Chesnara Regulatory News (CSN)

Chesnara plc

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

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

Financial Highlights

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

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

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

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

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

· Group solvency ratio remains very robust at 194%

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

Operational Highlights

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

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

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

· Group's regulatory compliance record remains robust

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

Statement regarding 2014 UK Budget

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

Graham Kettleborough, Chief Executive said:

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

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

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

The Board approved this statement on 27 March 2014.

Enquiries

Graham Kettleborough, Chief Executive, Chesnara plc - 07799 407519

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

Notes to Editors

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

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

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

2013 HIGHLIGHTS Note 1

FINANCIAL

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

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

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

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

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

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

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

OPERATIONAL

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

· Good regulatory compliance record continues.

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

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

Notes

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

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

(i) Gross cash generation, defined as:

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

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

(c) less cash utilised by Parent Company operations.

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

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

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

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

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

1. Maximise value from the in-force books

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

2. Enhance value through new business

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

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

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

3. Acquiring Life and Pension Businesses

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

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

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

4. Maintain Strong Solvency position

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

5. Adopt Good Regulatory Practice at all times

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

Risk Management

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

Pension reforms

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

Outlook

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

Peter Mason

Chairman

27 March 2014

INTRODUCTION

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

· How we have performed generally

· Key developments or challenges

· Key performance indicators

· Risks associated with each objective

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

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

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

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

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

1. Maximise value from the in-force book

2. Enhance value through new business

3. Acquire Life and Pension businesses

4. Maintain a strong solvency position

5. Adopt good regulatory practice at all times

MAXIMISE VALUE FROM THE IN-FORCE BOOK - UK

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

Highlights

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

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

· 5% growth in funds under management

· Positive EEV development

· Strong fund performance

· Improved policy attrition levels

Review of the year

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

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

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

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

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

Unit-linked funds under management

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

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

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

ii) received and invested premiums; and

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

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

Funds under management

Fund performance (annual return)

Annual policy attrition rate, based on policy count

Risks associated with the strategic objective

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

MAXIMISE VALUE FROM THE IN-FORCE BOOK - SWEDEN

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

Highlights

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

· Positive EEV development

· Fund performance improved significantly during 2013

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

Review of the year

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

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

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

· New business;

· Policy attrition;

· Fund performance; and

· Premium income.

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

New business

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

Policy attrition

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

Policy attrition trend analysis

Policy attrition 2013 vs. 2012

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

Fund performance

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

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

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

Relative fund performance

Premium income

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

Total premium income (£m)

Risks associated with the strategic objective

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

ENHANCE VALUE THROUGH NEW BUSINESS - SWEDEN

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

Highlights

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

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

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

· The development of innovative product concepts continues.

Review of year

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

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

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

New business premium income

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

Trend analysis of new business premium income (£m)

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

Market Share

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

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

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

Trend analysis of Movestic's share of new business

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

(excluding 'tick the box' market)

Development of innovative product concepts

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

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

Risks associated with the strategic objective

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

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

ACQUIRE LIFE AND PENSIONS BUSINESSES

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

Highlights

· Successful acquisition of Protection Life for £39.3m.

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

· General increase in acquisition market activity in the sector.

Review of the year

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

Protection Life

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

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

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

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

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

Acquisition process and approach

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

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

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

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

Risks associated with the strategic objective

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

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

Acquisition Outlook

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

MAINTAIN STRONG SOLVENCY POSITION - UK AND SWEDEN

Objectives

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

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

· delivering to the dividend expectations of our shareholders.

· potential acquisition opportunities.

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

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

Highlights

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

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

Regulatory capital at 31 December 2013

Notes:

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

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

o Group - 100% of minimum regulatory capital resources requirement

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

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

o Movestic - 150% of the capital resources requirement

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

Group solvency (IGD)

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

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

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

Solo solvency

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

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

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

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

Solvency II

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

ADOPT GOOD REGULATORY PRACTICE AT ALL TIMES - UK AND SWEDEN

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

UK

· Regulation and Legal

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

· FSA

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

· PRA

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

· FCA

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

· Solvency II

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

· ABI Retirement Code

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

· Treating Customers Fairly (TCF)

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

· Complaints

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

· Policyholder Investment Funds

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

SWEDEN

· Solvency II

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

· Customer information

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

· Pensions portability

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

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

Summary of each KPI

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

What is it?

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

Why is it important?

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

Highlights

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

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

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

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

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

Risks

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

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

What is it?

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

Why is it important?

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

Highlights

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

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

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

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

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

Risks 

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

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

What is it?

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

The principal underlying components of the EEV result are:

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

· Value added by the writing of new business.

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

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

Why is it important?

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

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

Highlights

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

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

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

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

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

Risks

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

EEV £376.4m (2012: £311.1m)

What is it?

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

Why is it important?

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

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

Highlights

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

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

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

· Good balance of EEV across the operating segments.

· Good product diversification within the value in-force.

Risks 

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

Further analysis of each KPI

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

Executive summary

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

Stable core

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

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

Variable element

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

Growth operation

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

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

IFRS results

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

Consolidation adjustments

The adjustments arising on consolidation are analysed below:

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

CA

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

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

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

S&P

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

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

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

PL

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

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

Movestic

Cash generation £36.7m (2012: £36.1m)

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

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

Highlights

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

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

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

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

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

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

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

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

EEV result

Summary

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

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

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

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

Profit after tax movement

Year ended 31 December 2012 to year ended 31 December 2013

Analysis of the EEV result in the year by business segment

Analysis of the EEV result in the year by earnings source

Economic conditions

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

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

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

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

New business contribution

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

Experience variances

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

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

Operating assumption changes

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

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

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

Gain on acquisition of Protection Life

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

Uncovered business and other group activities

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

The Movestic result is impacted by:

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

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

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

EEV movement 31 December 2012 to 31 December 2013:

EEV movement 31 December 2011 to 31 December 2012:

* stated before exceptional items

Summary

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

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

· Exceptional items, such as:

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

o Modelling adjustments;

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

· Dividends that are paid in the year.

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

Net of tax profit

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

Exceptional surplus on acquisition

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

Effect of modelling adjustments

· Year ended 31 December 2013

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

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

· Year ended 31 December 2012

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

Movestic

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

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

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

UK

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

Foreign exchange reserve movements

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

Dividends paid

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

Analysis of EEV

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

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

Analysis of VIF at 31 December 2013 - £262.2m

Analysis of EEV at 31 December 2013 - £376.4m

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

Highlights

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

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

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

Analysis of VIF by policy type

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

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

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

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

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

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

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

OBJECTIVES

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

1. Maintain solvency targets

2. Meet the dividend expectations of shareholders

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

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

5. Maintain the Group as a going concern.

how we deliver to our objectives

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

1. Monitor and control risk & solvency

2. Project key financial variables

3. Responsible investment management

outcomes

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

1. SOLVENCY - Group Solvency Ratio of 194%

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

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

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

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

How we Deliver our Financial Management Objectives

1. Monitor & Control RISK & SoLVENCY

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

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

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

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

These calculations are monitored continuously.

2. LONGER-TERM PROJECTIONS

Long term projections are performed covering, as a minimum:

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

(ii) Chesnara holding company cash flows;

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

(iv) European embedded value.

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

In addition:

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

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

3. RESPONSIBLE INVESTMENT Management

Investment management

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

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

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

OUTCOMES FROM IMPLEMENTING OUR FINANCIAL MANAGEMENT OBJECTIVES

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

1. Solvency

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

2. Shareholder returns

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

Dividend flows from CA plc to Chesnara are utilised in the first instance for the repayment and servicing of debt, coupled with bearing central corporate governance costs which cannot be fairly attributed to the long-term insurance funds, and which arise largely in connection with Chesnara's obligations as a listed company.

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

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

3. Capital structure

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

These flows are used:

(i) to repay our debt obligations;

(ii) to support dividend distributions to shareholders; and

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

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

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

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

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

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

4. Liquidity and policyholder returns

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

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

5. Maintain the Group as a going concern

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

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

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

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

Consolidated Statement of Comprehensive Income

Consolidated Balance Sheet