Chesnara Regulatory News (CSN)

Chesnara plc

A year of solid delivery on our core strategic objectives

Chesnara today reported results for the year ended 31 December 2014. The Group remains committed to delivering competitive returns to both its shareholders and policyholders, and continues to focus on:

· the core business of maximising value from the in-force life and pensions book.

· value enhancement through writing profitable new business in Sweden.

· making further life and pensions acquisitions where they meet stringent assessment criteria.

· Gross cash generation of £42.6m (2013: £49.7m). Cash is generated primarily from the UK business, which has remained resilient to falling bond yields in the year.

· Net cash generation of £71.1m (2013: £36.7m). Net cash generation includes a benefit of £27.4m arising from the Part VII transfer of Protection Life.

· 2.9% increase in total dividend compared with 2013. Recommended final dividend of 11.98p per share results in total dividend for the year of 18.40p per share (2013: 17.88p per share). 2.9% increase represents the tenth successive rise in annual dividends.

· EEV of £417.2m (2013: £376.4m). Growth of 10% driven by earnings of £44.2m and December 2014 equity raise of £34.5m, offset by dividend payments of £20.7m and Swedish Krona exchange losses of £17.3m.

· IFRS profit before tax of £28.8m (2013: £60.6m). Reduction compared with 2013 primarily driven by significant reduction in Government bond yields over the year.

· EEV earnings net of tax of £44.2m (2013: £82.7m). Strong 2014 result shows continued value emergence, albeit at a lower level than 2013, largely due to impact of fall in Government bond yields in the year.

· 23.6% increase in Movestic EEV new business contribution to £8.9m. Increase driven by a combination of higher volumes of new policies sold and improved margins.

· Group solvency ratio increased to 284% (2013: 194%). Increase is driven by regulatory earnings and equity raise. An element of the increase will reverse on completion of the Waard Group acquisition in 2015.

· Subsidiary solvency ratios remain strong and above internal targets. CA plc at 176% (2013: 218%); Movestic at 376% (2013: 311%).

Value from the in-force book

· Part VII transfer of Protection Life into Countrywide Assured completed. Transfer completed in line with planned timeframe and has delivered expected capital efficiencies. Transfer enabled a one-off cash transfer of £27.4m.

· Extension of core outsource contract with HCL. Contract extension has enhanced operational and financial security of the Group.

New business

· Management actions taken to enhance the profitability of new business. Enabled by the delivery of new policyholder funding structures and "white labelling" initiatives.

Acquisitions

· £34.5m of equity raised following announcement to make value-adding Waard Group acquisition. Waard Group is strongly capitalised and should generate attractive financial returns. The acquisition adds a third territory and provides a platform that will enable further acquisitions in the Dutch and continental European markets. It remains subject to Dutch regulatory approval.

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

Culture and values

· Group's regulatory compliance record remains robust.

John Deane, Chief Executive said:

'Chesnara has a very clear strategic focus: delivering value from the in-force book, writing profitable new business and making strategic acquisitions in the Life and Pensions sector. 2014 has seen delivery in all three areas, particularly the Part VII transfer of Protection Life, improvements in new business profitability in Sweden and our acquisition of the Waard Group. Our results have been delivered against a headwind of low bond yields.

Having completed the orderly handover from Graham Kettleborough I look forward to building on the past successes of the business with a strong and dedicated team for the benefit of our policyholders, investors, staff and other stakeholders.

In light of the operational achievements and good financial results in the year, the Board is therefore pleased to recommend a final dividend of 11.98p per share, resulting in a full year dividend increase of 2.9% over 2013.'

The Board approved this statement on 30 March 2015.

Enquiries

John Deane, Chief Executive, Chesnara plc - 01772 972079

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. On 31 December 2014 the PL business transferred into CA plc. 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.

Furthermore, the Company announced on 3 December 2014 its intention to purchase the Waard Group in the Netherlands for an initial consideration of £55.1m, financed by a successful share placing of £35.7m (£34.5m after costs) and cash reserves. Further details are available on the Company's website (www.chesnara.co.uk).

2014 HIGHLIGHTS Note 1

£28.8M IFRS PRE-TAX PROFIT

IFRS pre-tax profit for the year ended 31 December 2014 of £28.8m (year ended 31 December 2013: £60.6m).

£42.6M GROSS CASH GENERATION

Gross cash generated in the year of £42.6m (year ended 31 December 2013: £49.7m).

£40.8M INCREASE IN EEV TO £417.2M 

Increase in EEV from £376.4m at 31 December 2013 to £417.2m at 31 December 2014, stated after dividend distributions of £20.7m, and new equity of £34.5m in the year.

£44.2M EEV EARNINGS AFTER TAX

EEV earnings net of tax of £44.2m (year ended 31 December 2013: £82.7m, before modelling adjustments).

£8.9M MOVESTIC EEV NEW BUSINESS CONTRIBUTION

Movestic has generated a new business contribution of £8.9m in the year (year ended 31 December 2013: £7.2m), representing an increase of 23.6% year on year.

284% GROUP SOLVENCY

Strong Insurance Group Directive solvency cover of 284% (31 December 2013: 194%), stated after the impact of £34.5m of new equity raised during the year.

2.9% FULL YEAR DIVIDEND INCREASE

Total dividends for the year increased by 2.9% to 18.40p per share (6.42p interim and 11.98p proposed final). This compares with 17.88p per share in 2013 (6.25p interim and 11.63p final).

ANNOUNCEMENT TO ACQUIRE THE ENTIRE SHARE CAPITAL OF THE WAARD GROUP

During December 2014 Chesnara announced its intention to purchase the entire share capital of the Waard Group which will add further value to the Group.

£34.5M OF EQUITY RAISED TO FUND THE WAARD GROUP ACQUISITION

During December 2014 the Group issued £34.5m of new equity share capital (stated after issue costs) to support the acquisition of the Waard Group, due to complete in 2015. This has contributed to an increase in Group solvency at 31 December 2014. Waard Group numbers will be reported once the acquisition has completed.

PART VII TRANSFER OF PROTECTION LIFE INTO CA PLC

In line with our plans the insurance business of Protection Life was successfully transferred into Countrywide Assured plc on 31 December 2014 under Part VII of FSMA 2000.

EXTENSION OF CORE OUTSOURCE CONTRACT WITH HCL

We have extended our core outsource contract with HCL which ensures continuity of service and certainty of cost over a further 10 year period.

MANAGEMENT ACTIONS TAKEN TO ENHANCE THE PROFITABILITY OF NEW BUSINESS

Revised funding structures, including "white-labelling" initiatives, delivered during the year, contributing to a 17% increase in new business margins.

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.

"During 2014 there have been significant developments to the Chesnara Group. In particular we have announced the acquisition of the Waard Group in the Netherlands. Whilst the deal offers attractive returns in terms of both cash generation potential and embedded value growth, perhaps the most significant aspect is the opportunity we see to repeat the ongoing success of the UK consolidation model in a new territory. As always the ongoing development of the Group's acquisition strategy will never be at the expense of ensuring we continue to maximise the value emerging from our existing business and doing so in a responsible manner. In light of this, I am particularly pleased to report continued strong financial and regulatory performance in the year across all our businesses."

I start my Chairman's statement by reviewing how Chesnara has delivered against its three core strategic objectives and how it has done so remaining true to its well established culture and values of treating customers fairly and adopting a robust approach to regulatory compliance.

Maximise value from the in-force book

Despite generally adverse investment market conditions, in particular a relatively sharp reduction in the yield curve, the UK in-force book has continued to provide a reliable and resilient source of cash. The "variable" element of our financial model, namely S&P, has been adversely affected by a reduction in the yield curve, as would be expected, such that the increased exposure to policy guarantees has resulted in a cash strain. Reassuringly the more stable element of the financial model, consisting of CA, CWA and Protection Life, has generated levels of surplus broadly in line with expectations. Also, during the year there have been two key developments which will have a positive impact in terms of the emergence of value from the existing book in the future. We have extended our core outsource contract with HCL which ensures continuity of service and certainty of cost over a further 10 year period. Also, we have migrated the actuarial services that HCL used to provide to Towers Watson. As a more specialist actuarial operation, Towers Watson will offer a more flexible solution better suited to respond to future reporting and capital management requirements.

The embedded value of Movestic has increased during the year. However, this increase has been dampened by the depreciation of the Swedish Krona against Sterling during 2014.

Cash available for distribution

2014: £71.1m*

2013: £36.7m

*including Part VII impact of £27.4m

Enhance value through new business

New business profits in Movestic have continued to increase during the year. At the 2014 level of new business profit of £8.9m (2013: £7.2m), I believe that, although we primarily retain a closed book consolidation focus, the franchise value of our Swedish new business operation has become a significant aspect to the valuation of the Chesnara Group.

Movestic new business contribution in 2014

£8.9m

2013: £7.2m

Acquiring Life and Pension Businesses

Before I comment on the recently announced acquisition of the Waard Group in the Netherlands I would like to provide an update on the status of the acquisition of PL Ltd. The business has contributed significantly to the cash generation of the Group. IFRS pre-tax profits of £5.5m are broadly in line with expectations. In addition, the Part VII transfer was completed in December and the resulting capital efficiencies will enable a one-off cash transfer of £27.4m to Chesnara plc.

During December we announced our intention to acquire the Waard Group in the Netherlands. The move into a third geographical market received strong investor support. The positive equity raise process was consistent with the level of potential we see in the acquisition in its own right but also the strategic opportunity arising from entering a new territory in which closed book consolidation has yet to reach levels historically seen in the UK.

Our market intelligence suggests significant market consolidation potential in the Netherlands and we are pleased to be in a position to apply our acquisition and consolidation expertise, together with Waard Group management's local knowledge, in the Dutch market.

Investment proposition

The strong performance referred to above has resulted in continued strong returns to shareholders. The results have enabled us to continue our attractive dividend strategy whilst also ensuring we retain sufficient cash resources to support our growth strategy. The effective balance between dividend payments and the retention of capital to invest in acquisitions has been a key reason why Chesnara has out performed the FTSE 350 higher yield index.

Chesnara culture and values

Delivery of our objectives is underpinned by our well established culture and values which are based on an ethos of responsible management. All our business decisions are made so as to ensure policyholders are treated fairly and both policyholders and shareholders are not exposed to levels of risk beyond our risk appetite. More information about the Group's culture and values is included within the Business Review below.

Before I move on to consider the outlook for the Group I would like to take the opportunity to comment on the recent change in CEO. Graham Kettleborough had been CEO for 10 years from the initial listing of Chesnara plc. He has been at the heart of the Chesnara success story to date and I would like to thank him for his significant contribution to the Group. During that period shareholders, many of whom have been loyal investors from day one, have received extremely competitive total returns. As importantly however, shareholder returns have never been delivered to the detriment of ensuring policyholders are treated fairly and the Group has continued to be highly compliant in all regulatory matters.

It is easy to talk about matters such as culture and values but in reality it is only possible to maintain standards if the senior decision makers truly share the same cultural values. With this in mind a key priority in appointing Graham's replacement was to ensure any new CEO had a strong cultural fit and shared values. I strongly believe that following a rigorous recruitment process, Chesnara has managed to achieve this key objective of cultural continuity.

John Deane was appointed as Group CEO on 1 January 2015 and I am confident he will build upon all that is good about Chesnara and also drive it forward to ensure we take maximum advantage of the opportunities the strategic move into the Netherlands will present.

In addition to providing momentum to our new venture in the Netherlands John has demonstrated from a very early stage that sound governance remains at the heart of any long term success. He has developed a revised Governance model that adopts best practice, implemented in a pragmatic fashion. This will ensure any future development of the Chesnara Group continues to be built upon solid regulatory, risk appetite and culturally responsible foundations.

Regulatory

About the time of writing my statement in last year's Report & Accounts the UK Government had just announced proposed changes to the annuity market. Shortly after, the FCA announced its intention to undertake a full review of legacy closed book operations. Our early assessment of the potential impact of these two issues was that Chesnara would not be materially affected. We have worked to support the FCA legacy review and our assessment of these two issues remains unchanged. That said, the fact is that until the FCA concludes on the scope of the legacy review a degree of uncertainty of impact remains and management will manage the risk through the general governance and risk management framework.

Outlook

The acquisition of the Waard Group creates a three territory business model. This gives Chesnara wider reach, optionality and flexibility thereby improving the outlook for the continuation of our successful acquisition strategy. In addition to the benefits of a wider target market, my confidence in our acquisition strategy is underpinned by three key factors:

i) Strong financial foundations

We have the financial strength to fund future acquisitions. In particular we are modestly geared, have healthy solvency margins and have own cash available. We also continue to receive strong support from shareholders and lending institutions.

ii) Good regulatory track record

We continue our good regulatory track record in the UK and Sweden and there are positive signs and a strong intent to build similarly good relations with regulators in the Netherlands. Strong regulatory focus will mean regulators see Chesnara as a responsible buyer who will ensure the interests of policyholders are protected.

iii) Expertise and experience

Our recent track record demonstrates that the management team has the required drive and capabilities to deliver all aspects of successful acquisitions. The management team of the Waard Group will further enhance this capability into the Dutch market. We demonstrate diligent assessment of the risks and benefits of any opportunity, we have the commercial experience to effectively price for risk and importantly we have the technical and operational expertise to integrate acquired businesses into the Chesnara Group, thereby ensuring risks are managed and the benefits emerge as required.

In addition to my positive assessment of the acquisition strategy, the robustness of the UK in-force business and the continued growth in the Movestic new business results both contribute to my overall conclusion that the Chesnara Group is well positioned to continue to provide value to our shareholders and policyholders.

Peter Mason

Chairman

30 March 2015

INTRODUCTION

The Business Review is structured to report on how we have performed against each of our three stated strategic objectives and our culture and values. Where relevant the review reports separately for our UK and Swedish operations. The review focuses on:

· How we have performed generally

· Key developments or challenges

· Key performance indicators

· Risks associated with each objective

Our strategic objectives, culture and values are reassessed on an annual basis as part of the Group business planning process. Their continued relevance 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.

In the 2013 Report & Accounts we reported five core strategic objectives. This year, to reflect the way the Group manages itself, the objectives "Maintain a strong solvency position" and "Adopt good regulatory practice at all times" have been re-presented to be included within our overall Chesnara culture and values. This better reflects the fact that these are a "given" and underpin the delivery of our three core strategic objectives.

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, and its future development, are included in Section C - Corporate Governance of the 2014 Annual Report & Accounts, including a governance overview from the Chairman.

1. Maximise value from the in-force book

2. Enhance value through new business

3. Acquire Life and Pension businesses

Chesnara culture and values

MAXIMISE VALUE FROM THE IN-FORCE BOOK - UK

"Strong cash generation continues despite adverse investment market conditions. Operational cash is complemented by exceptional cash emerging from the Part VII transfer of Protection Life."

Highlights

· £50.9m of gross cash generation (2013: £54.1m), excluding Chesnara parent company cash.

· £27.4m exceptional cash release due to the Part VII transfer of PL into CA plc, contributing to net cash generation of £79.4m (2013: £41.1m).

· Funds under management resilient to book run off.

· Positive EEV development.

· Solid 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. In light of this we are pleased to have extended our outsource contract with HCL for a further 10 year period. The financial terms are in line with revised expense assumptions recognised in 2013. We have also transferred the actuarial services that HCL used to provide to Towers Watson. As a specialist actuarial service consultancy Towers Watson are better placed to respond to the changes imposed by business development and regulatory change.

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. All our primary managed funds have outperformed benchmarks during 2014.

£50.9m (2013: £54.1m) of gross cash

generated from business as usual operations.

Gross cash generation during the year has been remained strong in light of generally adverse investment market conditions. This is primarily due to the core product based surpluses being sufficiently resilient to market conditions to compensate for a reduction in cash emerging from the more volatile business segment, namely S&P. This is consistent with the fact that the S&P surplus is sensitive to investment market performance, which was generally adverse during the year.

"During the year we have progressed the integration of Protection Life which will ensure we maximise the potential value from the acquisition. In particular, the successful Part VII transfer has created a more capital efficient model thereby enabling a one-off significant cash transfer."

Unit-linked funds under management

The levels of unit-linked funds under management continue to support the on-going level of profitability of the UK business, 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.

Unit-linked funds under management remaining constant at £2.3bn despite book run off.

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

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 falls 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 by 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 they to occur. Conversely, increasing markets and yields will positively affect the results. Close management of the portfolio backing these liabilities continues.

Increased lapses on cash generative products are also a risk to the delivery of this strategic objective. We manage this risk through:

· Close monitoring of persistency levels.

· Active investment management to aim to deliver competitive policyholder investment returns.

· Outsourcer service levels that ensure strong customer service standards.

· Customer retention processes.

MAXIMISE VALUE FROM THE IN-FORCE BOOK - SWEDEN

"Following a favourable investment market performance, good new business levels and the impact of transfers creating a net inflow, Movestic's funds under management have increased by 23.0% during 2014."

Highlights

· Strong growth in funds under management; increase of 23.0% during 2014.

· Positive EEV development.

· Stable policy attrition levels.

· Competitive fund performance.

· Transfer-in levels exceed transfer outflows thereby reversing a recent trend for net outflows.

· Krona depreciation against Sterling in the year reduces reported results.

Review of the year

During 2014 continued IFA support, good service and support and strong investment performance led to increasing new sales, a large amount of transferred in business and a 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 continuing positive ratings. This has resulted in the further growth in the Pensions and Savings business on all key measures including funds under management, profitability and policy numbers.

The Life & Health book of business remains stable and the portfolio continues to deliver high quality in terms of claims development with a gross loss ratio of 56.5% for 2014 (2013: 50.3%). An element of the increase in loss ratio is due to increasing claims on health contracts. As a result we no longer write new health business.

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, as illustrated by the table below:

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

Policy attrition levels during 2014 have been relatively stable. The most significant measure is the level of pension transfers. Pension transfers out have improved. The levels experienced are deemed to be an inherent feature of the broader dynamics of the IFA market, rather than being a direct reflection of any Movestic specific issues. In light of this, the embedded value assumes no material improvement in persistency levels in the future. Management continually seeks to improve service levels, with a view to positively impacting the longer term persistency levels. Any positive impact will only be recognised if improvements are seen in actual attrition rates.

Despite there being only modest improvements in transfer-out levels, the ratios of transferred-in business to transferred out has improved further during 2014 to an extent that transfer inflows now exceed outflows.

The ratio of transferred-in business to transferred-out business has reached a milestone during 2014 in that transfers created a net inflow of funds during the year.

Policy attrition trend analysis

Policy attrition 2014 vs. 2013

Fund performance

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. Activity during 2014 included the development of a Movestic sustainability fund which is deemed to be an attractive investment proposition in light of the strong ecological political agenda in Sweden. Three new "white label" Movestic funds were also launched during the year together the "Movestic Sustainability Portfolio", which is suitable for customers who wish to draw down money to fulfil their retirement needs.

The relative fund performance measure (see table below) focuses on the number of funds under or over performing their relevant indices. It does not recognise the level of over or under performance nor does it reflect the relative size of each fund. 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 competitively during 2014 when compared with our peer group, 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 (SEKm):

Risks associated with the strategic objective

There remains a risk from high levels of lapses. It is 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 ongoing 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 customers and to Movestic in terms of its market position with other more traditional competitors.

Profit emerging from the in-force book is dependent upon the size of the funds under management. Adverse investment market conditions would therefore adversely impact this strategic objective.

From a Group perspective we are exposed to foreign currency fluctuations which impacts the Sterling value emerging from the Swedish operations.

ENHANCE VALUE THROUGH NEW BUSINESS - SWEDEN

"New business profits have increased further in 2014 as the result of continued improvement in IFA support together with an improvement in average margins."

Highlights

· Modest increase in new business volumes compared with 2013.

· Improved average profit margins despite increasingly competitive market conditions.

· The development of innovative product concepts continues.

Review of year

After a successful 2013, growth in new business has continued in 2014 with continued support being provided by the IFA market. The business is deemed to have reached a realistically sustainable level of new business volumes and hence focus in the year has partly been on developing products and fund commercial structures so as to increase the average profitability of the new business written. The 17% increase in gross new business margin (before acquisition costs) compared to 2013 illustrates the rewards from management's focus on profitability.

The approach taken by Movestic to focus on profitability and sustainability rather than having an inappropriate expectation of volume growth beyond a sensible natural level for the size of the business and the market competition, is very much in accordance with the Chesnara Group strategy regarding writing new business. It is very reassuring to see Movestic demonstrate how this sensible approach can continue to generate significant new business franchise value in the Group.

New business premium income

As expected the strong growth in new premium income in 2013, which was a year of recovery, has not continued in 2014. Volumes have, however, continued to increase, albeit at a more sustainable rate. They are in line with plan and are deemed to be positive in context of the market size and the scale of the Movestic operation. More importantly the volume is sufficient to provide a competitive return on capital and to create significant franchise value for the Chesnara Group.

The quarterly trend analysis shows a relatively marked reduction in the second half of 2014. This is partly a reflection of the general seasonality of new business levels and the inherent variability in new business over short timeframes. In addition, during the second half of 2014 there has been a general market shift from unit linked products to more traditional products offering more certainty of returns. Whilst in the short term any preference for the benefits of more traditional contracts puts an inevitable strain on Movestic's sales, the view remains that unit linked investments will become increasingly attractive over time as the sustainability of the returns being offered on traditional contracts becomes unviable.

Trend analysis of new business premium income (£m)

Market Share

The market share of our specific target market, namely the company paid unit linked market was 12.5% for 2014. This remains above our internal benchmark expectation for a company of Movestic's scale in relation to the scale of the market competition.

The downturn in the second half of the year is not reflective of any systematic concerns or deficiencies in the product offering. The second half results are also slightly understated as a result of a change in how Movestic interfaces with a particular broker leading to a tranche of new business being omitted from our Q4 sales volume submission. This was solely a market share reporting issue with no implications on policy processing and accounting routines.

Trend analysis of Movestic's share of new business

Movestic's share of new unit-linked company paid pension business year on year (excluding 'tick-the-box' market)

(excluding 'tick the box' market)

Development of innovative product concepts and margin enhancements

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. During 2014 there has been significant activity in this including the launch of three new funds white labelled as Movestic funds and the introduction of a Movestic Sustainability portfolio. The benefits of the new "white labelled" funds, enabled through the set-up of a new SICAV (fund structure) during the year, in addition to being well matched to policyholder requirements, is that Movestic receives a higher proportion of the product value chain thereby improving new business margins. The sustainability fund is very much required to meet the increasingly ecologically focused demands of the Swedish consumer.

Risks associated with the strategic objective

Economic conditions in Sweden have been mixed during 2014. The Swedish OMX all-share index has increased by 11.9% during the year whilst interest rates were reduced to zero in late October 2014, and now stand at negative 0.1%, effective at the start of February 2015. As a result, there remains a general sense of uncertainty that has led to some consumers preferring more traditional investment products to equity-based unit-linked investments. Whilst recent improvements in confidence and good equity market performance has ensured the unit linked market has remained attractive to many investors, there is a risk that returns being offered on traditional products will adversely impact the relative attractiveness of Movestic's unit linked proposition. We continue to 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 volumes are also sensitive to the quality of service provided to IFA's and the end customer. Movestic continues to score highly in internal and external service level assessments.

New business remains relatively concentrated towards several large IFAs. 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. Whilst Movestic has further broadened its coverage of the broker market, the fact remains that a large proportion of new business comes from a two large brokers thereby creating a level of concentration risk. In light of this risk, Movestic takes comfort from the fact they are assessed very favourably on an internal product provider assessment scorecard maintained by one of the major brokers. The second large broker has a proven strong level of support for the Movestic proposition as demonstrated by its continued support of Movestic during and subsequent to the servicing difficulties experienced in 2011.

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 focusing on achieving better terms in the fund operation.

ACQUIRE LIFE AND PENSIONS BUSINESSES

"During the year we announced the acquisition of the Waard Group in the Netherlands. The deal scores highly on our financial assessment criteria and is expected to be cash generative. The purchase price represents a healthy discount to embedded value. Perhaps of even more relevance is the opportunity to progress further value adding deals in the Dutch market."

Highlights

· Successful acquisition of the Waard Group in the Netherlands for €67.8m (subject to regulatory approval)

· Entry to a third market assessed as having significant further market consolidation potential.

· Benefits have accrued from the Protection Life acquisition in line with expectations.

Review of the year

There has been a continued 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. Despite the improving general M&A environment, regulatory review programmes and legislative changes have to an extent dampened the actual level of Life and Pension sector deals progressed in the UK. We are therefore mindful that there may be a slight short term hiatus in activity in the UK. As a result we have increased our focus on Western Europe. This has resulted in our move into the Dutch market through the acquisition of the Waard Group.

Acquisition of the Waard group

During November 2014 we announced the acquisition of the Waard Group in the Netherlands for €67.8m. To finance the deal we raised £34.5m of equity through a well supported share placing exercise. The acquisition creates a great opportunity to enter a new market within which consolidation has not yet begun. The deal was assessed positively on all four elements of our assessment scorecard:

Note 1: The discount to embedded value, in terms of the Group balance sheet expressed in Sterling, will have deteriorated compared with the initial deal assessment of 26% as a result of the Euro depreciation during 2015. However, it remains suitably positive and of course would recover should the Euro subsequently recover against Sterling.

At the date of publishing the 2014 Report & Accounts the purchase of the Waard Group remains subject to Dutch regulatory approval.

Protection Life

The PL business has been successfully transferred into CA plc during 2014, resulting in £27.4m of additional cash available to transfer to Chesnara plc. When PL Ltd was purchased we made plans to migrate the day to day servicing to HCL. This process is ongoing and is envisaged to complete during the first half of 2015. This is slightly later than planned but broadly in line with the plans made at acquisition. The first full year set of results have been reassuring and are broadly in line with expectations.

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, ensures we are aware of most viable opportunities in the UK and many opportunities in Europe. Despite our proven market presence, we have recently implemented a revised acquisition process framework in order to ensure we continue to identify and assess all potential value adding deals across our widening geographical markets.

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 and the degree of strategic fit and opportunity.

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 acquisition of the Waard Group opens a new territory and hence increases our options thereby reducing the risk that no further value adding deals are done. Also, the broader target market will also reduce the risk of inappropriate opportunities being progressed on the ground that better optionality will enable us to identify better fit deals at a more competitive price. As our acquisition strategy focuses more on non-UK markets we become increasingly exposed to currency risk. Where appropriate, as was the case with the Waard acquisition, we protect the Sterling value of the purchase price. Flexibility over the timing of subsequent capital extractions and dividend flows provide an element of management control over the Sterling value of cash inflows. We accept the short-term fluctuations in the reporting of embedded value that can arise.

During recent years we have enhanced our financial deal assessment 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

Despite some short term challenges in the UK due to the uncertainty created by regulatory review programmes, we remain confident that all the commercial and economic drivers for consolidation remain positive and hence the market will become more active in due course. In the meantime, the acquisition of the Waard Group will provide significant potential in the Dutch market. We are well positioned to take advantage of any value adding opportunities that may arise. Our financial foundations are strong and we continue to have strong support from shareholders and lending institutions to progress our acquisition strategy. In addition our operating model which consists of well established outsource arrangements plus efficient, modern in house solutions, means we have the flexibility to accommodate a wide range of potential target books. With all the above in mind, we are confident that we are well positioned to continue the successful acquisition track record in the future.

CHESNARA CULTURE AND VALUES

General business conduct

The principles of general business conduct are illustrated below:

· Conduct Business with professionalism and integrity.

· Conduct business with due care, skill and attention.

· Responsible management, with adequate risk management systems.

· Maintain adequate financial resources.

Good business conduct is in many ways a matter of behavioural or cultural practice and principles. Chesnara has always maintained high standards with regards to ensuring the business is managed on a risk based, fair and responsible basis. To further reinforce and embed this culture of responsibility revised Governance procedures and processes ("Governance Map") are being developed which are due for full implementation during 2015. The Governance Map will ensure Chesnara's cultural values and good business conduct are effectively applied across the enlarged Group. It will also create consistency of approach and transparency of policy both of which are fundamental requirements of the Solvency II regime.

A critical element of good business conduct in a regulated financial services business is the need to maintain adequate financial resources which in turn is managed by governing our solvency position. In recognition of this, as part of the day to day conduct of our business we regularly monitor the solvency position of the Group. This demonstrates our commitment to maintaining 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.

Highlights

· Group solvency continues to be strong at 284% (2013: 194%). This is stated after a proposed final dividend of £15.1m, and also reflects the benefit of the £34.5m equity raise in December 2014. Completion of the Waard Group acquisition in 2015 will reverse some of the increase in Group Solvency that has been seen in 2014.

Regulatory capital at 31 December 2014

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 Ltd - the European minimum long-term insurance capital requirement

o Movestic - 150% of the capital resources requirement

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 2014 is 284% (2013: 194%) with the surplus having moved from £76.8m at 31 December 2013 to £145.6m at 31 December 2014. IGD is stated after the final dividend of £15.1m (2013: £13.4m). The movement in IGD this year is a function of the following key items:

· Equity share raising; £34.5m was raised from a share placing for the acquisition of Waard Group.

· The Group regulatory surplus in the year. The Group Regulatory surplus in 2014 has been strong, amounting to £44.5m. This has resulted in a significant benefit to the IGD, outweighing the impact of the 2014 total dividend of £22.5m (interim dividend of £7.4m plus the proposed final 2014 dividend of £15.1m).

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 graph above shows that the solvency positions of each regulated subsidiary continue to exceed the internal targets imposed by the Board:

· CA plc solvency has reduced from 218% to176%, with the surplus over the requirement reducing from £52.3m to £50.3m. This is stated after proposed dividends of £65.0m (2013: £48.0m), thereby showing that strong solvency is still being achieved whilst delivering strong cash flows to the Chesnara parent company. The position at 31 December 2014 includes the impact of the Part VII transfer from PL into CA plc.

· PL Ltd solvency is 128% at 31 December 2014. The reduction when compared to the prior year is a result of the successful Part VII transfer of PL into CA plc. The remaining capital is due to be transferred in 2015 following de-regulation of PL Ltd.

· Movestic had a solvency ratio of 376% at 31 December 2014. 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 regulator.

Solvency II

The introduction of Solvency II on 1 January 2016 will change the capital position of both the Group and its regulated subsidiaries. The final impact of Solvency II continues to be uncertain although we expect the Group will not be adversely impacted. Solvency II may also result in the Board re-assessing the internal targets imposed on each regulated entity.

Treatment of customers

UK

· Treating customers fairly

We have embedded the principle that we aim to treat all customers fairly within all our people, processes and procedures. This aim has been shared with all our outsourcing partners. The principle goes beyond the way we answer telephone calls and deal with the regular service that we provide to our customers. It is also considered when we deal with complaints from our customers or where we identify an error within our systems that affects policyholder outcomes.

· Complaints

The general downward trend in the overall volume of complaints received has continued although we continue to receive a 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. A critical factor that has a bearing on the customer experience is the level of investment return on their assets. Whilst unit linked customers are naturally directly exposed to the volatility of investment markets outside of Chesnara's direct influence, it is important that we ensure the investment performance of our policyholder funds is competitive against market benchmarks. In light of this we are pleased to confirm that our main managed funds have all out-performed their benchmarks during 2014.

Sweden

Movestic has received high scores in external surveys conducted within the insurance industry in Sweden. Furthermore and in relation to the size of the operations, Movestic's complaints function receives very few customer complaints and cases brought to the Public Complaints Board are very rare. The Swedish Consumer Agency has recently completed a review regarding marketing of funds. The review of Movestic's information and marketing activities was closed without remarks.

Treatment of employees

We recognise that management and staff are at the heart of Chesnara's success. Our continued flexible and supportive approach has contributed to another year of low staff turnover throughout the Group.

The Waard Group has been through a period of significant uncertainty over recent years following the bankruptcy of its parent company. Throughout this period the staff and management have remained focussed, professional and loyal. Chesnara are keen that our new Dutch colleagues are rewarded for their professionalism and loyalty by being positively involved in our future plans for the development of the Waard Group.

Treatment of investors

As a listed company, clearly one of our core responsibilities is to continue to provide a competitive return to our shareholders. We are aware that for many of our shareholders continuity of our historically strong dividend performance is a core requirement. In light of this we are pleased that the financial performance of the Group during 2014 enables us to increase our full year dividend by 2.9% compared to 2013. The 2014 full year dividend of 18.4p per share represents a yield of 5.4% (based on the share price as at 31 December 2014 of 339.25p per share). Total shareholder returns over a 5 year and 1 year period are competitive in comparison to the FTSE 350 higher yield index.

In addition to providing financial returns to our investors we also recognise the importance of engaging with our investors in an effective way so as to ensure they are appropriately informed about the performance of the company. To this end, we produce Report and Accounts that aim to be as open and informative as is reasonable. We also ensure we are available to meet with investors and hold ad hoc presentations as appropriate.

The ongoing investor satisfaction is evidenced by the support received for the recent equity raise required to enable the Group's acquisition in the Dutch market.

Relationship with regulators

UK

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.

· Legacy review UK

During the year CA plc has participated in a review by the FCA that looked at legacy investment linked business. This review has looked at a number of areas including company governance, customer correspondence and policyholder charges. A report on the findings of this review is expected in the second quarter of 2015.

· Independent Governance Committees (IGCs) on pensions

The government has announced that there will be new requirements for the governance of both Workplace Personal Pension schemes and Occupational Pension schemes. The company has taken external legal advice on the impact of these changes and will be ensuring that the governance of these schemes going forward meets the requirements of the regulations and legislation. The changes are likely to result in the appointment of an external Governance Advisory Arrangement to oversee the Workplace Personal Pensions and report on their value for money whilst the Trustee arrangements for the occupational schemes will need to be reviewed and they will also need to report on value for money.

· Pension changes

The government has passed legislation that has changed the pensions rules with effect from April 2015 to allow policyholders to take their retirement benefits in a variety of ways, including as a lump sum. In order to comply with these new rules it has been necessary to update our systems and correspondence with customers. Following its introduction in April there is an expectation that there will be a peak in demand for this new benefit, we have therefore planned additional resources to meet this expected demand.

· PRA visit

As part of its regular monitoring of CA plc the PRA carried out its annual Periodic Summary Meeting. This meeting helps it understand the business and identify its monitoring requirements over the year.

Sweden

Movestic has an active dialogue with the regulator on business as usual matters, in conjunction with interactions on any specific regulatory affairs. The relationship with the regulator is good and no complaints or concerns have been expressed regarding Movestic's operations.

Netherlands

We have forged an encouraging initial relationship with the Dutch regulator (DNB) which builds upon a strong pre-existing relationship between the existing Waard Group management team and the DNB. The Declaration of No Objection (DNO) application, which the regulator is required to give before the transaction can complete, is pending at the point of issuing these Report & Accounts.

The key performance indicators illustrate how effectively we have delivered against our three strategic objectives. The strong net cash generation of £71.1m together with the significant embedded value earnings in the year clearly demonstrates how effectively we continue to deliver against our core objective of "maximising value from the in-force book'. Within the embedded value earnings there is a £9.7m new business profit item which reflects the positive performance against our objective to "Enhance value through new business". Finally, whilst not recognised in any of the 2014 figures, the impending acquisition of the Waard Group is forecast to have a positive impact on all of the financial measures in 2015, continuing to deliver our objective to add value by acquiring Life and Pension businesses.

Summary of each KPI

IFRS pre-tax profit £28.8m (2013: £60.6m)

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 objective of "maximising value from the in-force book".

Highlights

· Overall reduction of £31.8m in IFRS pre tax profit is driven by a £45.6m adverse swing in S&P result.

· S&P loss in the year is driven by reducing bond yields, which has resulted in the requirement to increase reserves held for policies with options and guarantees.

· This loss is off-set by a strong CA segment result, which has provided an expected hedge against this dynamic, with bond yields having had a positive impact.

· Movestic result is stronger than the prior year.

Risks

The IFRS profit can be affected by a number of our principal risks and uncertainties as set out on pages 45 to 46 of the 2014 Annual Report & Accounts. In particular, a significant reduction in Government bond yields during 2014 has had a material effect on the IFRS pre-tax profit in the year. Equity and property markets in the UK have been broadly flat during 2014, but had a more marked impact on the 2013 results, following strong performance in that year.

Net cash generation £71.1m (2013: £36.7m)

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 supports Chesnara's dividend-paying capacity and acquisition strategy. Cash generation can be a strong indicator of how we are performing against our stated objective of "maximising value from the in-force book". However, our cash generation is always managed in the context of our stated value of maintaining strong solvency positions within the regulated entities of the Group.

Highlights

· Gross cash generation across the Group continues to be strong, driven by strong and stable UK cash generation.

· Net cash generation is supported by the Part VII transfer of PL into CA plc on 31 December 2014.

· The cash generated during 2014, coupled with the strong parent company cash position of £80.1m at 31 December 2014 and the expected cash generative nature of the Waard Group acquisition leaves us in a good position to continue our attractive dividend policy and acquisition strategy.

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 on pages 45 to 46 of the 2014 Annual Report & Accounts. 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 levels of cash, both positively or adversely, generated by our regulated subsidiaries.

EEV earnings, net of tax £44.2m (2013: £82.7m excluding modelling adjustments of £4.1m)

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

· Although a reduction year on year, the EEV result for 2014 remains a positive indicator of the growth of the business.

· Economic items continue to contribute a significant portion of the overall EEV result, albeit at lower levels than in 2013.

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 on pages 45 to 46 of the 2014 Annual Report & Accounts. 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 £417.2m (2013: £376.4m)

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 intrinsic value. 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. It ignores the potential of new business to be written in the future (the franchise value of our Swedish business) and the value of the Company's ability to acquire further businesses.

Highlights

· Group EEV has increased by £40.8m, or 11% during the year.

· Post-tax EEV earnings have contributed £44.2m of the movement.

· The equity raise of £34.5m during Q4 2014 has added to the EEV. This is being used to acquire the Waard Group during 2015.

· Off-setting the above positive movement is a foreign exchange loss of £17.3m on the re-translation of the Movestic EEV, as a result of the weakening of the Swedish Krona against Sterling during the year, coupled with the reduction in EEV arising from dividends paid in the year.

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 10.0% weakening of exchange rates between Swedish Krona and Sterling would reduce the EEV of the Group by 3.0%, based on the composition of the Group's EEV at 31 December 2014.

Further analysis of each KPI

IFRS PRE-TAX PROFIT £28.8m (2013: £60.6m)

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, are the CA and PL segments. The requirements of these 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 a strong IFRS pre-tax surplus of £41.2m for CA (2013: £25.0m) and a PL pre-tax surplus of £5.5m. Assets under management within the CA segment, a key driver of surplus, have reduced from £1,736m at the start of the year to £1,702m at 31 December 2014. Whilst this represents a 2% reduction during the year, the reduction is less than the policy attrition levels in the year, despite slightly negative equity markets.

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 increase in the reserve for costs of guarantees since the start of the year of £17.8m in 2014. During 2013 the S&P segment included a surplus arising from movements in reserves for products with guarantees of £24.4m thereby representing a year on year adverse swing of some £42.2m.

Product based deductions continue to remain strong, at £17.1m (2013: £17.1m).

Growth operation

The long-term financial model of Movestic 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 23.5% (on constant exchange rates) since 31 December 2013.

As a result the underlying IFRS profit after adjusting for non-recurring items (the deferred acquisition cost charge in 2013 of £3.0m and the Modernac profit of £1.2m) has increased from £4.4m to £4.9m, or 11.4%.

The 2014 Movestic results have also been supressed, to some extent, by the deterioration in strength of the Swedish Krona against Sterling, which has witnessed a 13.9% fall during 2014.

Further detail of the results of the Movestic segment can be found below.

IFRS results

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

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

CA

The CA segment has reported a strong result for the year. This is driven predominantly by product deductions and the positive impact of reserve changes in the year. The table below bridges the IFRS profit for 2013 and 2014 and shows that the movement in surplus is driven by the aforementioned positive impact of reserve reductions in the year.

Profit before tax movement, year ended 31 December 2013 to year ended 31 December 2014

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

S&P

The S&P segment has posted a pre-tax loss for the year, compared with a profit in the prior year. The change in profitability can be highlighted by the following table:

Profit before tax movement, year ended 31 December 2013 to year ended 31 December 2014

S&P posted a pre-tax IFRS profit of £9.2m for year, the key components of the result being:

PL

The PL segment has contributed a pre-tax IFRS surplus of £5.5m during 2014 compared with £0.2m during 2013. The main reason for the increase year on year is that PL Ltd was purchased in November 2013, and therefore the earnings as reported in 2013 only reflect the earnings of the business subsequent to Chesnara's ownership, and consequently the contribution in 2013 was not material.

The main contributor to the pre-tax IFRS profit in 2014 is the expected release of the prudence margins within the reserving basis, relating to mortality, persistency and investment returns from the book, amounting to £5.3m. Experience surpluses, representing the difference between the expected releases of margins and the actuarial experience, were not material in the period. Administration expenses of £2.1m, representing the ongoing costs of administering the PL book of business were incurred in the year. These costs are in line with the expectations that were derived from our due diligence process, prior to completing the acquisition on 28 November 2013.

Movestic

The IFRS pre-tax results of Movestic, before the impact of DAC model changes of £(3.0)m (see note 4 below) and a non-recurring profit share of £1.2m (see note 2 below), both of which occurred during 2013, have increased slightly year on year, from £4.4m in 2013 to £4.9m in 2014. The table below analyses the constituent parts of the pre-tax IFRS profit:

Consolidation adjustments

The adjustments arising on consolidation are analysed below:

Cash generation £71.1m (2013: £36.7m)

"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 decreased by £4.0m in the year compared with 2013, largely due to the net impact of a large decrease in bond yields in the year.

· Net cash generation has benefitted from capital efficiencies of £27.4m arising from the Part VII transfer of PL into CA plc.

· In 2013 the acquisition of PL Ltd 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, £7.1m of cash has been generated by PL in its first full year, coupled with the synergistic impact of the Part VII transfer.

· Movestic required no additional funding during 2014 (2013: £nil).

· The increase in cash utilised by Chesnara in the year is due to a combination of, costs associated with PL Part VII transfer, as well as initial transaction costs in relation to the acquisition of Waard Group.

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 gross cash generation in 2014 held up well when compared with 2013.

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 manage the risk taking a longer-term perspective.

The following table identifies the source of internal gross and 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 £44.2m (2013: £82.7m excluding modelling adjustments)

Summary

2014 has delivered a significant EEV result for the Group, with a strong operating profit supplemented by value emerging from the impact of economic conditions. The 2014 result is, however, lower when compared with the prior year, largely due to the significant profits arising from investment and economic conditions in 2013 not being repeated to the same level during 2014. Whilst we have reported an overall economic profit during the year, it is not as strong as 2013, largely due to UK equity performance being slightly negative in 2014, coupled with a significant reduction in UK Government bond yields. Swedish equities have performed slightly better than the UK, although their impact on the UK results is slightly diminished by the weakening of the Krona against Sterling in the year.

Off-setting the reduced economic profits in the year are strong operating profits on covered business, amounting to £37.5m (2013: £8.9m). Further detail has been provided below, although the key drivers are an increase in shareholder returns on net worth, which is driven by UK Government bond value appreciation in the year, coupled with c£12m of positive operating assumption changes, largely in the CA segment (see further detail below).

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

Profit after tax movement

Year ended 31 December 2013 to year ended 31 December 2014

Analysis of the EEV result in the year by business segment

Analysis of the EEV result in the year by earnings source

Economic conditions

The EEV result is sensitive to economic conditions. Economic experience and assumption changes contributed a profit of £24.6m in 2014 compared with a profit of £71.1m in the prior year. Key economic condition highlights are as follows:

· The FTSE All share has fallen by 2.1% during 2014, compared with a rise of 16.7% in 2013.

· The Swedish OMX all share has increased by 11.9% during the year, compared with a 23.2% increase in the prior year.

· 10 year gilt yields have reduced by 1.2% in year, compared with an increase of 1.26% in 2013.

These conditions have led to a large reduction in the EEV economic profits during the year. The following table analyses the economic conditions impact by segment:

The CA segment has benefited from a number of positive items in the period, the most significant being the impact of investment returns in the year, driven by Government bond values increasing (c£14m) and the positive impact of tax gains of c£5m. Off-setting this are negative economic assumption changes of c£5m.

The S&P segment reported a loss as a result of prevailing economic conditions. This is almost exclusively due to the impact that the reduction in Government bond yields in the year has had on the reserves required for those products which contain options and guarantees.

PL has reported positive economic profits in the year. This is largely due to the positive impact that increasing bond values has had on this segment during the year.

Movestic is sensitive to movements in equity markets, largely due to its core income stream being dependent upon management charges generated from policyholders. These management charges are based on the level of funds under management, which are primarily equity invested. Strong equity returns in Sweden have driven this positive change in EEV over the year.

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. Movestic has contributed £8.9m (2013: £7.2m) of the £9.7m (2013: £7.9m) new business profits. This is made up of profit on brand new contracts of £6.0m (2013: £4.5m) coupled with £2.9m (2013: £2.7m) which is attributable to increments on policies that were in force at the start of the year. The reason for the increase in new contract profits is as a result of a notable increase in the margins on new products, coupled with slightly higher volumes of new policies sold year on year.

Experience variances

The CA segment has reported positive experience variances in the year. This is predominately due to positive lapse experience, which has benefitted the EEV result by c£5m. Off-setting this, the S&P segment has reported experience losses of £4.8m, the majority of which is due to better than expected policy attrition, resulting in additional strain arising from the reserves that are held to cover the associated policy options and guarantees. The PL result is driven by the allocation of additional central costs to the segment in the period. Regarding the Swedish business, it has reported a small negative experience in 2014. This is made up of a number of items, the most significant being positive lapse and transfers experience of c£2.3m, off-set by adverse expense variance of c£2.6m. The expense variance in the year has resulted in Movestic re-assessing its expense assumptions, leading to a small strengthening at the end of the year (see "Operating assumption changes" section below).

Operating assumption changes

The CA segment has reported a strong assumption change profit in the year. This is primarily due to a one off positive item of £17.3m arising from a change around how the assumptions for future bonus units that are allocated to policyholders are determined. The EEV impact of this assumption change is higher than IFRS due to the positive impact on the VIF, an asset that is not recognised for IFRS reporting purposes. In addition to this the CA segment has benefited from the positive impact of the new HCL contract, amounting to £4.2m. An equal and opposite effect can be seen in the S&P segment.

The S&P segment has reported a negative operation assumption change in the period. As referred to above, the main item that contributes to this a £4.2m strain arising from the modelling of the new HCL outsource contract.

The PL segment has reported an operating assumption change loss of £2.9m. This is as a result of a number of items, the most significant being the impact of new expense assumptions which capture additional central costs that were not allocated in the prior year.

Movestic has reported an operating assumption change loss of £5.2m in the year. This is driven by the need to increase the maintenance cost assumptions at the end of the year, resulting in an adverse impact of £3.4m.

Gain on acquisition of PL Ltd

The EEV result in 2013 benefitted from the impact of one-off gain of £12.3m arising from the purchase of PL Ltd.

Uncovered business and other group activities

The Chesnara segment of the uncovered business relates to Chesnara parent company costs, such as corporate governance and business development, that are not attributable to the covered business. The increase in costs when compared with 2013 largely relates to the costs associated with the Part VII transfer of the PL business into CA plc. Both 2013 and 2014 include similar amounts of costs associated with acquisition activities, being the Waard Group in 2014 and the purchase of PL Ltd in 2013.

The Movestic result contains a number of components which are not modelled on an EEV basis. The main component is the Life and Health business, which has reported a profit of £0.4m during 2014, £1.8m lower than the prior year profit of £2.2m. In addition the Movestic segment includes the impact of financial reinsurance valuation movements and the results of Movestic's associate business, Modernac.

European Embedded Value £417.2m (2013: £376.4m)

EEV movement 31 December 2013 to 31 December 2014

EEV movement 31 December 2012 to 31 December 2013

* 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:

- The impact of raising new equity;

- the surpluses arising on acquisitions; and

- 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 year is analysed in more detail within the preceding section.

Equity raised for acquisition

During November 2014 we announced the acquisition of the Waard Group in the Netherlands for €67.8m. To finance the deal we raised £34.5m of equity through a well supported share placing exercise. With a Euro-denominated purchase price, to mitigate the downside risk of a strengthening Euro the capital raised was converted to Euros at the time of the capital raise.

Exceptional surplus on acquisition

The purchase of PL Ltd during 2013 resulted in an acquisition surplus of £12.3m. The surplus arose because the EEV of PL Ltd 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 2014

There were no modelling adjustments during the year.

Year ended 31 December 2013

Positive modelling adjustments during 2013 of £4.1m related entirely to the Movestic business. These arose due to refinements being made to the way in which commissions were modelled.

Foreign exchange reserve movements

The £17.3m foreign exchange reserve movement during 2014 has arisen as a result of a significant weakening of the Swedish Krona against Sterling by 14% since the end of 2013.

Dividends paid

Dividends of £20.7m were paid during 2014, being the final dividend from 2013 of £13.3m and the interim dividend from 2014 of £7.4m.

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 2014 - £243.7m

Analysis of EEV at 31 December 2014 - £417.2m

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 (65%) of the total EEV, which includes the supplementary addition of the PL business last year. The value in-force component is dominated by the Swedish business which represents 61% of the total Group VIF.

The Group EEV includes £17.1m in "Other Group Activities" which includes the £34.5m equity raised through a share placing to finance the acquisition of the Waard Group.

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, 64.0% of the total product level value in-force relates to pension contracts, 23.5% to protection business and 10.3% 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 policy numbers in the table at 31 December 2013 have been restated to capture a change in the definition of a policy, following on from the migration of some actuarial services to Towers Watson. Whilst the change in policy numbers is not significant using the new definition, not adjusting would have meant that the movement in policy numbers in the year would have been misleading.

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 following diagram 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. Longer-term projections

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 284%

2. SHAREHOLDER RETURNS - 2014 TSR 11%; 2014 dividend yield 5.4% (based on share price as at 31 December 2014 of 339.25p and full year 2014 dividend of 18.4p).

3. CAPITAL STRUCTURE - Gearing ratio of 23.1% (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 regularly.

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 above.

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 five year period the EEV per share has increased from 258.7p at 31 December 2009 to 330.1p at 31 December 2014, which compares with the share price increasing from 191.1p to 339.25p 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 102.8% at 31 December 2014. Full year dividends over this same period have increased from 16.4p per share in 2010 to 18.40p per share in 2014.

Throughout 2014 and up to 23 March 2015 there has been a general appreciation in the share price, having increased by 10% from 321.75p per share at 1 January 2014 to 355.0p per share at 23 March 2015. The combined impact of the share price growth throughout 2014 and the continuing attractive dividends means shareholders have achieved strong total shareholder return.

3. Capital structure

The Group's UK operations are financed through a combination of retained earnings and debt finance. Surplus emerging from the UK business is used to:

(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 borrowings in place that part-finance the UK operations arose as follows:

· S&P, which was purchased in December 2010 for £63.5m, was accomplished by way of debt: equity financing broadly in a ratio of 2:1.

· PL, which was acquired 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 arranged to fund the purchase of S&P. The result is that, at 31 December 2014 bank borrowings amounted to £64.3m. This is a five year loan that has four years remaining.

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, if required.

With respect to acquisitions the Group seeks to finance these through a suitable mix of debt, existing cash resources, 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 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 the "Chesnara culture and values" section above indicates a strong solvency position as at 31 December 2014 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.

The Group is well capitalised, and has a healthy level of cash reserves to be able to meet its debt obligations as they fall due. 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, which brings with it the risk of bond default. 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.

In light of the above, our expectation is that the Group will continue to generate surplus in its UK long-term business sufficient to meet its debt obligations as they fall due, to continue to pursue an attractive dividend policy and to meet the short-term financing requirements of Movestic. The Director's Report in the 2014 Annual 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