Chesnara Regulatory News (CSN)

29 Mar 2007 07:00

Chesnara plc - Preliminary Results for the year ended 31 December 2006

Strong emerging surplus supports 6.6% final dividend increase

29 March 2007

Chesnara today reported final results for the twelve months to 31 December 2006. The Group is committed to offering shareholders an attractive long-term income stream arising from the profits of its substantially closed life assurance business.

* Profit (on IFRS basis) before tax increased by 22% to ‚£25.0m, 18.41p

earnings per share (2005 profit before tax: ‚£20.5m, 19.26p earnings per

share)

* Transfer of City of Westminster Assurance (CWA) business to Countrywide

Assured delivers positive solvency effects, tax benefits and operational

efficiencies

* Disposal of Premium Life International and charge obtained on Guardian

Assurance-held assets improve solvency position

* Contract concluded with Capita to outsource former CWA business provides

greater certainty of future policy-related expenses

* Mortgage endowment misselling provision assumptions prove adequate

* Favourable persistency experience

* Shareholder equity on EEV basis, pre proposed final dividend payment, now

‚£189.1m (31 December 2005: ‚£176.2m)

* Life Company solvency ratio improves to 205%, post dividend, (31 December

2005: 178%). Group solvency ratio, post dividend, increased to 225% (31 December 2005: 158%) * 8.05p final dividend per share proposed (7.55p): increased by 6.6% * Total dividend for year of 13.1p (12.45p): increased by 5.2% * Board remains committed to progressive dividend policy

* Search for value adding acquisition opportunities broadens and continues

Graham Kettleborough, Chief Executive said:

'At the half year we saw a strong emergence of surplus and this has continued,in line with our expectations, through the full year. The completion of thetransfer of the acquired CWA business into CA in the first half has enabled usto begin to realise the financial and operational synergies we planned. Thishas been complemented by three significant further transactions in the year -the sale of PLI, the charge on Guardian assets and the Capita outsourcing deal- which all bring greater financial certainty to the Group. This enables theBoard to deliver, once again, on its promise to shareholders of a reliable andprogressive dividend stream by proposing an increase to the final dividend of6.6% to 8.05p'

The Board approved this preliminary statement on 28 March 2007.

Enquiries

Graham Kettleborough

Chief Executive, Chesnara plc 07799 407519

Michael Henman/John Beresford-Peirse

Cubitt Consulting 0207 367 5106

Notes to editors:

Chesnara plc, which listed on the London Stock Exchange in May 2004, is theowner of Countrywide Assured plc ("CA"). CA is a life assurance company that issubstantially closed to new business. In June 2005, Chesnara confirmed itsstrategic intentions when it acquired a further closed life insurance company -City of Westminster Assurance ("CWA") - for ‚£47.8m. With effect from 30 June2006, CWA's policies and assets were transferred into CA plc. Chesnara'soperating model is to maintain a relatively small corporate governance team andoutsource the majority of its back office functions.Financial Highlights Year ended 31 December 2006 2005 IFRS basis Operating profit 26.5 21.3 Financing costs (1.2) (0.8)

Loss on sale of subsidiary company (0.3) -

---------- ---------- Profit before income taxes ‚£25.0m ‚£20.5m ========== ========== Basic earnings per share 18.41p 19.26p Dividend per share 13.1p 12.45p Shareholders' net equity ‚£114.3m ‚£108.3m ========== ==========

European Embedded Value basis (EEV)

Operating profit 15.0 10.7 Exceptional item

Profit on acquisition of subsidiary company - 30.3 Investment variances and economic assumption 15.6 10.9

changes ---------- ---------- Profit before tax ‚£30.6m ‚£51.9m ---------- ----------Covered Business Shareholder net worth 84.5 84.5 Value of in-force business 109.9 110.0 ---------- ---------- Embedded value 194.4 194.5 Acquired embedded value financed by debt (16.8)

(21.0)

Shareholders' equity in other Group companies 11.5 2.7 ---------- ---------- Shareholders' equity on EEV basis ‚£189.1m

‚£176.2m

---------- ---------- Life annual premium income (AP) ‚£113.4m

‚£118.0m

Life single premium income (SP) ‚£54.8m

‚£60.1m

Life annualised premium income (AP + 1/10 SP) ‚£118.9m ‚£124.0m

In contrast with the IFRS basis of reporting, the EEV basis recognises thediscounted value of the expected future cash flows, arising from the long-termbusiness contracts in force at the year end, as a component of shareholderequity. Accordingly, the EEV result recognises, within profit, the movement inthis component.The Group presents supplementary financial information, prepared in accordancewith the EEV basis, with effect from 1 January 2006. This first-time adoptionof EEV principles and associated disclosures represents a change from theAchieved Profit ("AP") basis of reporting, which was previously adopted by theGroup as the basis for presenting supplementary financial information.Restatement of information for the comparative period from the AP basis to theEEV basis, together with explanatory notes, was set out in the 2006 InterimFinancial Statements which are available on www.chesnara.co.ukUnder the EEV basis of reporting, the exceptional profit arising during theyear ended 31 December 2005 relates to the acquisition of CWA Life Holdings plcand represents the excess of the embedded value of that company, at theacquisition date, over the total purchase price. Investment variances andeconomic assumption changes for the year ended 31 December 2006 are stated netof a ‚£0.3m loss arising on the sale of a subsidiary company.

CHAIRMANS STATEMENT

I am pleased to present the third annual financial statements of Chesnara plc ("Chesnara").

BackgroundChesnara, owner of Countrywide Assured plc ("CA") since its listing in May2004, seeks to participate actively in the consolidation of the closed lifebusiness sector in the UK. In 2005 it acquired City of Westminster AssuranceCompany Limited ("CWA"), another closed life assurance company, from Irish Lifeand Permanent plc.CA now manages a portfolio of some 228,000 life assurance and pension policiesand is substantially closed to new business. It writes Guaranteed Bonds, asmall amount of protection business and accepts top-ups to existing contracts.As a substantially closed book it is expected that the embedded value of thebusiness will decline over time as the number of policies in force reduces andas the surpluses emerging in the business are distributed by way of dividends.As the portfolio runs off, the regulatory capital supporting it may also bereduced and returned to shareholders.In order to prolong the yield delivery, Chesnara seeks to acquire similarbusinesses. We believe, however, that such potential acquisitions should notdetract from our key objective of delivering a steady and attractive dividendyield.Review

New acquisition opportunities in the closed life sector in the UK slowed considerably in 2006, particularly within our ‚£50m to ‚£200m target value range. Our main focus has, therefore, been on enhancing shareholder value in the existing business and I am pleased to report a number of significant developments, which prolong and secure the dividend yield from those businesses.

* At the end of June 2006 the long-term business of CWA was transferred to CA

under the provisions of Part VII of the Financial Services and Markets Act

2000 (the "Part VII Transfer"). Besides realising significant financial

savings and synergies in resources required to manage the combined

businesses, the transfer has given rise to more efficient use of capital

required for regulatory purposes. In the second half of the year, following

a successful application to the High Court, ‚£3m of CWA share capital was

released;

* In January 2007 we entered into a contract with Capita Life and Pensions

Regulated Services Limited for the provision of administration services to

the CWA business for an initial term of 15 years. This followed discussions

with the incumbent administration services provider, whose contract was due

to expire in February 2009, which indicated that terms for renewal beyond

this date were unlikely to be attractive to us. Although the terms of the

new contract have given rise to a reduction of some ‚£5m in the value of the

in-force portfolio to reflect increased administration costs over the life

of the contract, they provide certainty of the administration expense base

for some time to come;

* During 2006 we have begun to witness a fall in the number of mortgage

endowment misselling complaints received. This follows less intense media

attention and a lower pitch of advertising by complaints handling firms, as

more policyholders have become time-barred from making successful

complaints. Approximately 70% of our in-force endowment policies are now

time-barred, this proportion being expected to increase to a maximum of 80%

over the course of 2007. These circumstances, together with the strength of

investment markets during 2006, have contributed to a position where

assumptions previously adopted to fix the level of associated provisions

have proved to be adequate. In addition, the 2006 results have benefited

from a Professional Indemnity ("PI") insurance recovery of ‚£1.1m in respect

of administration costs incurred in the handling of misselling claims; and

* Policy lapse experience and, accordingly, the rate of policy retention

within the in-force portfolio were favourable over 2006, particularly with

respect to protection policies. While this experience to some extent

follows naturally as the closed books proceed along their run-off cycle,

the underlying persistency was reinforced by investment market experience

over 2006. The strength of the markets has both enhanced the short-term

surplus and improved the longer-term outlook, as it has the effect of

increasing deductions made from unit funds.

The positive effects of these developments have more than compensated for thenegative impact of revised expense assumptions in relation to third-partyadministration contracts and have translated into a strong earnings performancefor 2006 on both of our principal bases of financial reporting.On the IFRS basis, we have posted a pre-tax profit of ‚£25.0m for the year ended31 December 2006, compared with ‚£20.4m for the corresponding period in 2005.This improvement is underpinned by the continuing strong emergence of surplusesin the life business, together with the absence of additional charges requiredto strengthen misselling provisions.This result allows the Board to recommend a final dividend of 8.05p per share(2005: 7.55p per share), in respect of the year ended 31st December 2006,representing an increase of 6.6% over the final dividend for 2005. Theresulting total dividend for the year of 13.1p (2005: 12.45p) represents a 5.2%increase.On the EEV basis of reporting, the Group recognises a pre-tax profit of ‚£30.6mfor the year ended 31 December 2006, compared with ‚£21.6m, before anexceptional item, for the corresponding period in 2005, and compared with anunderlying return of ‚£10.4m expected to arise from the unwind of the riskdiscount rate within the embedded value. This significant improvement reflects:

* The positive impact of economic assumption changes, which have been driven

principally by strength in the investment markets and by a reduction of ‚£

4.3m in projected policyholder tax arising as a result of the Part VII

Transfer;

* A positive variance of ‚£6.3m in the longer-term investment return; to which

investment market strength also contributed;

* The release of a reinsurer default reserve, measured for EEV purposes at ‚£

3.5m;

* Favourable lapse experience, across both the CA and CWA businesses,

amounting to some ‚£2.9m; and

* The adequacy of the additional provisions in respect of misselling redress

exposure, together with the related PI insurance recovery of ‚£1.1m.

offset by:

* A reduction of some ‚£7.7m in respect of revised expense assumptions

relating to third-party administration contracts.

In addition to the reduction in projected policyholder tax of ‚£4.3m, arising asa result of the Part VII Transfer, there is also a reduction in projectedshareholder tax of ‚£5.7m. These amounts, together with an associated release ofa deferred tax provision of ‚£0.6m, give rise to total projected tax synergiesover the whole life of the in-force portfolio arising as a result of the PartVII Transfer of ‚£10.6m in EEV terms.

Total shareholder equity, as stated on the EEV basis, pre final dividend appropriations has increased from ‚£176.2m at 31 December 2005 to ‚£189.1m at 31 December 2006 which reflects the strong net EEV earnings performance in the period.

CA's capital solvency ratio at 205% post dividend is at a healthy premium tothe target set by the Board of 150%, having increased from the combined CA andCWA post-dividend level of 178% at 31 December 2005. The Group's solvency ratiohas strengthened to 225% from the 31 December 2005 level of 158%, stated afterallowing for the respective final dividends.

Outlook

Experience during the year in the two key areas of mortgage endowmentcomplaints and persistency has proved favourable. This leads the Board tocontinue to look to the future with optimism. We remain aware of the importanceof these issues and, in the light of some continuing uncertainty with regard tothe application and interpretation of regulatory rules, will continue tomanage them closely. The key outsourcing contracts for the CA and CWAbusinesses now provide greater certainty regarding the overall expense base forsome time to come. During 2006 investment market performance has provided apositive underpin and, although returns in the medium term have beenencouraging, the equity market performance during the first quarter of 2007serves to remind us of the potential for future volatility. Following itsacquisition, CWA is providing a strong surplus flow and, following the Part VIITransfer, the expected financial and operational synergies are being realised.We believe we are well placed to fulfil our stated objective of continuing todeliver a reliable and progressive dividend flow.The flow of closed life book consolidation opportunities remains slow. Whilstcontinuing to pursue our activity in this marketplace we will also considerother opportunities which could leverage value from our existing capabilities.If there is no clearly superior investment alternative the possibility of areturn of surplus capital remains.

The Board wishes to extend its thanks to all employees for their continued contribution to the Group.

Christopher SporborgChairman28 March 2007

OPERATING AND FINANCIAL REVIEW

Basis of Accounting

The Group reports primarily in accordance with International FinancialReporting Standards ("IFRS"). As IFRS essentially permits the "grandfathering"of the principles and bases used to measure profit arising on long-terminsurance contracts under previously-adopted UK GAAP and, as the business ofthe Group predominantly relates to life contracts in run off, so the earningsprofile of the Group will continue to be dominated by the underlying emergenceof surplus in these businesses as measured for UK regulatory reportingpurposes.The Group continues to provide financial information supplementary to the IFRSbasis. With effect from reporting periods commencing on 1 January 2006, theGroup has adopted European Embedded Value ("EEV") principles as the basis forproviding this supplementary information in lieu of the Achieved Profit ("AP")basis of reporting. AP and EEV methodologies are similar, insofar as both aimto measure the underlying embedded value of the Group's life assurance,pensions and annuity businesses. However, EEV principles provide a frameworkwhich is intended to improve the comparability and transparency of embeddedvalue reporting across Europe. IFRS Result a. Analysis of results

The following summarises pre-tax earnings information reflected in the IFRS

Income Statement, showing, for the year ended 31 December 2006, the contribution from the constituent businesses of the Group. CA CWA Parent Amortisation business business company of AVIF Total ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 Year ended 31 December 2006 Operating profit 17,184 12,506 313 (3,502) 26,501 Finance costs - - (1,206) - (1,206) Loss on sale of (248) - - - (248) subsidiary company ---------- ---------- ---------- ---------- ---------- Profit before 16,936 12,506 (893) (3,502) 25,047 income taxes ========== ========== ========== ========== ========== Year ended 31 December 2005

Operating profit 8,591 14,607 105 (2,042)

21,261 Finance costs - - (805) - (805) ---------- ---------- ---------- ---------- ---------- Profit before 8,591 14,607 (700) (2,042) 20,456 income taxes ========== ========== ========== ========== ========== Notes (1) The CWA component of the 2005 pre-tax result is for the 7-month

post-acquisition period, whereas the component for 2006 is for a 12-month

period.

(2) Financing costs arise in respect of a bank loan raised to part finance

the acquisition of CWA. (3) Amortisation of Acquired Value In-Force (AVIF) represents a post acquisition charge to profits of the write down of the acquired value of CWA in-force business, as measured at the acquisition date. The pattern of

amortisation is broadly intended to match the pattern of surplus arising

from the run off of the underlying CWA insurance and investment contract

portfolios.

b. Commentary on overall result

Overall, the result for the year ended 31 December 2006 reflects the continuingstrong emergence of surplus in both the CA and CWA life businesses, as theunderlying in-force insurance and investment contracts run off. The CA resultsfor the year ended 31 December 2005 were materially adversely affected byincreases in provisions for redress and administration costs in connection withmortgage endowment misselling claims. We do not consider it necessary to makefurther increases to these provisions as at 31 December 2006 and this, togetherwith a ‚£1.1m recovery from PI insurers for misselling claims administrationcosts, underpins the significant improvement in the results compared with thepreceding year.

Other significant factors which have impacted the result attributable to CA for the year ended 31 December 2006 are:

(1) The recognition of ‚£0.4m of costs incurred in connection with the Part VIITransfer. While, under the IFRS basis of reporting, the synergistic benefitsarising from the transfer arise principally in future periods, the results forthe current year benefit from the release of some ‚£0.6m of deferred taxprovisions, thus reducing income tax expense for the year ended 31 December2006;(2) The recognition of a pre-tax book loss of ‚£0.3m arising on the disposal ofPremium Life International Limited ("PLI"). The related benefit arises from areduction in the cost of maintaining regulatory capital, as the disposal hasgiven rise to a reduction of ‚£2.0m in the Long Term Insurance Requirement (see"Solvency and Regulatory Capital" section below); and(3) A charge of ‚£1.1m in respect of the amortisation of deferred acquisitioncosts relating to insurance contracts (compared with ‚£4.0m for the year ended31 December 2005). As these costs are now fully amortised there will, infuture, be a greater degree of correlation between distributable surplusarising from the run off of the life businesses and the reported IFRS profitsattributable to them.The CWA result continues to make a significant contribution to Group earnings.Net of related parent company debt financing costs and of amortisation ofacquired in-force value, both of which are identified in the table above, thepre-tax contribution was ‚£7.8m for the year ended 31 December 2006 (‚£11.8m forthe 7-month post-acquisition period ended 31 December 2005). While theprior-period post-acquisition result benefited from a change in statutoryvaluation assumptions, resulting in part from favourable mortality experiencewhich we indicated would not necessarily replicate in future periods, the 2006result has been impacted by:

1. A reduction of ‚£1.4m in respect of the recapture of certain reinsurance

arrangements. This recapture, which became effective from 31 December 2006,

gives rise to future offsetting surpluses as the underlying policy

contracts run off; and

2. A net reduction of ‚£2m in respect of statutory expense assumptions which

have been revised to reflect fully the anticipated impact of changed

outsourcer administration arrangements for the in-force policy portfolio.

This is explained more fully in the following section.

(c) Management of the policy portfolio expense base

A key aspect of the ongoing profitability of the Group's life businesses is theextent to which they are able to secure appropriate third-party administrationarrangements. These arrangements seek to avoid fixed and semi-fixed expenseissues that would otherwise arise from a diminishing income stream as thein-force policy base runs off. Accordingly, the expense assumptions underlyingthe result give recognition to a projected expense stream which is more certainand which effectively reflects a higher proportion of expenses which arevariable with policy volume.

Following from these arrangements:

(1) For the CA business, a 15% decline in policy-based surplus, drivenprincipally by the reduced size of the policy portfolio, comparing 2006 withthe previous year, has been sheltered by a reduction in the expense base, whichwas largely anticipated by the expense assumptions established at the end of2005; and(2) For the CWA business, the expense assumptions adopted at the end of 2006reflect the anticipated impact of the replacement of CSC by Capita as thethird-party administration partner with effect from 1 April 2007, leading to anet reduction of some ‚£2.0m in the CWA pre-tax result. Significantly, as theCSC contract was due to expire in 2009, while the Capita contract expires in2022, there is now a greater degree of certainty regarding the expense baseover a longer contractual term.The expense assumptions relating to both the CA and CWA businesses also reflecta revised view of anticipated costs, over the life of the contracts, relatingto core systems developments, which may be necessary for business andoperational purposes, but which are not otherwise provided for in thecontracts. EEV ResultSupplementary information prepared in accordance with EEV principles and setout on pages 20 to 24 is presented to provide alternative information to thatpresented under IFRS. EEV principles recognise profits as they are earned overthe life of insurance and investment contracts and assist in identifying thevalue being generated by the life businesses. The result determined under thismethod represents principally the movement in the life businesses' embeddedvalue, before transfers made to the Parent Company and ignoring any capitalmovements. As the Group's life assurance operations are now substantiallyclosed to new business, the principal underlying components of the EEV resultare the expected return from the business in force (being the yield at the riskdiscount rate on the related policy cash flows as they fall into surplus)together with (1) variances of actual experience from that assumed for eachcomponent of the policy in force cash flows and (2) the impact of resettingassumptions for each component of the prospective cash flows.

The following is a summarised statement of the EEV pre-tax result:

Year ended 31 December 2006 2005 ‚£000 ‚£000

Operating profit of covered business 15,684 11,353

Other operational loss (699) (700) Exceptional item

Profit on acquisition of subsidiary company - 30,324

---------- ---------- Operating profit before tax 14,985 40,977

Variation from longer term investment return 6,307 14,525

Economic assumption changes 9,284 (3,598) ---------- ---------- Profit before tax 30,576 51,904 ========== ==========

Operating profit of covered business before tax at ‚£15.7m is significantly greater than the underlying return of ‚£10.4m expected to arise from the unwind of the risk discount rate within the embedded value. The principal factors which have contributed to the net excess are:

(1) Favourable lapse experience within both the CA and CWA businesses amounting to some ‚£2.9m;

(2) ‚£3.5m arising on the release of the Guardian default reserve; this is explained more fully on page 11; and

(3) ‚£1.1m recovery from PI insurers for misselling claims administration costs, as also referred to in the commentary under "IFRS Result" above.

The net excess has also been adversely affected by operating assumption changesof ‚£7.7m, which relates principally to the strengthening of expense assumptionsin connection with third-party administration arrangements. These arrangementswere changed significantly during the year.

The absence of the need for additional provisions in respect of redress for mortgage endowment misselling claims has contributed to the improvement in the operating profit of the covered business compared with 2005.

Profit before tax of ‚£30.6m has also benefited from the impact in both the CAand CWA businesses of a strong performance in investment markets during thelast quarter of 2006. Besides giving rise to a favourable effect oncurrent-year investment returns, this has also given rise to a resetting ofassumptions regarding future investment returns within the cashflows underlyingthe in-force value. This is reflected in "Economic assumption changes" in thetable above, which also include the favourable impact of a ‚£4.3m reduction innotional policyholder tax as a consequence of the Part VII Transfer. Togetherwith concomitant projected future tax savings of ‚£5.7m in shareholder tax and arelease of a deferred tax provision of ‚£0.6m, this gives rise to a projectedtotal saving in future tax of ‚£10.7m arising as a result of the Part VIITransfer and the net of tax result for the year has benefited by this amountThe results for the year ended 31 December 2005 reflect an exceptional creditof ‚£30.3m (‚£20.3m net of tax) relating to the acquisition of CWA. This amountrepresents the difference between the total purchase price and the embeddedvalue of CWA on acquisition, which has now been re-stated in accordance withEEV principles. Under the AP basis the exceptional credit was reported as ‚£18.3m (‚£13.1m net of tax) for the year ended 31 December 2005. The upwardrevaluation at the acquisition date arises principally from the application ofa lower risk discount rate to the projected cashflows from the acquiredin-force business.

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

The consolidated balance sheet prepared in accordance with EEV principles maybe summarised as: 31 December 2006 2005 ‚£000 ‚£000 Value of in-force business 109,941 109,961 Other net assets 79,167 66,212 ---------- ---------- 189,108 176,173 ========== ========== Represented by:

Embedded value ("EV") of covered business 194,405 194,437

Less: amount financed by borrowings (16,800) (21,000) ---------- ---------- EV of covered business attributable to shareholders 177,605 173,437 Net equity of other Group companies 11,503 2,736 ---------- ---------- Shareholders' equity 189,108 176,173 ========== ==========

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

31 December 2006 2005 Number of policies 000 000 Endowment 75 85 Protection 86 102 Annuities 4 4 Pensions 53 55 Other 10 10 ---------- ---------- Total 228 256 =========== ========== 31 December 2006 2005 Value in-force ‚£m ‚£m Endowment 70.3 76.7 Protection 73.1 80.7 Annuities 2.8 3.4 Pensions 41.7 39.6 Other 0.8 4.7 ---------- ---------- Total at product level 188.7 205.1 Valuation adjustments Holding company expenses (21.7) (25.5) Other (16.9) (28.9) Cost of capital (3.4) (3.1) ---------- ---------- Value in-force pre-tax 146.7 147.6 Taxation (36.8) (37.6) ---------- ---------- Value in-force post-tax 109.9 110.0 ========== ==========

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

The amount in respect of "other valuation adjustments" has reduced significantly over the year following a refinement of the projection processes, whereby certain elements previously contained within this category are now identifiable at product level and have accordingly been allocated to the product lines shown. The 2005 amounts have not been re-stated to reflect this.

Policyholder Funds Investment Return

The CA Managed Fund, which is managed by Schroder Investment Management Limitedand which represents a significant proportion of CA policyholder funds undermanagement, returned 9.82% over the year ended 31 December 2006. The CWA GlobalManaged Fund, which is managed by Irish Life Investment Managers Limited andwhich represents a significant proportion of CWA policyholder funds undermanagement, returned 9.34% over the same period. Both funds outperformed theaverage of 9% achieved by the ABI Life Balanced Managed Fund sector.

The absolute level of growth has had a positive effect on policyholder values, reduced the level of mortgage endowment misselling redress and led to an increase in the value in-force, as projected future charges, based on fund values, have increased.

Returns to ShareholdersReturns to shareholders are underpinned by the emergence of surplus in, andtransfer of surplus from, the life business' long-term insurance fund toshareholder funds and by the return on shareholder net assets representingshareholder net equity. These realisations are utilised in the first instancefor the repayment and servicing of the bank loan on the basis set out in Note5. The surplus arises from the realisation of value in-force, which effectivelyunwinds at the risk discount rate used to discount the underlying cash flows:at 31 December 2006 this rate was reset to 6.1% (31 December 2005: 5.6%). Thereturn on shareholder net assets is determined by the Group's investmentpolicy. Shareholder funds bear central corporate governance costs which cannotbe fairly attributed to the long-term insurance funds and which arise largelyin connection with the status of Chesnara as a listed company.Dividend distributions are currently set in the context of the Board's targetfor a minimum level of regulatory capital resources. This target, together withthe excess over it at 31 December 2006 is set below.The Board's continuing primary aim is to provide a reliable and progressivedividend flow to shareholders within the context of the emergence of surplus inthe life business. The Company's share price strengthened progressively throughthe second and third quarters of 2005, stabilising at a range between 155p and170p per share. This growth was driven in part by (i) the well publicisedconsolidation of that part of the life industry which focuses on the run off ofclosed life and pensions policy portfolios and by a positive reaction toChesnara's participation in this marketplace through the acquisition of CWA in2005 and by (ii) the recognition that, in accordance with its current strategy,Chesnara is essentially a yield stock, which, in the absence of the acquisitionof further closed-book propositions, holds out the prospect of a return ofcapital to shareholders. After some volatility in the early months of 2006 theshares have generally traded within a range of 170p to 185p. With totalproposed dividends in respect of the year ended 31 December 2006 at 13.1p pershare, this implies a yield of between 7.1% and 7.7%. At a market price of 170pper share, the shares may be characterised as trading at a discount of 6% tothe embedded value of the Group as now reported on the EEV basis as at 31December 2006. Similarly, at a market price of 185p per share, they may becharacterised as trading at a premium of just over 2% to Group embedded value.

Solvency and Regulatory Capital

Regulatory Capital Resources and Requirements

The regulatory capital of life insurance companies in the UK is calculated byreference to FSA prudential regulations. The rules are designed to ensure thatcompanies have sufficient assets to meet their liabilities in specified adversecircumstances. As such, there is a restriction on the full transfer of surplusfrom the long-term business fund to shareholder funds of the life company andon the full distribution of reserves from the life company to Chesnara.

The following summarises the capital resources and requirements of the life company for regulatory purposes, before and after making provision for dividend payments from the life company to Chesnara, which were approved after the respective period ends.

Subsequent to the Part VII Transfer on 30 June 2006, the capital requirementsand, accordingly, the regulatory solvency position of the life businesses,subsist entirely within one regulated entity, Countrywide Assured plc ("CA").Prior to that date the capital requirements and regulatory position weredetermined separately for the two regulated life companies, being CA and Cityof Westminster Assurance Company Limited ("CWA"). The prior period informationpresented below shows the information in a pro-forma aggregated format, for thesake of comparison with the current period. The Directors do not consider thatit is misleading to present the prior period information, which was previouslyreported on a separate-entity basis, in this way. 31 December 2006 2005 ‚£m ‚£m Pre-dividend

Available capital resources ("CR") 84.4 84.5 ---------- ---------- Long-term insurance capital requirement ("LTICR") 28.8 34.1 Resilience capital requirement ("RCR") 2.6 2.8 ---------- ---------- Total capital resources requirement ("CRR") 31.4 36.9 ---------- ---------- Target capital requirement cover 45.8 54.7 ---------- ---------- Excess of CR over target requirement 38.6 29.8

---------- ---------- Ratio of available CR to CRR 269% 229% ---------- ---------- Post dividend

Available capital resources ("CR") 64.4 65.7 ---------- ---------- Long-term insurance capital requirement ("LTICR") 28.8 34.1 Resilience capital requirement ("RCR") 2.6 2.8 ---------- ---------- Total capital resources requirement ("CRR") 31.4 36.9 ---------- ---------- Target capital requirement cover 45.8 54.7 ---------- ---------- Excess of CR over target requirement 18.6 11.0

---------- ---------- Ratio of available CR to CRR 205% 178% ---------- ----------

The CA Board, as a matter of policy, continues to target CR cover for total CRRat a minimum level of 150% of the LTICR and 100% of the RCR. Up until 30 June2006, the CWA target capital requirement cover was expressed as a ‚£5m excessover the regulatory CRR, as a consequence of a long-standing agreement with theFSA. With effect from 30 June 2006 the CRR of the transferred business isdetermined on the same basis as the existing CA business, so that, overall, theGroup benefits to the extent that the total CRR is lower than if the ‚£5m excesshad continued to be applied to the transferred business.‚£5.8m of the target capital requirement cover set out above (2005: ‚£11.7m) isrepresented by shareholder retained earnings: to the extent that the targetcover is maintained, this amount is not currently distributable from the lifebusiness.Available capital resources at 31 December 2006 and, therefore, the overallsolvency position have benefited from the full release of the ‚£6m reserve heldagainst the possible default of Guardian Assurance plc ("Guardian"), a majorreinsurer (see below).

Further, CA's solvency position has benefited from the disposal of PLI, referred to under IFRS Result in the Operating Review above, which has reduced the LTICR by ‚£2.0m, while capital resources reduced by ‚£0.3m.

It can be seen from this information that Chesnara, which relies on dividenddistributions from its life company, is currently in a favourable position toservice its loan commitments and to continue to pursue a progressive dividendpolicy.Insurance Group DirectiveIn accordance with the EU Insurance Group Directive, the Group calculates theexcess of the aggregate of regulatory capital employed over the aggregateminimum solvency requirement imposed by local regulators. The following setsout these calculations pre and post the recognition of interim and finaldividends for the financial year, but approved by the Board and paid to Groupshareholders after the respective dates: 31 December 2006 2005 ‚£m ‚£m Pre-dividend

Available group capital resources 79.2 66.2 Group regulatory capital requirement (31.4) (36.9) ---------- ---------- Excess 47.8 29.3 ========== ========== Cover 252% 179% ========== ========== Post-dividend

Available group capital resources 70.8 58.3 Group regulatory capital requirements (31.4) (36.9) ---------- ---------- Excess 39.4 21.4 ========== ========== Cover 225% 158% ========== ==========

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

Individual Capital Assessments

The FSA Prudential Sourcebooks require an insurance company to make its ownassessment of its capital needs to a required standard (a 99.5% probability ofbeing able to meet its liabilities to policyholders after one year). In thelight of scrutiny of this assessment, the FSA may impose its own additionalindividual capital guidance. The Individual Capital Assessment is based on arealistic liability assessment, rather than the statutory mathematicalreserves, and involves stress testing the resultant realistic balance sheet forthe impact of adverse events.Following the Part VII Transfer as at 30 June 2006, an Individual CapitalAssessment for the life businesses was established on a combined basis duringthe second half of 2006. As a result, it has been concluded that the effectivecurrent- and medium-term capital requirement constraints on distributions toChesnara will continue to be on the basis set out under "Regulatory capitalresources and requirements" above.

Guardian Default Reserve

Following the implementation of the Insurers (Reorganisation and Winding Up)Regulations 2004, CA maintained a reserve of ‚£6m at 31 December 2005 relatingto possible default by Guardian, with whom it had aggregate reinsuredliabilities at that time of ‚£221.3m. During 2006 Guardian granted a legalcharge to CA over the related investment assets, as a result of which the CABoard determined that the reserve is no longer required.The reserve was established determining the regulatory capital sourceposition and, therefore, served to restrict the amount which may be transferredfrom CA's long-term business fund to shareholder funds. It was also recognisedat ‚£3.5m in establishing the Embedded Value of the covered business inaccordance with EEV principles, which employ a market-consistent embedded valuemethodology (see below). Accordingly, the release of the reserve during 2006has increased available capital resources, as determined for regulatorysolvency purposes by ‚£6m and has also increased the profit of the coveredbusiness, as reported in the EEV supplementary information on page 24, by ‚£3.5m.Neither the establishment nor the release of the reserve have been recognisedfor IFRS reporting purposes, as the likelihood of default by Guardian under thereinsurance arrangements was considered by the CA Board to be remote.

EEV Reporting

As explained in the Notes to the Supplementary Information on pages 23 to 24,the Group has adopted European Embedded Value ("EEV") principles as the basisfor reporting supplementary financial information in lieu of the AchievedProfit ("AP") basis. This first-time adoption of EEV principles involves therestatement of supplementary financial information previously reported underthe AP basis. The impact of the adoption of EEV on shareholder net equity andprofit after tax as previously reported on the AP basis is set out andexplained in the 2006 Interim Financial Statements, which are available on ourwebsite www.chesnara.co.uk.

Consolidated Income Statement for the year ended 31 December 2006

Year ended 31 December 2006 2005 Note ‚£000 ‚£000 Insurance premium revenue 112,800 115,673 Insurance premium ceded to reinsurers (22,194) (26,691) ---------- ---------- Net insurance premium revenue 90,606 88,982 Fee and commission income Insurance contracts 43,519 49,405 Investment contracts 9,085 5,971 Investment income 151,470 214,691 ---------- ---------- Total revenue (net of reinsurance payable) 294,680 359,049 Other operating income 1,195 1,226 ---------- ---------- Net income 295,875 360,275 ---------- ---------- Policyholder claims and benefits incurred (218,541)

(291,921)

Reinsurers' share of claims and benefits

incurred 32,761 61,300 ---------- ---------- Net policyholder claims and benefits incurred (185,780) (230,621) ---------- ---------- Change in investment contract liabilities (58,905)

(85,130)

Reinsurers' share of investment contract

liabilities 1,304 3,742 ---------- ---------- Net change in investment contract liabilities (57,601) (81,388) ---------- ---------- Fees, commission and other acquisition costs (2,881) (5,699) Administrative expenses (17,184) (18,675) Other operating expenses Charge for amortisation of intangible assets (3,773) (2,364) Reinsurance recapture premium (1,374) - Other (781) (267) ---------- ---------- Total expenses (269,374) (339,014) ---------- ---------- Operating profit 26,501 21,261 Financing costs (1,206) (805)

Loss on sale of subsidiary company 3 (248)

- ---------- ---------- Profit before income taxes 25,047 20,456 Income tax expense 4 (5,791) (1,841) ---------- ---------- Profit for the year 19,256 18,615 ========== ========== Basic earnings per share 8 18.41p 19.26p ---------- ---------- Diluted earnings per share 8 18.41p 19.26p ========== ==========

Consolidated Balance Sheet at 31 December 2006

31 December 2006 2005 Note ‚£000 ‚£000 Assets Intangible assets Deferred acquisition costs 10,687 13,000

Acquired value of in-force business

Insurance contracts 22,144 24,900 Investment contracts 13,644 14,661 Property and equipment - -

Reinsurers' share of insurance contract provisions 207,279

199,563

Amounts deposited with reinsurers 63,721 62,697 Investment properties 27,750 25,422 Financial assets

Equity securities at fair value through income 738,487 688,478

Holdings in collective investment schemes at fair value through income 342,352

340,379

Debt securities at fair value through income 350,524

383,817

Loans and receivables including insurance receivables 17,130

19,810

Derivative financial instruments 30,642 16,108 ---------- ---------- Total financial assets 1,479,315 1,448,592 ---------- ----------

Reinsurers share of accrued policyholder

claims 4,191 4,810 Income taxes 260 199 Cash and cash equivalents 301,218 282,452 ---------- ---------- Total assets 2,130,209 2,076,296 ---------- ---------- Liabilities Insurance contract provisions 1,115,197 1,072,064 Financial liabilities

Investment contracts at fair value through

income 812,979 803,146 Borrowings 5 16,574 20,638 Derivative financial instruments 1,421 416 ---------- ---------- Total financial liabilities 830,974 824,200 ---------- ---------- Provisions 597 1,433 Deferred tax liabilities 13,946 13,327 Reinsurance payables 3,059 2,049

Payables related to direct insurance and

investment contracts 24,927 23,866 Deferred income 18,231 20,195 Income taxes 2,023 3,345 Other payables 7,000 7,550 ---------- ---------- Total liabilities 2,015,954 1,968,029 ---------- ---------- Net assets 114,255 108,267 ========== ========== Shareholders' equity Share capital 6 41,501 41,501 Share premium 6 20,458 20,458 Other reserves 50 50 Retained earnings 7 52,246 46,258 ---------- ---------- Total shareholders' equity 114,255 108,267 ========== ==========

Consolidated Statement of Cash Flows for the year ended 31 December 2006

Year ended 31 December 2006 2005 ‚£000 ‚£000 Profit for the year 19,256 18,615 Adjustments for: Depreciation - 105

Amortisation of deferred acquisition costs. 2,312 4,998 Amortisation of acquired in-force value 3,772 2,363

Tax expense 5,791 1,841 Interest receivable (26,331) (7,929) Dividends receivable (30,266) (17,901)Interest expense 1,206 805

Change in fair value of investment properties (2,328) (1,344)

Fair value gains on financial assets (54,154)

(75,786)

Loss on sale of property and equipment - 300 Loss on sale of subsidiary company 248 -

Interest received 28,981 9,545 Dividends received 27,099 18,473

Changes in operating assets and liabilities (excluding the effect of acquisitions) Increase in intangible assets related to investment and insurance contracts -

(8,936)

Decrease/(increase) in financial assets 20,039

(3,537)

Increase in reinsurers share of insurance contract provisions (7,097)

(37,818)

Increase in amounts deposited with reinsurers (1,024) (4,021)

Decrease in other loans and receivables 2,932 9,706 Increase in insurance contract provisions 44,056 122,572 Increase in investment contract liabilities 9,833 52,510 (Decrease)/Increase in provisions (836) 507 Increase/(decrease) in reinsurance payables 1,010

(1,284)

Increase in payables related to direct insurance

and investment contracts 1,061 9,515 Decrease in other payables (1,650) (5,199) ---------- ----------

Cash generated from operations 43,910 88,100

Income tax paid (6,470) (4,217) ---------- ----------

Net cash generated from operating 37,440 83,883

activities ========== ==========

Cash flows from investing activities Acquisition of subsidiary, net of cash - 124,497acquired Disposal of subsidiary, net of cash (295) -disposed of Purchases of property and equipment -

(2)

---------- ---------- Net cash (utilised by)/generated from (295) 124,495

investing activities ========== ==========

Cash flows from financing activities Proceeds from the issue of share capital - 23,533 (Repayment of)/proceeds from borrowings (4,200) 21,000

Payment of transaction costs - (2,539) Dividends paid (13,268) (11,249) Interest paid (911) (604) ---------- ----------

Net cash (utilised by)/generated from (18,379) 30,141

financing activities ========== ==========

Net increase in cash and cash equivalents 18,766 238,519 Cash and cash equivalents at beginning of 282,452 43,933

period ---------- ----------

Cash and cash equivalents at end of period 301,218 282,452

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

In the cash flow statement proceeds from the

sale of property and equipment comprise: Net book amount - 300 Loss on sale - (300) ---------- ---------- Proceeds from sale - - ========== ========== Consolidated Statement of Changes in Equity for the year ended 31 December 2006 Year ended 31 December 2006 Capital Share Share redemption Retained capital premium reserve earnings Total ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 Equity shareholders' 41,501 20,458 50 46,258 108,267 fundsat 1 January 2006 Profit for the period representing total recognised income and expenses - - - 19,256 19,256 Dividends paid - - - (13,268) (13,268) ---------- --------- ---------- ---------- ---------- Equity shareholders' funds at 31 December 41,501 20,458 50 52,246 114,255 2006 ========== ========= ========== ========== ========== Year ended 31 December 2005 Capital Share Share redemption Retained capital premium reserve earnings Total ‚£000 ‚£000 ‚£000 ‚£000 ‚£000

Equity shareholders' 40,500 - 50 38,892 79,442

funds at 1 January 2005 Profit for the period representing total recognised income and expenses - - - 18,615 18,615 Dividends paid - - - (11,249) (11,249) Issue of ordinary shares pursuant to exercise of option 84 1,449 - - 1,533 Issue of ordinary shares pursuant to placing and open offer 917 21,083 - - 22,000 Expenses incurred in connection with issue of ordinary shares pursuant to placing and open offer - (2,074) - - (2,074) ------- --------- ---------- --------- --------- Equity shareholders' funds at 31 December 41,501 20,458 50 46,258 108,267

2005 ======= ========= ========== ========= ========= 1. Basis of PreparationThese financial statements have been prepared in accordance with InternationalFinancial Reporting Standards including International Accounting Standards andInterpretations (collectively "IFRS") issued by the International AccountingStandards Board ("IASB") and endorsed for use by companies in the EU, and withthose parts of the UK Companies Act 1985 applicable to companies reportingunder IFRS.Full details of IFRS policies applied, which are unchanged from those appliedfor the year ended 31 December 2005 are set out in the financial statements forthe year then ended, a copy of which is available from our website www.chesnara.co.uk.

2. Status of financial information

The financial information contained in this preliminary announcement does notconstitute the Company's consolidated statutory financial statements for theyears ended 31 December 2006 or 2005, but is derived from those financialstatements. The financial statements for the year ended 31 December 2005, havebeen delivered to the Registrar of Companies. The financial statements for theyear ended 31 December 2006 will be delivered following the Company's AnnualGeneral Meeting. The auditors have reported on those financial statements;their reports were unqualified and did not contain statements under section 237(2) or (3) of the Companies Act 1985.

The financial statements will be posted to shareholders on 12 April 2007, copies of which will also be available from the Company Secretary, Chesnara plc, Harbour House, Portway, Preston, PR2 2PR.

3. Disposal of subsidiary

On 15 January 2006 the Group disposed of its interest in Premium LifeInternational Limited to LCL International Life Assurance Company Limited for aconsideration receivable in cash of ‚£1, which, net of cash balances of ‚£295,067in the subsidiary at that date, gave rise to a net cash outflow of ‚£295,066.This amount is reflected as a cash outflow from investing activitiesin theConsolidated Statement of Cash Flows.

The contribution of the subsidiary to the net profit for the year ended 31 December 2006 is not material and a loss of ‚£248,000 arising on the disposal has been recognised in the Consolidated Income Statement for that period.

Following the disposal there was a reduction of ‚£2,030,000 in the regulatory capital resource requirements of Countrywide Assured plc and there was a reduction in available capital resources of ‚£248,000.

4. Income tax expense Year ended 31 December 2006 2005 ‚£000 ‚£000 Current tax expense Current year 4,212 5,021 Adjustment to prior years 626 - Overseas tax 334 253 ---------- ---------- 5,172 5,274 Deferred tax expense Origination and reversal of temporary differences 619 (3,433) ---------- ---------- Total income tax expense/(credit) 5,791 1,841

========== ==========Reconciliation of effective tax rate on profit Year ended 31 December before tax 2006 2005 ‚£000 ‚£000 Profit before tax 25,047 20,456 ---------- ----------

Income tax using the domestic corporation tax 7,514 6,137 rate of 30% (2004: 30%)

Effect of tax rates in offshore jurisdictions - 4 Permanent differences 163 - Effect of UK taxing bases on insurance profits Offset of franked investment income (3,463) (3,790) Other 951 (510) Under provided in prior years 626 - ---------- ---------- Total income tax expense 5,791 1,841 ========== ==========5. BorrowingsGroup and Company 31 December 2006 2005 ‚£000 ‚£000 Bank loan 16,574 20,638 ========== ========== The bank loan which was drawn down on 2 June 2005 under a facility madeavailable in 4 May 2005 is unsecured and is repayable in five equal annualinstalments on the anniversary of the draw down date. Accordingly the currentportion as at 31 December 2006, being that payable within one year, is ‚£4,102,176 and the non-current portion is ‚£12,471,943. The outstanding principalon the loan bears interest at a rate based on the London Inter-bank Offer Rateand is payable in arrears over a period which varies between one and six monthsat the option of the borrower.

6. Share capital and share premium

Group 31 December 2006 31 December 2005 Share Share Number of capital Number of capital shares ‚£000 shares ‚£000 Share capital 104,588,785 41,501 104,588,785 41,501 ---------- ---------- ---------- ----------

There have been no changes in Group share capital and share premium during the year ended 31 December 2006.

Under the reverse acquisition basis of accounting, at the date of acquisitionof Chesnara plc (the legal parent) the amount of issued share capital in theconsolidated balance sheet represents the amount of issued share capital ofCountrywide Assured Life Holdings Limited (the legal subsidiary) immediatelybefore the acquisition and the deemed cost of acquisition, is taken as ‚£nil.The number of shares, representing the equity structure, reflects the equitystructure of Chesnara plc as set out below.

Company

The share capital of Chesnara plc comprises:

31 December 31 December 2006 2005 Authorised ‚£ ‚£ 201,000,000 Ordinary shares of 5p each 10,050,000 10,050,000 ========== ========== Number of Share Shares Capital Share CapitalIssued ‚£ ‚£ Ordinary shares of 5p each 104,588,785 5,229,439 5,229,439 ========== ========== ==========

There have been no changes in Company share capital and share premium during the year ended 31 December 2006.

7. Retained earnings Year ended 31 December 2006 2005 Retained earnings attributableto equity holders of ‚£000 ‚£000 the parent company comprise: Balance at 1 January 46,258 38,892 Profit for the year 19,256 18,615 Dividends Final approved and paid for 2004 - (6,124) Interim approved and paid for 2005 - (5,125) Final approved and paid for 2005 (7,986) - Interim approved and paid for 2006 (5,282) - ---------- ---------- Balance at 31 December 52,246 46,258 ========== ===========

The retained earnings balance represents the amount available for dividenddistribution to the equity shareholders of the parent company except for ‚£2,504,000 (31 December 2005: ‚£12,959,000) which is not distributable and whichmust be retained in the regulated life subsidiary company in accordance withthe solvency capital requirements pertaining to that subsidiary.The interim dividend in respect of 2005, approved and paid in 2005, was paid atthe rate of 4.9p per share. The final dividend in respect of 2005, approved andpaid in 2006, was paid at the rate of 7.55p per share so that the totaldividend paid to the equity shareholders of the Parent Company in respect ofthe year ended 31 December 2005 was made at the rate of 12.45p per share.The interim dividend in respect of 2006, approved and paid in 2006, was paid atthe rate of 5.05p per share to equity shareholders of the Parent Companyregistered at the close of business on 15 September 2006, the dividend recorddate.A final dividend of 8.05p per share in respect of the year ended 31 December2006 payable on 14 May 2007 to equity shareholders of the parent companyregistered at the date of business 10 April 2007, the dividend record date, wasapproved by the Directors after the balance sheet date. The resulting totaldividend of ‚£8.4m has not been provided for in these financial statements andthere are no income tax consequences.

The following summarises dividends per share in respect of the year ended 31 December 2005 and 31 December 2006:

2006 2005 p p

Interim - approved and paid 5.05 4.90

Final - proposed 8.05 7.55 ---------- ---------- Total 13.10 12.45 ========== ========== 8. Earnings per share

Earnings per share is based on the following:

Year ended 31 December 2006 2005 Profit for the year (‚£000) 19,256 18,615 Weighted average number of ordinary shares 104,588,785 96,637,227 ---------- ---------- Basic earnings per share 18.41p 19.26p ---------- ---------- Diluted earnings per share 18.41p 19.26p ========== ==========

The weighted average number of shares in respect of the year ended 31 December 2005 is based on

i. 84,564,168 shares in issue at the beginning of the period ii. 1,691,284 shares issued on 10 February 2005 pursuant to exercise of a share

option

iii. 18,333,333 shares issued on 2 June 2005 pursuant to a placing and open

offer

The weighted average number of ordinary shares in respect of the year ended 31December 2006 is based on 104,588,785 shares in issue at the beginning and endof the period.The diluted weighted average number of shares in respect of the year ended 31December 2005 was 96,673,130. The dilution reflects an adjustment for theequivalent number of shares that would have been issued for no considerationhad the exercise of the share option, granted to Numis Securities limited forbroking services, provided in connection with the admission of the company tothe Official List of the UK Listing Authority, been exercised prior to itsactual exercise date of 10 February 2005.

There were no further share options outstanding during the year ended 31 December 2005 or during the year ended 31 December 2006.

9. Additional information

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

10. Forward looking statements

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

Supplementary Information - European Embedded Value Basis

Summarised consolidated income statement

Year ended 31 December 2006 2005 Note ‚£000 ‚£000 Operating profit of covered 3 business 15,684 11,353 Other operational result (699) (700) ---------- ---------- Operating profit 14,985 10,653 Exceptional Item Profit on acquisition of subsidiary company - 30,324 Variation from longer-term investment return 6,307 14525 Effect of economic assumption changes 9,284 (3,589) ---------- ---------- Profit before tax 30,576 51,904 Tax (4,373) (11,970) ---------- ---------- Profit for the period 26,203 39,934 ========= ========== Earnings per share Based on profit for the period before exceptional item, net of attributable tax 25.05p 20.34p ---------- ---------- Based on profit for the period 25.05p 41.32p ---------- ---------- Diluted earnings per share Based on profit for the period before exceptional item, net of attributable tax 25.05p 8.42p ---------- ---------- Based on profit for the period 25.05p 33.20p ---------- ----------

Supplementary Information - European Embedded Value Basis

Summarised consolidated balance sheet

31 December 2006 2005 Note ‚£000 ‚£000 Assets Value of in force business 2,4 109,941 109,961 Reinsurers' share of insurance contract provisions 183,033 174,154 Amounts deposited with reinsurers 62,794 60,979 Investment properties 27,750 25,422 Deferred tax assets 121 120 Financial assets Equity securities at fair value through income 738,487 688,478 Holdings in collective investment schemes at fair value through income 342,352 340,379 Debt securities at fair value through income 350,524 383,817 Loans and receivables including insurance receivables 17,310 19,810 Derivative financial instruments 30,642 16,108 ---------- ---------- Total financial assets 1,479,315 1,448,592 ---------- ---------- Reinsurers' share of accrued policy claims 4,191 4,810 Income taxes 260 199 Cash and cash equivalents 301,218 282,452 ---------- ---------- Total assets 2,168,623 2,106,689 ---------- ---------- Liabilities Insurance contract provisions 1,091,889 1,051,913 Financial liabilities Investment contracts at fair value through income 832,025 819,306 Borrowings 16,574 20,638 Derivative financial instruments 1,421 416 ---------- ---------- Total financial liabilities 850,020 840,360 ---------- ---------- Provisions 597 1,433 Reinsurance payables 3,059 2,049 Payables related to direct insurance and investment contracts 24,927 23,866 Income taxes 2,023 3,345 Other payables 7,000 7,550 ---------- ---------- Total liabilities 1,079,515 1,930,516 ---------- ---------- Net assets 189,108 176,173 ========== ========== Shareholders' equity Share capital 41,501 41,501 Share premium 20,458 20,458 Other reserves 50 50 Retained earnings 127,099 114,164 ---------- ---------- Total shareholders' equity 2,4 189,108 176,173 ========== ==========

Supplementary Information - European Embedded Value Basis

Summarised consolidated statement of changes in equity

Year ended 31 December 2006 2005 ‚£000 ‚£000

Shareholders' equity at 1 January 176,173 126,029

Profit for the period representing total recognised income and expense 26,203 39,934 Dividends paid (13,268) (11,249) Issue of ordinary shares pursuant to exercise of option - 1,533 Issue of ordinary shares pursuant to placing and open offer - 22,000 Expenses incurred in connection with issue of ordinary shares pursuant to placing and open offer - (2,074) ---------- ---------- Shareholders' equity at 31 December 189,108 176,173 ========== ==========

Supplementary Information - European Embedded Value Basis

Notes to the Supplementary Information

1. Basis of preparation

The Group presents financial statements which are supplementary to the Group'sprimary financial statements which have been prepared in accordance withInternational Financial Reporting Standards ("IFRS"). This supplementaryinformation has been prepared in accordance with the European Embedded Value("EEV") principles issued in May 2004 by the European CFO Forum andsupplemented by Additional Guidance on EEV Disclosures issued by the same bodyin October 2005. The principles provide a framework intended to improvecomparability and transparency in embedded value reporting across Europe.This first time adoption of EEV principles and associated disclosuresrepresents a change from the Achieved Profit (AP) basis of reporting, which haspreviously been adopted by the Group as the basis for presenting supplementaryfinancial information. The adoption of EEV principles does not affect the basisof reporting the statutory results, the regulatory capital position or thedividend paying capacity of Chesnara plc.The Directors consider that the EEV methodology is a refinement of the AP basispreviously adopted by the Group and represents a more meaningful basis ofreporting the underlying value of the business and the underlying drivers ofperformance.Information relating to the restatement of supplementary financial information,from reporting in accordance with the AP basis to reporting in accordance withEEV principles, is set out in 2006 Interim Financial statements, which areavailable on our website www.chesnara.co.uk.

The description of covered business and the methodology and assumptions used in applying EEV principles are also set out in the Interim Financial Statements.

2. Analysis of shareholders' equity

31 December 2006 2005 ‚£000 ‚£000 Covered business Required capital 44,192 54,749 Free surplus 40,268 29,727 ---------- ---------- Shareholder net worth 84,460 84,476 Value of in-force business 109,941 109,961 ---------- ---------- Embedded value of covered 194,401 194,437 business Less: amount financed by (16,800) (21,000) borrowings ---------- ---------- Embedded value of covered business attributable to shareholders 177,601 173,437 Net equity of other Group 11,507 2,736 companies ---------- ---------- Total shareholders' equity 189,108 176,173 ========== ========== The movement in the value of in-force business comprises: Value at beginning of period 109,961 61,437 Acquired in-force value arising - on the acquisition of CWA Life Holdings plc 53,804 Amount charged to operating profit (20) (5,280) ---------- ---------- Value at end of period 109,941 109,961 ========== ==========

On 2 June 2005, the Group drew down ‚£21m on a bank loan facility, in order topart fund the acquisition of CWA Life Holdings plc. This effectivelyrepresented a purchase of part of the underlying value in force of CWA by wayof debt finance and it follows that the embedded value of the covered businessis not attributable to equity shareholders of the Group to the extent of theoutstanding balance on the loan account at each balance sheet date. The loan isrepayable in five equal annual instalments on the anniversary of the draw downdate, the funds for the repayment effectively being provided by way of therealisation of the underlying value of in-force business of the coveredbusiness. In accordance with this, ‚£4.2m of the loan was repaid on 2 June 2006,leaving principal outstanding at that date of ‚£16.8m.

3. Analysis of profit of covered business

Year Ended 31 December 2006 2005 ‚£000 ‚£000 New business contribution 1,599 1,147 Return from in-force business Expected return 10,386 9,087 Experience variances 7,459 (563) Operating assumption changes (5,072) 542 Return on shareholder net worth 1,312 1,140 ---------- ---------- Operating profit 15,684 11,353 Variation from longer-term 6,307 14,525investment return Effect of economic assumption 9,284 (3,598)changes ---------- ---------- Profit before tax 31,275 22,280 Tax (4,496) (2,068) ---------- ---------- Profit after tax 26,779 20,212 ========== ==========The profit of covered business varies from amounts presented in the summarisedconsolidated income statement in respect of the pre-tax result of the holdingcompany presented as "other operational result", any tax pertaining thereto,which is included in "other tax", and profit on acquisition of subsidiarycompany and related tax, which are exceptional items. The variation fromlonger-term investment return for the year ended 31 December 2006 is stated netof a loss of ‚£248,000 arising on the sale of a subsidiary company. 4. Reconciliation of shareholders' equity on the IFRS basis to shareholderequity on the EEV basis 31 December 2006 2005 ‚£000 ‚£000 Shareholders' equity on the IFRS basis 114,255 108,267 Adjustments Deferred acquisition costs Insurance contracts - (1,114) Investment contracts (10,074) (11,239) Deferred income 17,239 19,145 Adjustment to provisions on investment contracts, net of amounts deposited with reinsurers (19,596) (16,700) Adjustments to provisions on insurance contracts, net of reinsurers' share (936) (34) Acquired in-force value (25,933) (28,703) Deferred tax 4,212 2,590 Reinsurer default reserve - (6,000) ---------- ----------

Group shareholder net worth 79,167 66,212

Value of inforce business 109,941 109,961 ---------- ---------- Shareholders' equity on the EEV basis 189,108 176,173 ========== ========== Group shareholder net worth comprises: Shareholder net worth in covered business 84,460 84,476 Shareholder's equity in other Group companies 11,507 2,736 Debt finance (16,800) (21,000) ---------- ---------- Total 79,167 66,212 ========== ========== The reinsurer default reserve adjustment at 31 December 2005 related to areserve which was established for FSA prudential reporting and which wasrecognised for reporting on the EEV basis, but not for reporting on the IFRSbasis. The reserve was not recognised for reporting in accordance with IFRS asthe events to which it relates were, in the opinion of the Directors,considered to be remote or uncertain. However, the reserve was charged to theshareholder net worth component of the embedded value of the covered business,as this was held to be consistent with the market-consistent valuation approachadopted in accordance with EEV principles. The reserve was maintained againstthe effect of possible default by a major reinsurer, Guardian Assurance plc,which is a subsidiary of Aegon NV. As a result of mitigating action that wastaken during 2006 the reserve is no longer required at 31 December 2006.