of acquired value of in-force business (3,688) (3,265) - (6,953) Charge for amortisation of customer relationships - (188) - (188) Other (2,417) (110) 332 (2,195) --------- ---------- ---------- ---------

Segmental expenses (329,012) (105,443) (2,831) (437,286)

---------- --------- --------- --------- Segmental income less expenses 24,784 (2,157) (2,316) 20,311 Share of profit from associates - 39 - 39 Profit recognised on acquisition of subsidiary - - 25,056 25,056 --------- --------- --------- --------- Segmental operating profit/ (loss) 24,784 (2,118) 22,740 45,406 Financing costs - (508) (157) (665) ---------- --------- ---------- ---------- Profit/(loss) before tax 24,784 (2,626) 22,583 44,741 Income tax credit/ (expense) 948 (148) 392 1,192 Non-controlling interest 7 7 --------- --------- --------- --------- Profit/(loss) after tax attributable to shareholders 25,732 (2,767) 22,975 45,940 ========= ========= ========= =========

(ii) Segmental income statement for the year ended 31 December 2008

UK Swedish Other Group Business Business Activities Total £000 £000 £000 £000 Insurance premium revenue 94,274 - - 94,274 Insurance premium ceded to reinsurers (17,193) - - (17,193) ---------- --------- --------- --------- Net insurance premium revenue 77,081 - - 77,081 Fee and commission income Insurance contracts 35,289 - - 35,289 Investment contracts 9,305 - - 9,305 Net investment return (225,080) - 2,338 (222,742) --------- ---------- ---------- ---------- Total revenue (net of reinsurance payable) (103,405) - 2,338 (101,067) Other operating income 1,224 - 90 1,314 ---------- ---------- --------- ---------- Segmental income (102,181) - 2,428 (99,753) ---------- --------- ---------- --------- Insurance contract claims and benefits incurred Claims and benefits paid to insurance contract holders (131,829) - - (131,829) Net decrease in insurance contract provisions 180,265 - - 180,265 Reinsurers' share of claims and benefits (8,736) - - (8,736) --------- --------- ---------- --------- Net insurance contract claims and benefits incurred 39,700 - - 39,700 ---------- --------- ----------- --------- Change in investment contract liabilities 108,516 - - 108,516 Reinsurers' share of investment contract liabilities (4,743) - - (4,743) --------- ---------- --------- ---------- Net change in investment contract liabilities 103,773 - - 103,773 ---------- --------- --------- ---------- Fees, commission and other acquisition costs (1,377) - - (1,377) Administrative expenses (12,161) - (1,472) (13,633) Other operating expenses Charge for amortisation of acquired value of in-force business (3,578) - - (3,578) Other (562) - (1,091) (1,653) ---------- --------- --------- --------- Segmental expenses 125,795 - (2,563) 123,232 ---------- --------- --------- ---------- Segmental operating profit/(loss) 23,614 - (135) 23,479 Financing costs - - (752) (752) ---------- ---------- --------- ---------- Profit/(loss) before tax 23,614 - (887) 22,727 Income tax (expense)/credit (2,856) - 146 (2,710) ----------- ---------- ---------- ----------- Profit/(loss) after tax attributable to shareholders 20,758 - (741) 20,017 ========= ========= ========= ==========

(iii) Segmental balance sheet as at 31 December 2009

Other Group UK Swedish Activities Business Business Total £000 £000 £000 £000 Intangible assets 32,471 70,061 - 102,532 Property and equipment - 491 - 491 Investment in associates - 1,051 - 1,051

Reinsurers' share of insurance contract provisions

209,604 27,262 - 236,866

Amounts deposited with reinsurers 27,056 -

- 27,056 Investment properties 3,355 - - 3,355 Financial assets 1,413,798 974,475 71 2,388,344

Reinsurers' share of accrued policyholder claims 4,728 -

- 4,728 Income tax - - 395 395 Cash and cash equivalents 120,830 14,776 19,635 155,241 --------- ---------- ---------- ---------- Total assets 1,811,842 1,088,116 20,101 2,920,059 --------- ---------- ---------- ---------- Bank overdrafts 2,312 - - 2,312 Insurance contract provisions 1,044,680 32,353 - 1,077,033

Investment contracts at fair value through income 610,930 918,291

- 1,529,221

Liabilities relating to policyholders' funds held

by the Group - 41,107 - 41,107 Borrowings - 24,799 4,197 28,996

Derivative financial instruments 54

- 54 Provisions 1,452 - - 1,452 Deferred tax liabilities 9,613 751 2 10,366 Reinsurance payables 2,064 12,975 - 15,039

Payables related to direct insurance and

investment contracts 24,751 5,682 - 30,433 Deferred income 13,132 - - 13,132 Income taxes 854 459 - 1,313 Other payables 3,825 3,990 2,018 9,833 --------- --------- ---------- ---------- Total liabilities 1,713,667 1,040,407 6,217 2,760,291 --------- --------- --------- ---------- Net assets 98,175 47,709 13,884 159,768 Non-controlling interest - (13) - (13) --------- ---------- --------- ----------

Net assets attributable to shareholders 98,175 47,696

13,884 159,755 ========= ========== ========== ==========

(iv) Segmental balance sheet as at 31 December 2008

UK Other Swedish Group Business Business Activities Total £000 £000 £000 £000 Intangible assets 37,066 - - 37,066

Reinsurers' share of insurance contract provisions 182,693 -

- 182,693

Amounts deposited with reinsurers 22,181 -

- 22,181 Investment properties 3,432 - - 3,432 Financial assets 1,236,534 - 1,177 1,237,711

Reinsurers' share of accrued policyholder claims 4,100 -

- 4,100 Cash and cash equivalents 155,009 - 37,372 192,381 --------- ---------- ---------- ---------- Total assets 1,641,015 - 38,549 1,679,564 ---------- ---------- --------- ---------- Bank overdrafts 1,086 - 8 1,094 Insurance contract provisions 923,506 - - 923,506

Investment contracts at fair value through income

558,542 - - 558,542 Borrowings - - 8,358 8,358

Derivative financial instruments 70 -

- 70 Provisions 3,397 - - 3,397 Deferred tax liabilities 10,798 - - 10,798 Reinsurance payables 1,397 - - 1,397

Payables related to direct insurance and

investment contracts 23,891 - - 23,891 Deferred income 14,575 - - 14,575 Income taxes 1,213 - (139) 1,074 Other payables 4,207 - 2,287 6,494 ---------- ---------- ---------- ----------- Total liabilities 1,542,682 - 10,514 1,553,196 --------- ---------- --------- --------- Net assets 98,333 - 28,035 126,368 ========= ========== ========= ========== 5 Income tax expense Year ended 31 December

Total income tax (credit)/expense comprises: 2009 2008 £000 £000 UK Business and Other Group Activities (1,340) 2,710

Swedish Business 148 - --------- --------- Total (1,192) 2,710 ========= ========= Year ended 31 December

UK Business and Other Group Activities 2009 2008

£000 £000 Current tax expense Current year 3,548 3,037 Overseas tax 976 730 Adjustment to prior years (4,681) (8) ---------- ---------- Net (credit)/expense (157) 3,759 Deferred tax credit Origination and reversal of temporary differences (1,183) (1,049) ---------- ---------

Total income tax (credit)/expense (1,340) 2,710

========= ========== Reconciliation of effective tax rate on profit Year ended 31 December before tax 2009 2008 £000 £000 Profit before tax 47,367 22,727 --------- --------- Income tax using the domestic corporation tax rate of 28% (2008: 28.5%) 13,263 6,477 Non-taxable profit on acquisition of subsidiary (7,016) - Impact of small companies rate for subsidiaries -

Permanent differences 304 116 Effect of UK taxing bases on insurance profits Offset of franked investment income (3,859) (3,885) Variation in rate of tax on amortisation of acquired in-force value 73 90 Other 576 (80) Overprovided in prior years (4,681) (8) --------- ---------

Total income tax (credit)/expense (1,340) 2,710

========= =========

The amount overprovided in prior years relates principally to the writeback of a provision for current tax made in respect of 2007. This provision had been established because of uncertainty surrounding the interpretation of UK tax legislation relating to that year. In the event, the submission to HMRC of the tax computation for that year has resolved the uncertainty and the provision has, accordingly, been released.

The Income tax credit relates to the UK Business and Other Group Activities operating segments together.

Year ended 31 December Swedish Business 2009 2008 £000 £000 Current tax expense Current year 12 - Overseas tax - - Adjustment to prior years - - --------- --------- 12 Deferred tax expense Origination and reversal of temporary differences 136 - --------- --------- Total income tax expense 148 - ========= =========

Reconciliation of effective tax rate on profit Year ended 31

before tax December 2009 2008 £000 £000 Loss before tax (2,626) - --------- --------- Income tax using the domestic corporation tax rate of 26.3% (691) - Non-taxable income in relation to unit-linked business 349 Policyholder tax 13 -

Non-taxable fair value adjustment on acquisition 440 - Impact of different rate for subsidiaries 5 -

Permanent differences (13) - Unrecognised tax recoverable 47 Non-deductible expenses 8 - Overprovided in prior years (10) - --------- --------- Total income tax expense 148 - --------- --------- 6 Borrowings 31 December 2009 2008 £000 £000 Bank loan 4,197 8,358

Amount due in relation to financial reinsurance 24,686 -

Other 113 - --------- --------- Total 28,996 8,358 ========= ========= Current 12,474 4,168 Non-current 16,522 4,190 --------- --------- Total 28,996 8,358 ========= ========= The bank loan, which was drawn down on 2 June 2005 under a facility madeavailable on 4 May 2005, is unsecured and is repayable in five equal annualinstalments on the anniversary of the draw down date. Accordingly the currentportion as at 31 December 2008, being that payable within one year, is £4,168,000 and the non-current portion is £4,190,000. The outstanding principalon the loan bears interest at a rate based on the London Inter-bank Offer Rate,payable in arrears over a period which varies between one and six months at theoption of the borrower.

The fair value of the bank loan at 31 December 2009 was £4,200,000 (31 December 2008: £8,400,000).

The fair value of amounts due in relation to financial reinsurance was £26,415,353 (31 December 2008: £nil)

The fair value of other borrowings is not materially different from itscarrying value. 7 Share capital 31 December 2009 31 December 2008 Share Share capital capital Number of Number of shares £000 shares £000 Share capital 104,588,785 41,501 104,588,785 41,501 ========= ======== ========= =========

There have been no changes in Group share capital and share premium during the year ended 31 December 2009.

The number of shares in issue at the balance sheet date included 3,096,194 shares held in treasury (31 December 2008: 3,096,194).

Under the reverse acquisition basis of accounting referred to in Note 1, at thedate of acquisition of Chesnara plc (the legal parent) the amount of issuedshare capital in the consolidated balance sheet represents the amount of issuedshare capital of Countrywide Assured Life Holdings Limited (the legalsubsidiary) immediately before the acquisition and the deemed cost ofacquisition, as explained in Note 1, is taken as £nil. The number of shares,representing the equity structure, reflects the equity structure of Chesnaraplc as set out below. 8 Retained earnings 31 December 2009 2008 £000 £000

Retained earnings attributable to equity holders of

the parent company comprise Balance at 1 January 67,738 63,775 Profit for the year 45,940 20,017 Dividends Final approved and paid for 2007 -

(10,302)

Interim approved and paid for 2008 -

(5,752)

Final approved and paid for 2008 (10,200) - Interim approved and paid for 2009 (5,734) - ---------- ---------- Balance at 31 December 97,744 67,738 ========= ========== The interim dividend in respect of 2008, approved and paid in 2008, was paid atthe rate of 5.50p per share. The final dividend in respect of 2008, approvedand paid in 2009, was paid at the rate of 10.05p per share so that the totaldividend paid to the equity shareholders of the Parent Company in respect ofthe year ended 31 December 2008 was made at the rate of 15.55p per share.The interim dividend in respect of 2009, approved and paid in 2009, was paid atthe rate of 5.65p per share to equity shareholders of the Parent Companyregistered at the close of business on 12 September 2009, the dividend recorddate.A final dividend of 10.3p per share in respect of the year ended 31 December2009 payable on 20 May 2010 to equity shareholders of the Parent Companyregistered at the close of business on 16 April 2010, the dividend record date,was approved by the Directors after the balance sheet date. The resulting totalfinal dividend of £10.5m has not been provided for in these financialstatements and there are no income tax consequences.

The following summarises dividends per share in respect of the year ended 31 December 2008 and 31 December 2009:

2009 2008 p p

Interim - approved and paid 5.65 5.50

Final - proposed 10.30 10.05 --------- --------- Total 15.95 15.55 ========= ========= 9 Earnings per share

Earnings per share are based on the following:

Year ended 31 December 2009 2008 Profit for the year attributable to shareholders (£000) 45,940 20,017 --------- ---------

Weighted average number of ordinary shares 101,492,591 104,021,765

--------- --------- Basic earnings per share 45.26p 19.24p --------- ---------- Diluted earnings per share 45.26p 19.24p ========= ==========

The weighted average number of ordinary shares in respect of the year ended 31December 2009 is based on 104,588,785 shares in issue at the beginning and endof the period less 3,096,194 shares held in treasury at the beginning and endof the period.The weighted average number of ordinary shares in respect of the year ended 31December 2008 is based on 104,588,785 shares in issue at the beginning of theperiod and on 104,588,785 shares in issue at the end of the period less3,096,194 own shares held in treasury, taking account of the timing of thepurchases of own shares. There were no share options outstanding during the year ended 31 December 2008or during the year ended 31 December 2009. Accordingly, there is no dilution ofthe average number of ordinary shares in issue in respect of these periods. Earnings per share for the year ended 31 December 2009 includes the impact of £25,056,000 of profit recognised on the acquisition of Moderna. Excluding thisitem both the basic and diluted earnings per share for the year ended 31December 2009 would have been 20.58p per share.

10 Additional Information

Additional information relating to the Company can be found on its website www.chesnara.co.uk.

11 Forward looking statements

This document may contain forward-looking statements with respect to certain ofthe plans and current expectations relating to future financial condition,business performance and results of Chesnara plc. By their nature, allforward-looking statements involve risk and uncertainty because they relate tofuture events and circumstances that are beyond the control of Chesnara plcincluding, amongst other things, UK domestic and global economic and businessconditions, market-related risks such as fluctuations in interest rates,inflation, deflation, the impact of competition, changes in customerpreferences, delays in implementing proposals, the timing, impact and otheruncertainties of future acquisitions or other combinations within relevantindustries, the policies and actions of regulatory authorities, the impact oftax or other legislation and other regulations in the jurisdiction in whichChesnara plc and its subsidiaries operate. As a result, Chesnara plc's actualfuture condition, business performance and results may differ materially fromthe plans, goals and expectations expressed or implied in these forward-lookingstatements.

SUPPLEMENTARY INFORMATION - EUROPEAN EMBEDDED VALUE BASIS

SUMMARISED EEV CONSOLIDATED INCOME STATEMENT

Year ended 31 December 2009 2008 Note £000 £000

Operating profit of covered business 6 19,120 25,521

Other operational result 868 385 ----------- ---------- Operating profit 19,988 25,906

Variation from longer-term investment return 13,750 (16,831) Effect of economic assumption changes (9,730) 6,951

--------- ----------

Profit before tax and before exceptional item 24,008 16,026

Exceptional item

Profit on acquisition of subsidiary company 54,187 -

--------- --------- Profit before tax 78,195 16,026 Tax 12,070 (1,200) --------- --------- Profit for the year 90,265 14,826 --------- --------- Attributable to: Shareholders 90,272 14,826 Non-controlling interest (7) - --------- ---------- 90,265 14,826 ========= ========= Earnings per share

Based on profit for the period attributable to

shareholders 88.94p 14.25p --------- ---------- Diluted earnings per share

Based on profit for the period attributable to

shareholders 88.94p 14.25p --------- ---------

SUPPLEMENTARY INFORMATION - EUROPEAN EMBEDDED VALUE BASIS

SUMMARISED EEV CONSOLIDATED BALANCE SHEET

31 December 2009 2008 Note £000 £000 Assets Value of in force business 5,8 198,312 84,940

Deferred acquisition costs arising on unmodelled

business 197 -

Acquired value of customer relationships 346

-

Internally-developed software 4,060

- Property and equipment 491 - Investment in associate 1,051 -

Reinsurers' share of insurance contract

provisions 209,537 165,648 Amounts deposited with reinsurers 26,240 21,404 Investment properties 3,355 3,432 Deferred tax assets 1,972 - Financial assets

Equity securities at fair value through income 454,970 363,879

Holdings in collective investment schemes at

fair value through income 1,612,861 576,502 Debt securities at fair value through income 247,836

279,104

Insurance and other receivables 19,822 11,056 Prepayments 3,784 1,600 Policyholders' funds held by the Group 41,107

-

Derivative financial instruments 7,964 5,570 --------- --------- Total financial assets 2,388,344 1,237,711 --------- --------- Reinsurers' share of accrued policy claims 4,728 4,100 Income taxes 395 - Cash and cash equivalents 155,241 192,381 --------- --------- Total assets 2,994,269 1,709,616 --------- --------- Liabilities Bank Overdraft 2,312 1,094 Insurance contract provisions 1,049,906 907,071 Financial liabilities Investment contracts at fair value through income 1,543,915 573,955 Borrowings 36,307 8,358

Derivative financial instruments 54

70

Liabilities relating to policyholders' funds held by the Group 41,107 - --------- --------- Total financial liabilities 1,621,383 582,383 --------- --------- Provisions 1,452 3,397 Reinsurance payables 15,039 1,397

Payables related to direct insurance and

investment contracts 30,433 23,891 Income taxes 1,313 1,181 Other payables 9,833 6,494 --------- --------- Total liabilities 2,731,671 1,526,908 --------- ---------- Net assets 262,598 182,708 ========= ========= Equity Share capital 41,501 41,501 Share premium 20,458 20,458 Treasury shares (3,379) (3,379) Foreign exchange reserve 5,539 - Other reserves 50 50 Retained earnings 198,416 124,078 --------- ---------- Total shareholders' equity 262,585 182,708 Non-controlling interest 13 - ---------- ---------- Total equity 5,8 262,598 182,708 ========= ==========

SUPPLEMENTARY INFORMATION - EUROPEAN EMBEDDED VALUE BASIS

SUMMARISED EEV CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Year ended 31 December 2009 2008 £000 £000

Shareholders' equity at 1 January

182,708 187,315 Purchase of treasury shares - (3,379)

Profit for the period attributable to shareholders

90,272 14,826

Foreign exchange reserve movement

5,539 Dividends paid (15,934) (16,054) --------- ---------

Shareholders' equity at 31 December

262,585 182,708 ========= =========

NOTES TO THE SUPPLEMENTARY INFORMATION

1 Basis of preparation

This section sets out the detailed methodology followed for producing theseGroup financial statements which are supplementary to the Group's primaryfinancial statements which have been prepared in accordance with InternationalFinancial Reporting Standards ('IFRS'). These financial statements have beenprepared in accordance with the European Embedded Value ('EEV') principlesissued in May 2004 by the European CFO Forum and supplemented by AdditionalGuidance on EEV Disclosures issued by the same body in October 2005. Theprinciples provide a framework intended to improve comparability andtransparency in embedded value reporting across Europe.In order to improve understanding of the Group's financial position andperformance, certain of the information presented in these financial statementsis presented on a segmental basis: the business segments are the same as thosedescribed in Note 4 to the primary financial statements prepared on the IFRSbasis above. The Swedish Business was acquired on 23 July 2009: accordingly,the results relating thereto, as reflected in segmental analysis are for aperiod just in excess of five months. Prior year information in respect of thefinancial position as at 31 December 2008 and for the year then ended isdesignated as £nil in respect of the Swedish Business, while other prior yeardata are designated as not applicable ('n/a').

2 Covered business

The Group uses EEV methodology to value the bulk of its long-term business (the 'covered business'), which is written primarily in the UK and Sweden, as follows:

(i) for the UK Business, the covered business comprises the business's long-termbusiness being those individual life insurance, pensions and annuity contractsfalling under the definition of long-term insurance business for UK regulatorypurposes. The operating expenses of the holding company, Chesnara plc, aretreated as an integral part of the UK covered business.(ii) for the Swedish Business, the covered business comprises the business'slong-term pensions and savings unit-linked business. Group life and sicknessbusiness, including waiver of premium and non-linked individual life assurancepolicies are not included in the covered business: the result relating to thisbusiness is established in accordance with IFRS principles and is includedwithin 'other operational result' within the consolidated summarised incomestatement.

Under EEV principles no distinction is made between insurance and investment contracts, as there is under IFRS, which accords these classes of contracts different accounting treatments.

3 Methodology(a) Embedded ValueOverview

Shareholders' equity comprises the embedded value of the covered business,together with the net equity of other Group companies, including that of theholding company which is stated after writing down fully the carrying value ofthe covered business.The embedded value of the covered business is the aggregate of the shareholdernet worth ('SNW') and the present value of future shareholder cash flows fromin-force covered business (value of in-force business) less any deduction forthe cost of required capital. It is stated after allowance has been made foraggregate risks in the business. SNW comprises those amounts in the long-termbusiness, which are either regarded as required capital or which representsurplus assets within that business.

New business

UK Business

Much of the covered business is in run-off and is, accordingly, substantiallyclosed to new business. The UK Business does still sell a small amount of newbusiness but, overall, the contribution from new business to the resultsestablished using EEV methodology is not material. Accordingly, not all ofthose items related to new business values, which are recommended by the EEVguidelines, are reported in this supplementary financial information.

Swedish Business

New business, in relation to the pensions and savings covered business is takenas all business where contracts are signed and new premiums paid during thereporting period, for both new policies and premium increases on existingbusiness, but excluding standard renewals. New business premium volume for theperiod which is consistent with the analysis of profit in Note 6, being theperiod from 23 July 2009, the date of acquisition of the Swedish Business, to31 December 2009, is as follows:

New business premium income relating to

pensions and savings covered business,

£16.5m *

*Basis: annualised premium plus 1/10 single premium translated into sterling at the post-acquisition average rate of SEK 11.5594 = £1.

The new business contribution has been assessed as at the end of the period, using opening assumptions.

Value of in-force business

The cash flows attributable to shareholders arising from in-force business are projected using best estimate assumptions for each component of cash flow.

The present value of the projected cash flows is established by using adiscount rate which reflects the time value of money and the risks associatedwith the cash flows which are not otherwise allowed for. There is a deductionfor the cost of holding the required capital, as set out below.

Taxation

The present value of the projected cash flows arising from in-force business takes into account all tax which is expected to be paid under current legislation, including tax which would arise if surplus assets within the covered business were eventually to be distributed.

The value of the in-force business has been calculated on an after-tax basis and is grossed up to the pre-tax level for presentation in the income statement. The amount used for the grossing up is the amount of shareholder tax, excluding those payments made on behalf of policyholders, being policyholder tax in the UK Business and yield tax in the Swedish Business.

Cost of capital

The cost of holding the required capital to support the covered business (see 3(b) below) is reflected as a deduction from the value of in-force business andis determined as the difference between the amount of the required capital andthe projected release of capital and investment income.

Financial options and guarantees

UK Business

The principal financial options and guarantees in the UK Business are (i)guaranteed annuity rates offered on some unit-linked pension contracts and (ii)a guarantee offered under Timed Investment Funds that the unit price availableat the selected maturity date (or at death, if earlier) will be the highestprice attained over the policy's life. The cost of these options and guaranteeshas been assessed, in principle, on a market-consistent basis, but, inpractice, this has been carried out on approximate bases, which are appropriateto the level of materiality of the results.

Swedish Business

In respect of the Swedish Business, some contracts provide policyholders withan investment guarantee, whereby a minimum rate of return is guaranteed for thefirst 5 years of the policy, at a rate of 3% per annum. As at 31 December 2009,the total amount guaranteed was approximately £0.6m. Thus, due to low volumesand the limited exposure, the value of the guarantee is ignored as not materialto the results.Allowance for risk

Allowance for risk within the covered business is made by:

(i) setting required capital levels by reference to the assessment of capital needs made by the directors of the regulated entities within the UK and Swedish Businesses ( the 'Directors');

(ii) setting the risk discount rate, which is applied to the projected cash flowsarising on the in-force business, at a level which includes an appropriate riskmargin; and

(iii) explicit allowance for the cost of financial options and guarantees and, where appropriate, for reinsurer default.

Internal Group Company

EEV Guidance requires that actual and expected profit or loss incurred by aninternal group company on services provided to the covered business should beincluded in allowances for expenses. The covered business in the SwedishBusiness is partially managed by an internal group fund management company. Notall relevant future income and expenses of that company have been included inthe calculation of embedded value. However, the effect is not considered to bematerial.

(b) Level of Required Capital

The level of required capital of the covered business reflects the amount ofcapital that the Directors consider necessary and appropriate to manage therespective businesses. In forming their policy the Directors have regard to theminimum statutory requirements and an internal assessment of the market,insurance and operational risks inherent in the underlying products andbusiness operations. The capital requirement resulting from this assessmentrepresents (a) for the UK Business, 150% of the long-term insurance capitalrequirement ('LTICR') together with 100% of the resilience capital requirement('RCR'), as determined by the regulations of the Financial Services Authorityin the UK and (b) for the Swedish Business, 150% of the regulatory solvencyrequirement as determined by Finansinspektionen in Sweden.

The required level of regulatory capital is provided as follows:

(i) for the UK Business, by the retained surplus within the long-term business fundand by share capital and retained earnings within the shareholder funds of theregulated entity; and

(ii) for the Swedish Business, by share capital and additional equity contributions from the parent company, net of the accumulated deficit in the regulated entity, these components together comprising shareholder's equity.

The Swedish Business is reliant, in the medium term, on further equity contributions from the parent company, Chesnara plc.

(c) Discount Rates

The discount rates are a combination of the reference rate and a risk margin.The reference rate reflects the time value of money and the risk marginreflects any residual risks inherent in the covered business and makesallowance for the risk that future experience will differ from that assumed. Inorder to reduce the subjectivity when setting the discount rates, the Group hasdecided to adopt a 'bottom up' market-consistent approach to allow explicitlyfor market risk.Using the market-consistent approach, each cash flow is valued at a discountrate consistent with that used in the capital markets: in accordance with this,equity-based cash flows are discounted at an equity discount rate andbond-based cash flows at a bond discount rate. In practice a short-cut methodknown as the 'certainty equivalent' approach has been adopted. This methodassumes that all cash flows earn the reference rate of return and arediscounted at the reference rate. In general, and consistent with the market'sapproach to valuing financial instruments for hedging purposes, the referencerate is based on swap yields. In respect of the UK Business, where, in prioryears, non-linked business was substantially backed by government bonds, theyields on these assets were taken. During 2009, the investment guidelines forthe relevant part of the UK Business were revised, so the use of yields ongovernment backed bonds is no longer appropriate, resulting in the use of swapyields for all reference rates. Within the risk margin, allowance also needs to be made for non-market risks.For some of these risks, such as mortality and expense risk, it is assumed thatthe shareholder can diversify away any uncertainty where the impact ofvariations in experience on future cash flows is symmetrical. For those risksthat are assumed to be diversifiable, no adjustment to the risk margin has beenmade. For any remaining risks that are considered to be non-diversifiablerisks, there is no risk premium observable in the market and, therefore, aconstant margin has been added to the risk margin. The margin added reflectsthe assumed risks within the businesses and is 50 basis points for the UKBusiness and 70 basis points for the Swedish Business.A market-consistent valuation approach also generally requires consideration of'frictional' costs of holding shareholder capital: in particular, the cost oftax on investment returns and the impact of investment management fees canreduce the face value of shareholder funds. For the UK Business, the expensesrelating to corporate governance functions eliminate any taxable investmentreturn in shareholder funds, while investment management fees are not material.For the Swedish Business, appropriate allowance is made for the cost of tax onlocked-in capital and the cost for an investor of owning an asset indirectlyvia an investment policy rather than by direct investment into the underlyingassets.At previous reporting dates it has been our practice, having calculated anembedded value using a market-consistent method, to undertake a process knownas the calibration of the Risk Discount Rate ('RDR'), whereby we have equatedthe results from a traditional embedded value approach, including assumedactual investment returns and traditional cost of capital, to that derivedusing the market-consistent method. Accordingly, the discount rate required forthe traditional embedded value, to equate the results, represents the RDR, andthe difference between this derived RDR and the risk-free rate is the riskmargin. Disclosures, including the analysis of profit and the sensitivities,were then presented on the traditional embedded value method. In order tostreamline the process, all amounts disclosed for 2009 reporting have beenpresented using the market-consistent method. This does not impact the level ofembedded value reported, but results in changes in the disclosedsensitivities and in the analysis of profit. Unlike previous reporting periodsthere is no RDR to disclose.

(d) Analysis of Profit

The contribution to operating profit, which is identified at a level which reflects an assumed longer-term level of investment return, arises from three sources:

(i) new business;

(ii) return from in-force business; and

(iii) return from shareholder net worth.

Additional contributions to profit arise from:

(i) variances between the actual investment return in the period and the assumed long-term investment return; and

(ii) the effect of economic assumption changes.

The contribution from new business represents the value recognised at the endof each period in respect of new business written in that period, afterallowing for the cost of acquiring the business, the cost of establishing therequired technical provisions and after making allowance for the cost ofcapital, calculated on opening assumptions.

The return from in-force business is calculated using closing assumptions and comprises:

(i) the expected return, being the unwind of the discount rates over the period applied to establish the value of in-force business at the beginning of the period;

(ii) variances between the actual experience over the period and the assumptions made to establish the value of business in force at the beginning of the period; and

(iii) the net effect of changes in future assumptions, made prospectively at the endof the period, from those used in establishing the value of business in forceat the beginning of the period, other than changes in economic assumptions.

The contribution from shareholder net worth comprises the actual investment return on residual assets in excess of the required capital.

(e) Assumption Setting

There is a requirement under EEV methodology to use best estimate demographicassumptions and to review these at least annually with the economic assumptionsbeing reported at each reporting date. The current practice is detailed below.

Each year the demographic assumptions are reviewed as part of year-end processes and hence were reviewed in December 2009.

The detailed projection assumptions, including mortality, morbidity,persistency and expenses reflect recent operating experience. Allowance is madefor future improvement in annuitant mortality based on experience andexternally published data. Favourable changes in operating experience,particularly in relation to expenses and persistency, are not anticipated untilthe improvement in experience has been observed. Holding company expenses (forthe Chesnara Group such expenses relate largely to listed company functions)are allocated to the UK covered business, except for a relatively small amountof expense, which is assumed to relate to business development functions, toreflect effort expended within the holding company relating to the transactionof life assurance business through the subsidiary companies. Hence the expenseassumptions used for the cash flow projections include the full cost ofservicing this business.The economic assumptions are reviewed and updated at each reporting date basedon underlying investment conditions at the reporting date. The assumed discountrate and inflation rates are consistent with the investment return assumptions.In addition, the demographic assumptions used at December 2009 are consideredto be best estimate and, consequently, no further adjustments are required. Inrespect of the UK Business, the assumptions required in the calculation of thevalue of the annuity rate guarantee on pension business have been set equal

tobest-estimate assumptions.(f) Pension Schemes

In the Swedish Business, where the Group participates in a combined defined benefit and defined contribution scheme, future contributions to the scheme are reflected in the value of in-force business.

4 Assumptions(a) Investment ReturnsInvestment returns are assumed to be equal to the reference rate, as covered innote 3I above. For linked business, the aggregate return has been determined bythe reference rate less an appropriate allowance for tax. UK Business Swedish Business 31 December 31 December 2009 2008 2009 2008 Investment Return 3.8% 3.6% 3.74%* n/a Inflation RPI 2.9% 1.5% 2.0% n/a

* A full swap curve is used: the rate quoted is for a term of ten years and is presented as an indicative rate.

(b) Actuarial Assumptions

The demographic assumptions used to determine the value of the in-force business have been set at levels commensurate with the underlying operating experience identified in the periodic actuarial investigations.

(c) Taxation

Projected tax has been determined assuming current tax legislation and rates continue unaltered, except where future tax rates or practices have been announced.

(d) Expenses

The expense levels are based on internal expense analysis investigations and are appropriately allocated to the new business and policy maintenance functions.

For the UK Business, these have been determined by reference to:

(i) the outsourcing agreements in place with our third-party business process administrators;

(ii) anticipated revisions to the terms of such agreements as they fall due for renewal; and

(iii) corporate governance costs relating to the covered business.

For the Swedish business, these have been determined by reference to:

(i)an expense analysis in which all expenses were allocated to covered and uncovered business, with expenses for the covered business being allocated to acquisition and maintenance activities; and

(ii) expense drivers, being, in relation to acquisition costs, the numberof policies sold during the period and, in relation to maintenance expenses, the average number of policies in force during the period.

The expense assumptions for the UK Business also include the expected future holding company expenses which will be recharged to the worldwide covered business.

No allowance has been made for future productivity improvements in the expense assumptions.

(e) Discount Rate

The reference rate is set by reference to mid swap rates available in the market at the end of the reporting period.

An explicit constant margin is added to the reference rate to cover anyremaining risks that are considered to be non-market, non-diversifiable risks,as there is no risk premium observable in the market. This margin, which is 50basis points for the UK Business and 70 basis points for the Swedish Business,gives due recognition to the fact that:

a) For the UK Business:

(i) the covered business is substantially closed to new business;

(ii) there is no significant exposure in the with profit business, which is wholly reinsured;

(iii) expense risk is limited as a result of the outsourcing of substantially all policy administration and related functions to third-party business process administrators; and

(iv) for much of the life business the Group has the ability to vary risk charges made to policyholders.

b) For the Swedish Business:

(i) the covered business remains open;

(ii) the in-force business is relatively small;

(iii) reinsurance is used to significantly reduce insurance risks; and

(iv) a number of the risks provide diversification benefits within the Chesnara Group, in relation to reinsurance counterparties, market exposures and policyholder populations.

The sensitivity of the value of in-force business to the discount rate beinggreater for the Swedish Business than for the UK Business, the relative marginsprovided by these adjustments is more material (more than twice) for theSwedish Business than for the UK Business, to reflect these different risks. UK Business Swedish Business 31 December 31 December 2009 2008 2009 2008 Reference rate 3.8% 3.6% 3.74%* n/a Non-diversifiable risk 0.5% 0.5% 0.7% n/a Discount rate 4.3% 4.1% 4.44%* n/a

* A full swap curve is used: the rate quoted is for a term of ten years and is presented as an indicative rate.

5 Analysis of shareholders' equity

31 December UK Swedish Other Group 2009 Business Business Activities Total £000 £000 £000 £000Regulated entities Capital 32,042 44,165required 12,123 - Free 40,253 52,590surplus 12,337 - --------- --------- --------- --------- Shareholders' net worth of 72,295 24,460 - 96,755regulated entities Adjustments to shareholder net worth Deferred acquisition - (44,721) - (44,721) costs Financial reinsurance - (5,313) - (5,313) liability Other - 4,299asset / - 4,299 liability adjustments --------- --------- --------- --------- Adjusted 72,295 (21,275) - 51,020shareholder net worth In-force 85,559 112,753 - 198,312value of covered business --------- --------- --------- --------- Embedded 157,854 91,478 - 249,332value of regulated entities Less: amount (4,197) - - (4,197)financed by borrowings --------- --------- --------- --------- Embedded 153,657 91,478 - 245,135value of regulated entities attributable to shareholders Net equity of other Group - (1,048) 18,498 17,450companies --------- --------- --------- ---------- Total 153,657 18,498 262,585shareholders' 90,430 equity ========= ========= ========= ========= Swedish Other Group UK Business Business Activities Total31 December 2008 £000 £000 £000 £000 Regulated entities Capital 35,615 - - 35,615required Free 33,774 - - 33,774surplus --------- --------- --------- --------- Shareholders net worth of 69,389 - - 69,389 regulated entities In-force 84,940 - - 84,940value of covered business --------- --------- -------- --------- Embedded value of 154,329 - - 154,329regulated entities Less: amount (8,358) - - (8,358)financed by borrowings --------- --------- --------- --------- Embedded value of 145,971 - - 145,971regulated entities attributable to shareholders Net equity of other Group - - 36,737 36,737 companies --------- --------- --------- --------- Total 145,971 - 36,737 182,708shareholders' equity ========= ========= ========= =========

The movement in the in-force value of covered business comprises:

UK Swedish Total Year ended 31 Business Business December 2009 £000 £000 £000 Value at beginning 84,940 - 84,940 of period Amount arising on - 95,953 95,953 acquisition Amount credited/ 619 16,800 17,419 charged to operating profit --------- --------- --------- Value at end of 85,559 112,753 198,312 period ========= ========= ========= UK Swedish Total Year ended 31 Business Business December 2008 £000 £000 £000 Value at beginning of 94,007 - 94,007 period Amount charged to (9,067) - (9,067) operating profit --------- --------- --------- Value at end of 84,940 - 84,940 period ========= ========= ========= UKBusiness(i) On 2 June 2005, the Group drew down £21m on a bank loan facility, in order topart fund the acquisition of CWA Life Holdings plc. This effectivelyrepresented a purchase of part of the underlying value in force of CWA by wayof debt finance and it follows that the embedded value of the UK regulatedentity is not attributable to equity shareholders of the Group to the extent ofthe outstanding balance on the loan account at each balance sheet date. Theloan is repayable in five equal annual instalments on the anniversary of thedraw down date, the funds for the repayment effectively being provided by wayof the realisation of the underlying value of in-force business of the coveredbusiness. In accordance with this, £4.2m of the loan was repaid on 2 June 2008and a further £4.2m was repaid on 2 June 2009, leaving principal outstanding atthat date of £4.2m.

(ii) The embedded value of regulated entities comprises the embedded value of the covered business only.

Swedish Business

(i) The adjusted shareholder net worth of the Swedish Business is that of the regulated entity, which includes also the net worth attributable to the

non-covered business within the regulated entity.

(ii) Accordingly, for the Swedish Business, the embedded value of regulated

entities comprises the embedded value of covered business and the value of thenon-covered business of the regulated entity, the latter component being valuedon an IFRS basis. 6 Analysis of profit Year ended 31 UK Swedish December 2009 Business Business Total £000 £000 £000Covered business New business 1,482 783 2,265contribution Return from in-force business Expected return 7,357 1,682 9,039 Experience 4,499 2,060 6,559variances Operating 8,862 (7,405) 1,457assumption changes Return on shareholder (200) - (200)net worth --------- --------- --------- Operating profit 22,000 (2,880) 19,120 Variation from 6,206 7,544 13,750longer-term investment return Effect of economic (12,286) 2,556 (9,730)assumption changes --------- --------- --------- Profit on covered 15,920 7,220 23,140business before tax Tax thereon 11,893 - 11,893 --------- --------- ---------- Profit on covered 27,813 7,220 35,033business after tax ========= ========= Results of non-covered business and of other group companies Profit before tax, 868and exceptional item Exceptional profit arising on acquisition of 54,187Swedish Business Tax 177 --------- Profit after tax 90,265 Non-controlling interest 7 --------- Profit for the period 90,272attributable to shareholders =========

Year ended 31 December 2008

UK Swedish Business Business Total £000 £000 £000 Covered business

New business contribution

715 - 715 Return from in-force business Expected return 10,445 - 10,445 Experience variances 9,166 -

9,166

Operating assumption changes 4,590 -

4,590

Return on shareholder net worth 605 - 605 --------- --------- ---------- Operating profit 25,521 - 25,521 Variation from longer-term investment return (16,831) - (16,831) Effect of economic assumption changes 6,951 - 6,951 --------- --------- --------- Profit on covered business before tax 15,641 - 15,641 Tax thereon (1,376) - (1,376) --------- --------- --------- Profit on covered business after tax 14,265 - 14,265 ========= ========= Results of non-covered

business and of other group

companies Profit before tax, 385 Tax 176 Profit after tax attributable to shareholders 14,826 =========

The results of the non-covered business and of other Group companies before taxand before exceptional item are presented as 'other operating income' in theconsolidated income statement. For UK Business, the result of the coveredbusiness includes the expenses of the holding company, with an equal andopposite adjustment to the result of the non-covered business and of otherGroup companies.Included within the effect of economic assumption changes in respect of the UKBusiness for the year ended 31 December 2009 is an amount of £5,620,000 being areduction of pre-tax profit relating to a change in the basis of taxation ofoverseas dividends. This change leads to a reduction in the estimate of futuredeductions for taxation from policyholder linked funds and is matched by abroadly offsetting reduction in the estimate of future tax payable. This is asignificant component of the tax credit of £11,893,000 in respect of tax forthe UK Business for the year ended 31 December 2009 as shown above.

7 Sensitivities to alternative assumptions

The following tables show the sensitivity of the embedded value as reported at31 December 2009, and of the new business contribution of the Swedish Businessfor the five months then ended, to variations in the assumptions adopted in thecalculation of the embedded value. Sensitivity analysis is not provided inrespect of the new business contribution of the UK Business for the year ended31 December 2009 as the reported level of new business contribution is notconsidered to be material (see Note 3a) above). It largely relates toguaranteed bond business, where a close asset/liability matching approachleaves values broadly insensitive to changes in experience. New Business Embedded Value Contribution UK Swedish Swedish Business Business Business £m £m £m Published value as at 153.7 90.4 0.831 December 2009 Changes in embedded value/new business contribution arising from: Economic sensitivities 100 basis point (3.9) (1.5) (0.1)increase in yield curve 100 basis point 2.5 1.4 0.1reduction in yield curve 10% decrease in equity (3.5) (6.4) (0.3)and property values Operating sensitivities 10% decrease in 2.1 5.4 0.3maintenance expenses 10% decrease in lapse 2.5 8.4 0.5rates 5% decrease in mortality/morbidity rates Assurances 1.2 0.4 0.1 Annuities (0.9) n/a n/a Reduction in the required capital to statutory minimum 0.1 0.1 -

The published value of the new business contribution relating to the Swedish Business and the related changes due to the stated sensitivities are for a five-month post-acquisition period.

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

Economic sensitivities

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

ii) 100 basis point reduction in the yield curve. The reference rate is reduced by 1%. The rate of future inflation has also been reduced by 1% so that real yields remain constant; and

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

Operating sensitivities

i) 10% decrease in maintenance expenses, giving rise to, for example, a base assumption of £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; and

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

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

Excluding the sensitivities relating to a 100 basis point increase andreduction in the yield curve, both of which are presented, the sensitivities tochanges in the assumptions in the opposite direction will result in changes ofsimilar magnitude to those shown in the above table but in the oppositedirection. 8 Reconciliation of shareholders' equity on the IFRS basis to shareholders'equity on the EEV basis Other Swedish UK Group Business Business Activities Total £000 £000 £000 £000 31 December 2009 Shareholders' 47,696 93,561 18,498 159,755 equity on the IFRS basis Adjustments Deferred acquisition costs Investment (1,447) (7,173) - (8,620) contracts Deferred - 12,319 - 12,319 income Adjustment to provisions on investment contracts, net of - (15,038) - (15,038) amounts deposited with reinsurers Adjustments to provisions on insurance - (238) - (238) contracts, net of reinsurers' share Acquired (61,675) (18,282) - (79,957) in-force value Acquired (2,336) - - (2,336) value of customer relationships Adjustment to (5,073) - - (5,073) borrowings Deferred tax 512 2,949 - 3,461 --------- --------- --------- --------- Shareholder (22,323) 68,098 18,498 64,273 net worth Value of 112,753 85,559 - 198,312 in-force business --------- --------- --------- --------- Shareholders' 90,430 153,657 18,498 262,585 equity on the EEV basis ========= ========= ========= ========= Shareholder net worth comprises: Shareholder (21,275) 72,295 - 51,020 net worth in regulated entities Shareholders' net equity in other Group companies (1,048) - 18,498 17,450 Debt finance - (4,197) - (4,197) --------- --------- --------- --------- Total (22,323) 68,098 18,498 64,273 ========= ========= ========= ========= Other Swedish UK Group Business Business Activities Total £000 £000 £000 £000 31 December 2008 Shareholders' equity on the - 89,631 36,737 126,368 IFRS basis Adjustments - Deferred acquisition - costs Investment contracts - (8,047) - (8,047) Deferred income - 13,705 - 13,705 Adjustment to provisions on investment contracts, net of - (15,863) - (15,863) amounts deposited with reinsurers Adjustments to provisions on insurance - (610) - (610) contracts, net of reinsurers' share Acquired in-force - (21,020) - (21,020)value Deferred tax - 3,235 - 3,235 --------- --------- --------- ---------- Shareholder - 61,031 36,737 97,768 net worth Value of - 84,940 - 84,940in-force business --------- -------- --------- --------- Shareholders' equity on the - 145,971 36,737 182,708 EEV basis ========= ========= ========= ========= Shareholder net worth comprises: Shareholder net worth in - 69,389 - 69,389 regulated entities Shareholders' net equity on other Group companies - - 36,737 36,737 Debt finance - (8,358) - (8,358) --------- -------- --------- --------- Total - 61,031 36,737 97,768 ========= ========= ========= ========= 9 Exceptional itemThe profit arising on acquisition of a subsidiary company is presented as anexceptional item in the consolidated income statement. It arises on thepurchase, on 23 July 2009, of 100% of the issued share capital of ModernaF¶rs¤kringar Liv AB ('Moderna'), comprising the Swedish Business, and ismeasured as the difference between the purchase consideration of SEK250,000,000 (£19,956,000) and the embedded value of the Moderna Group at thepurchase date, being SEK 917,356,510 (£74,143,000), which was established inaccordance with the methodology set out in Notes 2 to 4 of these supplementaryfinancial statements. 10 Earnings per share Year ended Year ended 31 December 31 December 2009 2008 p p Basic earnings per share

Based on profit for the period attributable to

shareholders 88.94 14.25 --------- ---------

Based on profit for the period attributable to shareholders before exceptional item 35.55 14.25 --------- --------- Diluted earnings per share

Based on profit for the period attributable to

shareholders 88.94 14.25 --------- ---------

Based on profit for the period attributable to shareholders before exceptional item 35.55 14.25 --------- ---------

11 Foreign exchange translation reserve

A foreign exchange translation reserve arises on the translation of thefinancial statements of the Swedish Business, the functional currency of whichis the Swedish Krona, into pounds sterling, which is the presentationalcurrency of the Group financial statements. Items in the consolidated incomestatement are translated at the average exchange rate of SEK11.5594= £1 rulingin the reported period, while all items in the balance sheet are stated at theclosing rates ruling at the reported balance sheet date, being SEK11.5305 = £1at 31 December 2009. The differences arising on translation using thismethodology are recognised directly in shareholders' equity within the foreignexchange translation reserve.The reported embedded value is sensitive to movements in the SEK:£ exchangerate. Had the exchange rate as at 31 December 2009 been 10% higher atSEK12.6836 = £1, then the reported embedded value of £262.6m as at 31 December2009 would have been reported as £254.4m.

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