Chesnara Regulatory News (CSN)

28 Aug 2009 07:00

CHESNARA PLC - INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2009

2.7% increase continues strong dividend growth at Chesnara

28 August 2009

Chesnara today reported interim results for the first half of 2009. As theacquisition of Moderna Forsakringar Liv AB ("Moderna") completed on 23rd July no account is taken of the effect of the acquisition or their financial performancein these results.

The Group remains committed to offering shareholders an attractive long-term income stream arising from the profits of its life assurance businesses.

* Profit (on IFRS basis) before tax for the six months ended 30 June 2009 up

12% to 11.2m, (2008 half-year profit before tax: 10.0m)

* Earnings per share (on IFRS basis) of 8.17p, (2008 half-year earnings per

share: 7.71p) * On EEV basis pre-tax profit for the half-year of 7.8m (half-year 2008 loss: 5.2m). * Positive mortality and persistency experience

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

GBP178.9m - 1.76p per share (30 June 2008: 179.0m - 1.71p per share)

* Life company solvency ratio, after dividend payment strong at 241% (30 June

2008: 227%). Group solvency ratio increases to 408% post interim dividend

(30 June 2008: 348%)*. * 5.65p interim dividend per share proposed: increased by 2.7% * Board remains confident about future dividend flows * Search for value adding acquisition opportunities continues

Graham Kettleborough, Chief Executive said:

'The resilience of our underlying business has again enabled us to deliver strong results in the face of volatile investment market conditions. This strength enabled the Board to confidently pursue the acquisition of Moderna which we successfully completed at a significant discount to its embedded value thus considerably enhancing shareholder value.

We will continue to search for further acquisitions and our financial strength allows the Board, once again, to deliver on our promise of a reliable and progressive dividend stream by proposing a 2.7% increase in the interim dividend to 5.65p per share.'

The Board approved this statement on 27 August 2009.

Enquiries

Graham KettleboroughChief Executive, Chesnara plc 07799 407519Michael Henman Cubitt Consulting 0207 367 5106Notes to editors:

Chesnara plc, which listed on the London Stock Exchange in May 2004, is theowner of Countrywide Assured plc ("CA") and Moderna Forsakringar Liv AB("Moderna"). CA is a life assurance subsidiary that is substantially closed tonew business. In June 2005 Chesnara acquired a further closed life insurancecompany - City of Westminster Assurance ("CWA") - for 47.8m. With effect from30 June 2006, CWA's policies and assets were transferred into CA plc.

Moderna was acquired on 23 July 2009 for 20m. The company continues to seek new business and grow the strong position it has achieved in the Swedish unit-linked market since its launch in 2002.

* Post the Moderna acquisition the Group Solvency Ratio remains strong at anestimated 283%. Chesnara plc Condensed Consolidated Financial Statements for the Six Months Ended 30 June 2009 Notes On 30 June 2006 the long-term business of City of Westminster Assurance CompanyLimited, a Group subsidiary acquired on 2 June 2005, was transferred, under theprovisions of Part VII of the Financial Services and Markets Act 2000, to the Group's other principal operating subsidiary, Countrywide Assured plc, in whichthe whole of the UK Life operations of the Group now subsist. However, within this document reference is made to 'CWA' and to 'CA' to continue to identify respectively the long-term business which had been conducted within the respective companies prior to the transfer. As stated in Note 7 to the unaudited Condensed Consolidated Financial

Statements on page 23, Chesnara plc acquired the entire issued share capital of Moderna Forsakringar Liv AB ('Moderna') on 23 July 2009. Accordingly, the

Moderna financial position and post-acquisition results will first be consolidated into the Group's financial statements for the year ending 31 December 2009 and are not included in these financial statements.

Chesnara plcCONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED30 JUNE 2009FINANCIAL HIGHLIGHTS Unaudited 6 months ended Year ended 30 June 31 December 2009 2008 2008 IFRS basis Operating profit 11.3 10.4 23.5 Financing costs (0.1) (0.4) (0.8) ---------- ---------- ---------- Profit before income taxes GBP11.2m GBP10.0m GBP22.7m ========= ========== ========== Basic earnings per share 8.17p 7.71p 19.24p Dividend per share 5.65p 5.50p 15.55p Shareholders' net equity GBP124.5m GBP123.5m GBP126.4m ========== ========== ==========

European Embedded Value basis (EEV)

Operating profit / (loss) 10.2 (4.7) 25.9 Investment variances and economic (2.4) (0.5) (9.9)assumption changes ---------- ---------- ---------- Profit / (loss) before tax 7.8 (5.2) 16.0 Tax (1.4) 7.2 (1.2) ---------- ---------- ---------- Profit for the period GBP6.4m GBP2.0m GBP14.8m ========== ========== ========== Covered Business Shareholder net worth 55.0 57.1 69.4 Value of in-force business 80.2 85.9 84.9 ---------- ---------- ---------- Embedded value 135.2 143.0 154.3 Acquired embedded value financed by (4.2) (8.3) (8.4)debt Shareholders' equity in other Group 47.9 44.3 36.8companies ---------- ---------- ---------- Shareholders' equity on EEV basis GBP178.9m GBP179.0m GBP182.7m ========== ========== ========== Life annual premium income (AP) GBP43.5m GBP47.4m

92.6m

Life single premium income (SP) GBP13.2m GBP13.3m

23.9m

Life annualised premium income (AP + GBP44.8m GBP48.7m GBP95.0m1/10 SP)

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 period-end, as a component of shareholderequity. Accordingly, the EEV result recognises, within profit, the movement

inthis component.CHAIRMAN'S STATEMENT

I am pleased to present the sixth interim statements of Chesnara plc ('Chesnara').

Background

Chesnara was listed on the London Stock Exchange in May 2004. Originally formedto become the holding company of Countrywide Assured plc on its demerger fromCountrywide plc, in June 2005 it acquired City of Westminster Assurance CompanyLimited, a further closed life assurance company, the long-term business ofwhich was transferred to Countrywide Assured plc on 30 June 2006. In July 2009Chesnara completed the acquisition of Moderna Forsakringar Liv AB ('Moderna'),an open Swedish life assurance company.Countrywide Assured plc now manages a portfolio of some 184,000 life assuranceand pension policies and is substantially closed to new business. It writes asmall amount of new business and accepts top-ups to existing contracts. As asubstantially 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 surplus emerging in the business is distributed by way of dividends. Asthe portfolio runs off, the regulatory capital supporting it may also bereduced.

Moderna manages a portfolio of some 75,000 life assurance and pension policies and is open to new business. It, predominantly, writes unit-linked pension business through independent financial advisers and it is expected that its embedded value will increase over time as further new business is written.

In order to prolong yield delivery, Chesnara seeks to acquire furtherbusinesses. We continue to believe that such potential acquisitions will, inthe long term, support and be complementary to our key objective of deliveringa steady and attractive dividend yield.

Review of the Business

In the first half of the year we continued to examine potential acquisitionopportunities and were pleased to announce the acquisition of Moderna which wefinanced from internal cash resources on 23 July 2009 at a price of 20.0m - asignificant discount to its Embedded Value. We believe that Moderna, under itscontinuing management, can provide strong growth in its chosen markets andcontribute to the future prosperity of Chesnara.Investment market volatility has become a feature of recent times and the firsthalf of 2009 has proved no exception, having experienced the lows of mid-Marchto a near recovery to end 2008 levels at the half year point. Althoughinvestment market returns had an adverse effect on our Q1 performance, thesubsequent near full recovery and our long-standing prudent approach to thebusiness has enabled the posting of a result, which in the prevailingcircumstances, continues to prove resilient.With the effect of investment markets during the period being limited, thepositive effects of continuing good persistency, mortality experience showingpositive gains and the mortgage endowment misselling reserve proving adequate,we are able to report improved results on both an IFRS and an EEV basiscompared with the corresponding period in 2008.On the IFRS basis of reporting we have posted a pre-tax profit of 11.2m forthe half-year ended 30 June 2009 compared with 10.0m for the correspondingperiod in 2008.On the European Embedded Value ('EEV') basis of reporting, the Group recognisesa pre-tax profit of 7.8m for the half-year ended 30 June 2009 compared with aloss of 5.2m for the same period in 2008, which had been impacted by thesignificant decline in global investment markets. Total shareholder equity, as stated on an EEV basis, pre interim dividendappropriation, has reduced from 182.7m ( 1.80 per share) at 31 December 2008to 178.9m ( 1.76 per share) at 30 June 2009. This is after the payment of thefinal dividend of 10.2m (10.05p per share) in respect of 2008.Countrywide Assured plc's capital solvency ratio at 241% remains at a healthypremium to the target set by the Board of 150% (30 June 2008: 227%). TheGroup's solvency position, post the proposed interim dividend, has strengthenedsignificantly from 348% as at 30 June 2008 to 406% as at 30 June 2009. Takingaccount of the Moderna acquisition, this subsequently reduced to an estimated283%. Based on these results the Board is pleased to recommend an interim dividend of5.65p (2008: 5.5p), which represents an increase of 2.7% and equates to a totalinterim dividend of 5.7m.Outlook

Despite the continuing effects of volatile investment markets, the fundamentals of the business and our prudent approach continue to generate resilient results. Overall, in the face of a challenging environment, the group has produced improved results and this bodes well for the future.

We continue to search for acquisitions in the life assurance market and, as recent market transactions demonstrate, there has been a resurgence of available opportunities. With our strong capital base, we are in a good position to take advantage of any suitable opportunities as demonstrated by our purchase of Moderna.

We remain well placed to continue fulfilling our stated objective of deliveringa reliable and progressive dividend stream and wish to thank our employees fortheir contribution to the Group in realising this aim. Peter MasonChairman27 August 2009 DIRECTORS' INFORMATIONPeter Mason is Chairman of Chesnara plc and Chairman of the Chesnara NominationCommittee. He was appointed to these roles on 1 January 2009. Prior to this hewas the Senior Independent Non-executive Director of Chesnara plc and Chairmanof the Audit Committee and he also served on the Remuneration and NominationCommittees during 2008 but retired from the Audit and Remuneration Committeeson 31 December 2008. He is currently a Non-executive Director of HomeownersFriendly Society and Countrywide Assured plc. He is the Investment Director andActuary of Neville James Group, an investment management company. He wasadmitted as a Fellow of the Institute of Actuaries in 1979.Graham Kettleborough is the Chief Executive of Chesnara plc. He joinedCountrywide Assured plc in July 2000 with responsibility for marketing andbusiness development and was appointed as Managing Director and to the Board inJuly 2002. Prior to joining Countrywide Assured plc, he was Head of Servicingand a Director of the Pension Trustee Company at Scottish Provident. He haslifetime experience in the financial services industry, primarily in customerservice, marketing, product and business development, gained with ScottishProvident, Prolific Life, City of Westminster Assurance and Target Life.Ken Romney is the Finance Director and Company Secretary of Chesnara plc. Hejoined Countrywide Assured plc in 1989 and became a member of the Board in1997. He has worked in the life assurance industry for the last 25 years. Hewas Chief Accountant at Laurentian Life (formerly Imperial Trident) up to 1987and was Financial Controller at Sentinel Life between 1987 and 1989. He workedfor Price Waterhouse in their audit division until 1983 in both the UK andSouth Africa. He is a Fellow of the Institute of Chartered Accountants inEngland and Wales.

Frank Hughes is the Business Services Director of Chesnara plc. He joined Countrywide Assured plc in November 1992 as an IT Project Manager and was appointed to the Board as IT Director in May 2002. He has 24 years' experience in the life assurance industry gained with Royal Life, Norwich Union and CMG.

Mike Gordon is an Independent Non-executive Director of Chesnara plc and isChairman of the Remuneration Committee. He was appointed as Senior IndependentNon-executive Director of Chesnara plc on 1 January 2009. He also serves on theAudit Committee and the Nomination Committee. He spent 12 years as Group SalesDirector of Skandia Life Assurance Holdings. He is Chairman of BankhallInvestment Management Limited, a Skandia-owned subsidiary.Terry Marris is an Independent Non-executive Director of Chesnara plc andserves on the Audit Committee, the Remuneration Committee and the NominationCommittee. He joined Countrywide Assured Group plc in 1992 and was ManagingDirector of Countrywide Assured plc until July 2002. Previous roles includedsenior management positions at Lloyds Bank and General Accident. Peter Wright (appointed 1 January 2009) is an Independent Non-ExecutiveDirector who was appointed to the Chesnara plc Board on 1 January 2009. At thesame date he was appointed as Chairman of the Audit Committee and as a memberof the Remuneration Committee. On 9 July 2009, he was also appointed as amember of the Nomination Committee. He retired as a Principal of Towers Perrinon 1 January 2008. He is a former Vice President of the Institute of Actuaries,having been admitted as a Fellow in 1979.INTERIM MANAGEMENT REPORTBackgroundChesnara continues to seek to participate in the consolidation of the closedlife business sector in the UK. In 2004, at the same time that we listed on theLondon Stock Exchange, we acquired Countrywide Assured plc on its effectivedemerger from Countrywide plc, while in 2005 we acquired City of WestminsterAssurance Company Limited from Irish Life and Permanent plc. In 2006 we mergedthe long-term business of the two companies in order to realise significantfinancial and operational synergies.

During the first half of 2009 the Group announced the planned purchase of Moderna Forsakringar Liv AB ("Moderna"), an open Swedish life assurance company. The purchase completed on 23 July at a price of 20m - a significant discount to its Embedded Value.

As Countrywide Assured plc is substantially closed to new business its primaryfocus is on the efficient run-off of the existing life and pension portfolios.This gives rise to the emergence of surplus which supports our primary aim ofdelivering an attractive long-term dividend yield to our shareholders. By thevery nature of the life business assets the surplus arising will deplete overtime as the policies mature, expire or are the subject of a claim. Therefore,to prolong the yield delivery we continue to seek to acquire similarbusinesses.Moderna is a young, growing life company focussed on writing profitable life,pension and investment business through its strong relationships withindependent advisers and other distribution channels. Whilst it may, initially,utilise Group capital to fund new business it is expected to become a netcontributor in the short to medium term, whilst producing strong Embedded Valuegrowth.Review of the Business

In addition to progressing the Moderna acquisition, the Group has continued toconcentrate on its policy of delivering enhanced value to shareholders throughfocusing on the efficient run-off of its Life business.The continued strength of the emergence of surplus has underpinned the overallfinancial performance of the business and enabled the delivery of a slightlyimproved profit on the IFRS basis of reporting, a significant increase in EEVprofit and the maintenance of a healthy regulatory solvency position.Whilst the result has, inevitably, been affected by the volatility prevailingin the investment markets this has been offset by good ongoing performance inkey business areas. There have been no new regulatory issues that have givenrise to any significant concerns or costs.

These key areas are reviewed in more detail in the following sections.

Investment Funds

Strong performance in the unit-linked funds helps promote policy retention andincreases the embedded value of the Group as future management charges will beof a higher magnitude. The CA Managed Fund, which represents a significantproportion of the CA policyholder funds under management, returned -8.1% duringthe twelve months ended 30 June 2009 and the CWA Global Managed Fund, whichrepresents a significant proportion of CWA policy funds under management, alsoreturned -8.1% over the same period. These returns, on balance, comparefavourably with the average of -13.5% achieved by the ABI Life Balanced ManagedFunds sector.As these are Managed Funds the returns reflect the performance of the equity,fixed interest and property markets consequent upon the general economicclimate. Market performance does affect fund values and, consequently, embeddedvalue. Guidance as to the sensitivity of embedded value to market movements isprovided on page 32.The Board continue to have a prudent approach to the investment of shareholderfunds, which underpins our strong solvency position. The benchmark of 70% cashand 30% fixed interest has been maintained.

Policy Attrition

The longer a policy stays in force the greater the profit that accrues to theGroup. We have continued to maintain a strong focus on the retention ofpolicies where it is in the interests of customers to continue with theirarrangements. At the 2008 year-end we reported that the rate of policyattrition had decreased. This improvement has been sustained and a further slightreduction in policy cessation rates has been evident. However, this benefit hasnot been reflected in the assumptions underpinning the EEV at the half year aswe suspect that the current economic climate and, in particular, the risinglevel of unemployment may, at least temporarily, stall the improvements we

havehistorically seen.Financial ExposuresThe Group pays particular attention to any area where it has potentiallysignificant financial exposure. In life and pensions these typically arise inthe areas of onerous policy options and guarantees and of compensation claimsfor past misselling of products. Whilst the Group has very little exposure tothe impact of investment market performance on options and guarantees, it doeshave some ongoing exposure to potential misselling of policies sold inconnection with an endowment mortgage. We are required to make redress to asubset of mortgage endowment policyholders who have been missold their productand to write to policyholders on a biennial basis setting out their potentialreturns based on specified growth rates. In the past there has been significantmedia attention and aggressive advertising by claims management firms on thisissue. This activity has continued to reduce as more potential claims becometime-barred from making a successful complaint. At the present time, over 80%of relevant mortgage endowments are time-barred with the balance of thepopulation carrying little potential liability to compensation. During thefirst half of 2009, the number of complaints we have received has continued toreduce, albeit not at the pace it has done previously. The reduction in thosereceived has been offset by slightly higher uphold rates and, due to marketlows in the period, increased compensation levels. Based on current experiencewe believe that the reserve we hold will prove adequate.

As disclosed in previous statements, we identified an error in an old unit pricing system which had resulted in incorrect capital gains tax being deducted from unit-linked funds. A project is now well advanced which provides recompense to affected policyholders in line with Treating Customers Fairly ('TCF') principles and, based on experience to date, we are able to release

1.1m from the previously established provision of 2.5m net of estimated recoveries.

Regulatory Issues

We have maintained our focus on achieving the FSA's requirements to treat ourcustomers fairly and evidencing and further embedding this within the companyculture. Other than meeting the regulator's industry-wide requirement for morefrequent high level solvency reporting, there has been little in the regulatorylandscape of note in the first half of the year.

Expense Base

Operational and outsourcer costs are being kept under control and our policy attrition rate is better than assumed. The result is that there are more policies in force over which fixed costs can be allocated, leading to cost efficiencies reflected in lower per policy costs.

Key to our strategy of expense base management is the outsourcing of our backoffice functions to professional outsourcing organisations. This results inpredictable levels of per policy cost each year for the term of the relevantcontract and removes cost inefficiencies that can occur as a result of adiminishing policy base.

Service levels from both Capita and HCL Insurance BPO Services Limited, who are managing the CA book of business, are in line with agreed standards.

IFRS Result

The following summarises pre-tax earnings information reflected in the IFRS Condensed Consolidated Statement of Comprehensive Income, showing the contribution from the Life business and from the Parent Company.

Life Parent Amortisation Total business company of AVIF GBP000 GBP000 GBP000 GBP000Six months ended 30 June 2009 (unaudited) Operating profit / 13,401 (327) (1,751) 11,323(loss) Financing costs - (112) - (112) ---------- ---------- ---------- ---------- Profit / (loss) before 13,401 (439) (1,751) 11,211income taxes ======== ========== ========== ========== Six months ended 30 June 2008 (unaudited) Operating profit / 11,062 1,121 (1,751) 10,432(loss) Financing costs - (455) - (455) ---------- ---------- ---------- ---------- Profit / (loss) before 11,062 666 (1,751) 9,977income taxes ========== ========== ========== ========== Year ended 31 December 2008 Operating profit / 27,116 (135) (3,502) 23,479(loss) Financing costs - (752) - (752) ---------- ---------- ---------- ---------- Profit / (loss) before 27,116 (887) (3,502) 22,727income taxes ========== ========== ========== ========== Notes(1) Financing costs relate to a bank loan raised to part finance the acquisition of CWA.(2) 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.Overall, the result for the six months ended 30 June 2009 reflects thecontinuing strong emergence of surplus in the life business, as the underlyinginsurance and investment contracts run off. However, the impact of investmentmarket conditions over the period has adversely impacted the life businessresult by some 1.5m, mirroring conditions similar to those experienced in thecorresponding six-month period in 2008. This has been almost exactly offset byfavourable mortality experience in the period and the resilience of the resulthas been further underpinned by continuing tight control over expenses in thelife business and by the release of 1.1m in respect of a remedial provision nolonger considered to be required.The parent company result has also been adversely impacted by weak investmentreturns: these are net of a recovery of 0.2m in respect of a cash deposit withKaupthing, Singer and Friedlander which we had fully written off to the extentof some 1.1m during the second half of 2008. Weaker interest rates did,however, serve to reduce the overall burden of financing costs.

EEV Result

Supplementary information prepared in accordance with EEV principles and setout in the financial information on pages 24 to 33 is presented to providealternative information to that presented under IFRS. EEV principles recogniseprofits as they are earned over the life of insurance and investment contractsand assist in identifying the value being generated by the life businesses. Theresult determined under this method represents principally the movement in thelife businesses' embedded value, before transfers made to the Parent Companyand ignoring any capital movements. As the Group's life assurance operationswere substantially closed to new business during the period under review, theprincipal underlying components of the EEV result are the expected return fromthe business in force (being the yield at the risk discount rate on the relatedpolicy cash flows as they fall into surplus) together with (1) variances ofactual experience from that assumed for each component of the policy in-forcecash flows and (2) the impact of resetting assumptions for each component ofthe prospective cash flows.

The following is a summarised statement of the EEV result:

Unaudited 6 months ended Year ended 30 June 31 December 2009 2008 2008 GBP000 GBP000 GBP000 Operating profit / (loss) before tax 10,227 (4,669)

25,906

Variation from longer term investment

return (2,710) 428 (16,831) Economic assumption changes 293 (950) 6,951 ---------- ---------- ---------- Profit / (loss) before tax 7,810 (5,191) 16,026 Tax - current (4,071) (2,500) (3,759) - deferred 2,638 9,726 2,559 ---------- ---------- ---------- Profit for the period after tax 6,377 2,035 14,826 ========== ========== ==========

Favourable lapse experience of 3.2m and favourable mortality/morbidity experience of 1.6m over the six-month period, together with the expected unwind of the risk discount rate at 6.3% of some 4.0m, contributed to a very strong EEV operating result for the period.

This was further enhanced by the release of 1.1m from a remedial provision andby a recovery of 0.2m in respect of a cash deposit previously written off,both referred to under 'IFRS Result' above. Investment market returns continued to be weak, generating an adverse variancein excess of 2.7m. However, taking the six-month period as a whole, equitymarket performance was steady, in spite of sharp intra period fluctuations, sothat the investment market experience variance arising on our linked portfolioswas relatively minor.

Overall, embedded value performance has held up well in a trading environment which continues to be difficult and challenging.

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

The consolidated balance sheet prepared in accordance with EEV principles maybe summarised as: Unaudited 30 June 31 December 2009 2008 2008 GBP000 GBP000 GBP000 Value of in-force business 80,153 85,939 84,940 Other net assets 98,732 93,109 97,768 ---------- ---------- ---------- 178,885 179,048 182,708 Represented by: ========== ========== ==========

Embedded value ('EV') of covered business 135,175 143,005 154,329

Less: amount financed by borrowings (4,194) (8,326) (8,358) ---------- ---------- ----------

EV of covered business attributable to

shareholders 130,981 134,679 145,971 Net equity of other Group companies 47,904 44,369 36,737 ---------- ---------- ---------- Shareholders' equity 178,885 179,048 182,708 ========== ========== ==========

Subsequent to 31 December 2008, a dividend of 26m was paid to Chesnara plc from the Life business. This reduced the EV of the covered business, while increasing the net equity of other Group companies.

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

Unaudited 30 June 31 December 2009 2008 2008Number of policies 000 000 000 Endowment 58 62 62 Protection 61 70 64 Annuities 5 4 5 Pensions 52 50 53 Other 8 9 8 ---------- ---------- ----------- Total 184 195 192 ========== ========== ============ Subsequent to 30 June 2008, and following the migration of CWA's business tothe outsourcer's systems, the methodology for determining CWA policy numberswas amended. The numbers of policies as at 30 June 2008, as reflected above,have not, as regards the CWA component, been re-stated in accordance with thischange in methodology and are as originally reported. The numbers of policiesas at 31 December 2008 and 30 June 2009 are stated in accordance with thechange in methodology. Unaudited 30 June 31 December 2009 2008 2008Value in-force GBPm GBPm GBPm Endowment 46.5 51.4 53.8 Protection 47.3 55.0 51.2 Annuities 5.3 2.3 4.5 Pensions 32.7 34.1 33.5 Other - 0.2 - ---------- ---------- ------------ Total at product level 131.8 143.0 143.0 Valuation adjustments Holding company expenses (8.8) (20.5) (8.7) Other (23.1) (20.5) (26.3) Cost of capital (4.4) (5.1) (5.1) ---------- ---------- ---------- Value in-force pre-tax 95.5 96.9 102.9 Taxation (15.3) (11.0) (18.0) ---------- ---------- ---------- Value in-force post-tax 80.2 85.9 84.9 =========== ========== ===========

Principal Risks and Uncertainties

The Group's management of insurance risk is a critical aspect of the business.The primary insurance activity carried out by the Group comprises theassumption of the risk of loss from persons that are directly subject to therisk. Such risks in general relate to life, accident, health and financialperils that may arise from an insurable event, with the majority of the Group'sexposure relating to mortality risk on individual lives, predominantly in theUK. As such, the Group is exposed to the uncertainty surrounding the timing andseverity of claims under the related contracts.The Group is also exposed to a range of financial risks through its lifeassurance contracts, financial assets, financial liabilities, includinginvestment contracts and borrowings, and its reinsurance assets. In particular,the key financial risk is that in the long term its investment proceeds are notsufficient to fund the obligations arising from its insurance and investmentcontracts. The most important components of this financial risk are market risk(interest rate risk and equity price risk), and credit risk, including the riskof reinsurer default. The Group has procedures for setting and monitoring theGroup's assets and liability position with the objective of ensuring that theGroup can always meet its obligations without undue cost and in accordance withthe Group's internal and regulatory capital requirements.Detailed information on the characteristics and management of insurance andfinancial risks borne by the Group is provided in Notes 4 and 5 respectively ofthe Company's published consolidated financial statements for the year ended 31December 2008.

In addition, insofar as the Group makes estimates and assumptions that affect the reported amounts of the following assets and liabilities, there is uncertainty as to the amounts at which they may eventually be settled or realised and as to the timing of settlement or realisation:

estimates of future benefits payments arising from long-term insurance contracts;

fair value of investment contracts;

liability for redress in respect of mortgage endowment misselling complaints and of unit pricing error;

deferred acquisition costs and deferred income; and

amortisation of acquired value of in-force business.

Detailed information on these items is provided in Note 3 of the Company's published consolidated financial statements for the year ended 31 December 2008.

There have been no changes in the nature and incidence of the principal risksand uncertainties, referred to above, during the six months ended 30 June 2009,except in relation to continuing volatility in global investment markets. Theimpact of this on reported results for the six months ended 30 June 2009 is setout in the commentary under 'IFRS Result' and 'EEV Result' above. Clearly thereis continuing significant uncertainty with regard to the direction ofinvestment markets over the remaining six months of the current financial yearand attention is drawn particularly to the sensitivity of the reported embeddedvalue of the Company to investment market and interest rate movements set outin Note 7 to the European Embedded Value Basis Supplementary Information onpage 32.

Related Party Transactions

There have been no related party transactions that have occurred during the first six months of the financial year that have materially affected the financial position or performance of the Group during that period and there have been no changes in the related party transactions described in the last annual report that could do so.

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 Lifecompany for regulatory purposes after making provision for dividend paymentsfrom the Life company to Chesnara, which were approved after the respectiveperiod ends. There were no such dividends relating to 30 June 2009 or 30 June2008. Unaudited 30 June 31 December 2009 2008 2008 GBPm GBPm GBPm

Available capital resources ('CR') 55.0 57.1

43.0 ----------- ----------- ----------- Long-term insurance capital requirement ('LTICR') 21.2 23.6 22.5

Resilience capital requirement ('RCR') 1.6 1.5

1.8 ------------ ----------- -----------

Total capital resources requirement

('CRR') 22.8 25.1 24.3 ----------- ---------- ----------

Target capital requirement cover 33.5 37.0

35.6 ---------- ---------- ----------

Excess of CR over target requirement 21.5 20.1

7.4 ---------- ---------- ---------- Ratio of available CR to CRR 241% 227% 177% ---------- ---------- ----------

The CA Board, as a matter of policy, continues to target CR cover for total CRR at a minimum level of 150% of the total LTICR and 100% of the RCR.

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.

Available capital resources as at 30 June 2009 are reflected after taking account of an FSA rule modification, granted on 17 August 2009, to allow Countrywide Assured plc to not treat entities, if control is exercised by, or on behalf of, HM Treasury, as closely-related counterparties.

Insurance Group Directive

In 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 after the recognition of interim and final dividends forthe financial year, approved by the Board and paid to Group shareholders afterthe respective dates: Unaudited 30 June 31 December 2009 2008 2008 GBPm GBPm GBPm Available group capital resources 93.0 87.3

86.9

Group regulatory capital requirements (22.8) (25.1) (24.3) ----------- ---------- ---------- Excess 70.2 62.2 62.6 ========== ========== ========== Cover 408% 348% 358% ========== ========== ==========

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

Available group capital resources as at 30 June 2009 are reflected after taking account of an FSA rule modification as referred to above.

As stated on page 4 above, the Group financed the acquisition of Moderna frominternal cash resources on 23 July 2009. Had this transaction occurred on 30June 2009, the cover at that date would have been an estimated 283%.

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 on the statutory mathematicalreserves, and involves stress testing the resultant realistic balance sheet forthe impact of adverse events.Countrywide Assured plc completed a further annual assessment during 2008 as aresult of which it was concluded that the effective current- and medium-termcapital requirement constraints on distributions to Chesnara will continue tobe on the basis set out under "Regulatory capital resources and requirements"above.EU Solvency II FrameworkOver the first half of 2009 we have continued to monitor developments in the EUSolvency II framework which, when introduced, will replace the currentframework, developed in the 1970s, with a risk-based approach. We commissioneda firm of external consultants to undertake a gap analysis and the results ofthis are being used to inform our Implementation Plan, to meet the initialimplementation date of October 2012. In the meantime, we have continuedinternal quantitative analysis and begun to assess the impact on the Group ofthe content of the numerous Consultation Papers which have been issued by theCommittee of European Insurance and Occupational Pensions Supervisors('CEIOPS')

Developments

In the second half of the year Chesnara will continue to search forconsolidation or other value-enhancing acquisition opportunities and work withour outsource partners to ensure continuing delivery of acceptable servicelevels. We will also maintain our focus on mortgage endowment and persistencyissues.

In addition we will seek to work with our new colleagues in Moderna to maximise the value they can bring to the Group.

Consolidation

The effects of the dislocation in the financial markets have given rise tofurther opportunities for consolidation in the life assurance market. We haverecently seen evidence of this with the restructuring at Pearl, the proposedpurchase of Lincoln by Sun Life of Canada and Resolution's agreed offer forFriends Provident and their reported plans for further consolidation. Whilstnot competing at this value level we are seeing more opportunity in ourtargeted range of the market.

Regulatory

With our TCF project on track, our Individual Capital Assessment indicatingthat, at present, we have no requirement to hold additional regulatory capitaland no other significant regulatory challenges emerging we will look to buildon our progress to date and to ensure that we maintain strong and focussedmanagement of our regulatory and risk programmes.

Financial Reporting

In June 2008, the European Insurance CFO Forum ('CFO Forum') issued theEuropean Insurance CFO Forum Market Consistent Embedded Value ('MCEV')Principles (copyright (C)Stichting CFO Forum Foundation 2008). These principles,with which we had intended to comply with effect from the interim financialstatements for the six months ended 30 June 2009, represent a development ofthe existing European Embedded Value ('EEV') principles issued by the sameForum, which form the current basis of preparation of our SupplementaryInformation - European Embedded Value Basis as set out on Note 1 to theSupplementary Information on page 26. However, on 22 May 2009, the CFO Forumannounced that the mandatory MCEV reporting date for all its member firms wouldbe deferred until 2011, in light of developments arising from the currentfinancial crisis. In accordance with this, we have also decided to defercompliance with the MCEV Principles, and any amendment thereto, until 2011.

Mortgage Endowments and Persistency

Notwithstanding the acceptable mortgage endowment experience and the positivepersistency result in the first half of the year we remain aware that they areboth significant drivers of both current and future profitability. Thereforethey will, necessarily, receive ongoing focussed management attention.

Outlook

The results for the first six months have benefited from ongoing improvement in policy attrition rates, improved mortality experience, strong expense management and a reduction in the adverse impact of investment market performance. We believe that the results demonstrate a level of ongoing resilience to the rigours of volatile market conditions.

The uncertain economic climate may bring challenges in terms of persistency andendowment misselling claims. In the case of persistency we have yet to reflectthe improvements in persistency that we have enjoyed in recent times and thisprovides a buffer against any adverse experience. On endowments, the percentageof clients time-barred continues to edge up whilst the average compensationwill reduce if equity markets continue their upward trend. We believe thecurrent reserve reflects a realistic view of likely future outcomes.We continue to seek consolidation opportunities that could leverage value fromour existing, and newly acquired, capabilities with a higher level of optimismthan in recent times.

We continue to believe we are well placed to fulfil our stated objective of delivering a reliable and progressive dividend flow.

The Board wishes to extend its thanks to all its employees for their continued contribution to the Group and extends a welcome to our new colleagues in Sweden.

Dividend

We have signalled that we aim to provide a reliable and progressive dividendpayment. With the continuing healthy emergence of surplus from the underlyingproduct base, the improving situation in the key areas of mortgage endowmentand persistency and the strong solvency position of the business, the Board arepleased to be able to recommend an interim dividend of 5.65p, which representsan increase of 2.7% over the 2008 interim payment.Graham KettleboroughChief Executive Officer27 August 2009

STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE HALF YEARLY FINANCIAL REPORT

The Directors confirm that, to the best of their knowledge:

the condensed set of consolidated financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU; and

the interim management report includes a fair view of the information required by:

DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication ofimportant events that have occurred during the first six months of thefinancial year and their impact on the condensed set of financial statementsand a description of the principal risks and uncertainties for the remainingsix months of the year; and

DTR 4.2.8R of the Disclosure and Transparency Rules in respect of transactions that have taken place in the first six months of the current financial year that have materially affected the financial position or performance of the Group during that period; and any changes in the related party transactions described in the last annualreport that could do so.

On behalf of the Board:Ken RomneyFinance Director27 August 2009 CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE SIX MONTHSENDED 30 JUNE 2009 Unaudited Year ended 6 months ended 30 June 31 December 2009 2008 2008 Note GBP000 GBP000 GBP000 Insurance premium revenue 44,577 48,183 94,274 Insurance premium ceded to reinsurers (8,110) (8,779) (17,193) ---------- ---------- ---------- Net insurance premium revenue 36,467 39,404 77,081 Fee and commission income Insurance contracts 17,573 17,905 35,289 Investment contracts 3,299 4,907 9,305 Net investment return 9,145 (114,296) (222,742) ---------- ---------- ----------

Total revenue (net of reinsurance

payable) 66,484 (52,080) (101,067) Other operating income 1,498 1,031 1,314 ---------- ---------- ---------- 67,982 (51,049) (99,753) ---------- ---------- ---------- Insurance contract claims and benefits incurred Claims and benefits paid to insurance contract holders (60,417) (72,350) (131,829)

Net decrease in insurance contract

provisions 9,809 97,734 180,265

Reinsurers' share of claims and benefits 7,287 (4,011) (8,736) ---------- ---------- ---------- Net insurance contract claims and benefits incurred (43,321) 21,373 39,700 ---------- ---------- ----------

Change in investment contract

liabilities (3,658) 51,632 108,516

Reinsurers' share of investment

contract liabilities 193 (2,352) (4,743) ---------- ---------- ----------

Net change in investment contract

liabilities (3,465) 49,280 103,773 ---------- ---------- ---------- Fees, commission and other acquisition costs (661) (601) (1,377) Administrative expenses (6,322) (6,531) (13,633) Other operating expenses

Charge for amortisation of acquired

value of in-force business (1,863) (1,740) (3,578) Other (1,027) (300) (1,653) ---------- ---------- ---------- Total expenses (56,659) 61,481 123,232 ---------- ---------- ---------- Operating profit 11,323 10,432 23,479 Financing costs (112) (455) (752) ---------- ---------- ---------- Profit before income taxes 4 11,211 9,977 22,727 Income tax expense (2,922) (1,917) (2,710) ---------- ---------- ----------

Profit for the period and total comprehensive income for the period 3 8,289 8,060 20,017 ========== ========== ========== Basic earnings per share 2 8.17p 7.71p 19.24p ========== ========== ========== Diluted earnings per share 2 8.17p 7.71p 19.24p ========== ========== ===========

The profit for the period and the total comprehensive income for the period are both attributable solely to the owners of the company.

CONDENSED CONSOLIDATED BALANCE SHEET AT 30 JUNE 2009

Unaudited 30 June 31 December 2009 2008 2008 Note GBP000 GBP000 GBP000 Assets Intangible assets

Deferred acquisition costs 8,116 9,158

8,590

Acquired value of in-force business Insurance contracts 15,512 18,197 16,866 Investment contracts 11,101 12,118 11,610 Reinsurers' share of insurance 181,769 197,763 182,693contract provisions Amounts deposited with reinsurers 22,339 24,876 22,181 Investment properties 3,272 3,673 3,432 Financial assets Equity securities at fair value through income 356,387 443,155 363,879 Holdings in collective investment

schemes at fair value through income 589,530 634,228 576,502

Debt securities at fair value 258,410 247,457 279,104through income Insurance and other receivables 9,812 13,008 11,056 Prepayments 2,920 269 1,600

Derivative financial instruments 2,410 8,338

5,570 ---------- ---------- ---------- Total financial assets 1,219,469 1,346,455 1,237,711 ---------- ---------- ---------- Reinsurers' share of accrued 3,519 4,356 4,100policyholder claims Cash and cash equivalents 178,789 244,810 192,381 ---------- ---------- ---------- Total assets 4 1,643,886 1,861,406 1,679,564 ---------- ---------- ---------- Liabilities Bank overdrafts 2,074 1,506 1,094 Insurance contract provisions 910,174 1,009,868 923,506 Financial liabilities Investment contracts at fair value 535,536 650,061 558,542through income Borrowings 6 4,194 8,326 8,358 Derivative financial instruments 746 2,474 70 ---------- ---------- ---------- Total financial liabilities 540,476 660,861 566,970 ---------- ---------- ---------- Provisions 2,580 3,494 3,397 Deferred tax liabilities 9,647 11,263 10,798 Reinsurance payables 1,772 1,942 1,397 Payables related to direct insurance 24,948 24,023 23,891and investment contracts Deferred income 13,779 15,576 14,575 Income taxes 6,956 2,643 1,074 Other payables 7,023 6,688 6,494 ---------- ---------- ---------- Total liabilities 4 1,519,429 1,737,864 1,553,196 ---------- ---------- ---------- Net assets 124,457 123,542 126,368 ========== ========== ========== Shareholders' equity Share capital 41,501 41,501 41,501 Share premium 20,458 20,458 20,458 Treasury shares (3,379) - (3,379) Other reserves 50 50 50 Retained earnings 3 65,827 61,533 67,738 ---------- ---------- ---------- Total shareholders' equity 124,457 123,542 126,368 ========== ========== ========== CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED 30 JUNE2009 Unaudited Year ended 6 months ended 30 June 31 December 2009 2008 2008 GBP000 GBP000 GBP000 Profit for the year 8,289 8,060 20,017 Adjustments for: Amortisation of deferred acquisition 474 384 952costs Amortisation of acquired in-force value 1,863 1,739 3,577 Tax expense 2,922 1,917 2,710 Interest receivable (8,558) (13,825) (24,398) Dividends receivable (15,266) (15,908) (35,781) Interest expense 112 455 752

Change in fair value of investment 160 (10)

324properties Fair value losses on financial assets 3,824 146,777 247,210 Interest received 8,627 10,639 22,150 Dividends received 15,024 18,399 39,278

Changes in operating assets and

liabilities Decrease in financial assets 14,494 30,569

38,166

Decrease in reinsurers' share of insurance

contract provisions 1,505 14,895 30,221 (Increase) / decrease in amounts deposited (158) 2,682 5,377with reinsurers

Decrease in insurance and other 1,417 2,818

194receivables (Increase) / decrease in prepayments (1,320) 15

1,316

Decrease in insurance contract (13,332) (100,980) (187,342)provisions Decrease in investment contract (23,006) (76,442) (167,961)liabilities Decrease in provisions (817) (81) (178)

Increase / (decrease) in reinsurance 375 320

(225)payables

Increase in payables related to direct insurance and investments contracts 1,057 1,164

1,032

Increase / (decrease) in other payables 427 1,353 (2,728) ---------- ---------- ---------- Cash (utilised by) / generated from (1,887) 34,940 (5,337)operations Income tax paid 1,811 (600) (2,921) ---------- ---------- ----------

Net cash (utilised by) /generated from

operating activities (76) 34,340 (8,258) ========== ========== ==========

Cash flows from financing activities

Repayment of borrowings (4,200) (4,200) (4,200) Dividends paid (10,200) (10,302) (16,054) Interest paid (96) (432) (720) Purchase of treasury shares - - (3,379) ---------- ---------- ---------- Net cash utilised by financing activities (14,496) (14,934) (24,353) ========== ========== ==========

Net (decrease) / increase in cash and cash

equivalents (14,572) 19,406 (32,611) Cash and cash equivalents at beginning of 191,287 223,898 223,898period ---------- ---------- ---------- Cash and cash equivalents at end of period 176,715 243,304 191,287 ========== ========== ==========

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE SIX MONTHS ENDED 30 JUNE 2009

Unaudited Six months ended 30 June 2009

Capital Share Share redemption Treasury Retained capital premium reserve shares earnings Total GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 Equity shareholders' fundsat 1 January 2009 41,501 20,458 50 (3,379) 67,738 126,368 Profit for the periodrepresenting total recognised income and expenses - - - - 8,289 8,289 Dividends paid - - - - (10,200) (10,200) ---------- --------- ---------- --------- ---------- --------Equity shareholders' funds at 30 June 2009 41,501 20,458 50 (3,379) 65,827 124,457 ========== ========== ========== ========= ========== ======== Unaudited Six months ended 30 June 2008 Capital Share Share redemption Treasury Retained capital premium reserve shares earnings Total GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 Equity shareholders' funds at 1 January 2008 41,501 20,458 50 - 63,775 125,784Profit for the period representing total recognised income and expenses - - - - 8,060 8,060Dividends paid - - - - (10,302) (10,302) ---------- ---------- ---------- -------- ---------- --------Equity shareholders' funds at 30 June 2008 41,501 20,458 50 - 61,533 123,542 ========== ========== ========== ========= ========== ======== Year ended 31 December 2008 Capital Share Share redemption Treasury Retained capital premium reserve shares earnings Total GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 Equity shareholders' fundsat 1 January 2008 41,501 20,458 50 - 63,775 125,784Purchase of treasury shares - - - (3,379) - (3,379)Profit for the period representing total recognised income and expenses - - - - 20,017 20,017Dividends paid - - - - (16,054) (16,054) ---------- ---------- ---------- --------- ---------- --------Equity shareholders' fundsat 31 December 2008 41,501 20,458 50 (3,379) 67,738 126,368 ========== ========== ========== ========= ========== ========

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of preparation

This condensed set of consolidated financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the EU.As required by the Disclosure and Transparency Rules of the Financial ServicesAuthority, the condensed set of consolidated financial statements has beenprepared applying the accounting policies and presentation that were applied in the preparation of the Group's published consolidated financial statementsfor the year ended 31 December 2008, which were prepared in accordance with IFRSas adopted by the EU. Any judgements and estimates applied in the condensed set of financial statements are consistent with those applied in the preparationof the Group's published consolidated financial statements for the year ended 31 December 2008.In preparing these financial statements, the Company has, for the first time,applied the revised IAS1 'Presentation of Financial Statements: A RevisedPresentation' and IFRS 8 'Operating Segments', both of which are effective foraccounting periods commencing on or after 1 January 2009. The principal effectof applying IAS1 is the re-naming of the Income Statement to 'CondensedConsolidated Statement of Comprehensive Income'. IFRS 8 sets out requirementsfor the disclosure of information about an entity's operating segments and alsoabout the entity's products and services, the geographical areas in which itoperates and its major customers. Disclosure of the requirements can be seen inNote 4 of the financial statements.

The financial information shown in this half-year review is unaudited and does not constitute statutory accounts within the meaning of Section 435 of the Companies Act 2006.

The comparative figures for the financial year ended 31 December 2008, are notthe company's statutory accounts for that financial year. Those accounts havebeen reported on by the company's auditors and delivered to the Registrar ofCompanies. The report of the auditors was (i) unqualified, (ii) did not includea reference to any matters to which the auditors drew attention by way ofemphasis without qualifying their report and (iii) did not contain a statementunder Section 237 (2) or (3) of the Companies Act 1985.

2. Earnings per share

Earnings per share is based on the following:

Unaudited 6 months ended Year ended 30 June 31 December 2009 2008 2008

Profit for the period ( 000) 8,289 8,060

20,017 ---------- ---------- ---------- Weighted average number of ordinary 101,492,591 104,588,785 104,021,765shares ---------- ---------- ---------- Basic earnings per share 8.17p 7.71p 19.24p ---------- ---------- ---------- Diluted earnings per share 8.17p 7.71p 19.24p ========== ========== ==========

The weighted average number of ordinary shares in respect of the six months ended 30 June 2009 is based on 104,588,785 shares in issue at the beginning and end of the period less 3,096,194 own shares held in treasury.

The weighted average number of shares in respect of the year ended 31 December2008 is based on 104,588,785 shares in issue at the beginning of the period andon 104,588,785 shares in issue at the end of the period less 3,096,194 ownshares held in treasury, taking account of the timing of the purchases of ownshares.

The weighted average number of ordinary shares in respect of the six months ended 30 June 2008 is based on 104,588,785 shares in issue at the beginning and end of that period.

There were no share options outstanding during the periods covered by these financial statements. Accordingly, there is no dilution of the average number of ordinary shares in issue in respect of those periods.

3. Retained earnings Unaudited 6 months ended Year ended 30 June 31 December 2009 2008 2008 GBP000 GBP000 GBP000 Balance at 1 January 67,738 63,775 63,775 Profit for the period 8,289 8,060 20,017 Dividends Final approved and paid for 2007 - (10,302) (10,302) Interim approved and paid for 2008 - - (5,752) Final approved and paid for 2008 (10,200) - - ---------- ---------- ----------

Balance at 30 June/31 December 65,827 61,533 67,738

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

The final dividend in respect of 2007, approved and paid in 2008, was paid at the rate of 9.85p per share.

The interim dividend in respect of 2008, approved and paid in 2008, was paid at the rate of 5.50p per share.

The final dividend in respect of 2008, approved and paid in 2009, was paid at the rate of 10.05p per share, so that the total dividend paid to the equity shareholders of the parent company in respect of the year ended 31 December 2008 was 15.55p per share.

An interim dividend of 5.65p per share in respect of the year ending 31December 2009, payable on 12 October 2009 to equity shareholders of the parentcompany registered at the close of business on 11 September 2009, the dividendrecord date, was approved by the Directors after 30 June 2009. The resultinginterim dividend of 5.7m has not been provided in these financial statements.

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

2009 2008 Interim dividend 5.65p 5.50p ========== Final dividend 10.05p ---------- Total for the year 15.55p ==========4. Operating segments

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

During the period under review, the Group had one reportable business segment, being its UK life assurance operation, Countrywide Assured Holdings Limited

'CALH'), which holds the Group's life assurance assets and liabilities and was the Group's main strategic unit. The strategic unit is responsible for managing unit-linked and non-linked business.

The management team reviews internal management reports for Countrywide Assured plc, the principal operating subsidiary of CAHL, on a quarterly basis.

There were no changes to the basis of segmentation or the measurement basis for segment profit during the six months ended 30 June 2009.

The functions performed by the holding company, Chesnara plc, are defined under the operating segment analysis as reconciling corporate activities.

The table below provides information on the profit before tax and the totalassets and liabilities of the reporting segment and the Group for the periodunder review. Unaudited 6 months ended Year ended 30 June 31 December 2009 2008 2008 Profit before tax GBP000 GBP000 GBP000 Segment profit before tax 13,401 11,062 27,116 Funding costs (112) (455) (752)

Charge for amortisation of acquired value

of in-force business (1,751) (1,751) (3,502) ---------- ---------- ---------- Net segment profit before tax 11,538 8,856 22,862

Reconciling corporate activities (327) 1,121

(135) ---------- ---------- ---------- Group profit before tax 11,211 9,977 22,727 ========== ========== ==========

Group total assets and liabilities

Segment total assets 1,569,357 1,786,729 1,614,120 Acquired value of in-force business 25,806 29,308

27,557

Reconciling corporate activities 48,723 45,369 37,887 ---------- ---------- ---------- Group total assets 1,643,886 1,861,406 1,679,564 ========== ========== ========== Segment total liabilities 1,507,046 1,719,965 1,535,848 Acquired value of in-force business 6,799 7,708 7,254deferred tax Funding 4,194 8,326 8,358 Reconciling corporate activities 1,390 1,865 1,736 ---------- ---------- ---------- Group total liabilities 1,519,429 1,737,864 1,553,196 ========== ========== =========

5. Partial recovery from Kaupthing Singer and Friedlander of bad debt written off

in relation to a cash deposit

As stated in the Group's financial statements for the year ended 31 December2008, following the entry of Kaupthing Singer and Friedlander intoadministration, a cash deposit with them in the amount of 1.1m had been fullywritten down during the year ended 31 December 2008. As part of the ongoingadministration process, an initial payment of 0.2m was received on 24 July2009 and this recovery has been included in income for the six months ended

30June 2009. 6. Borrowings Unaudited 30 June 31 December 2009 2008 2008 GBP000 GBP000 GBP000 Bank Loan 4,194 8,326 8,358 ========== =========== =========== The bank loan, which was drawn down on 2 June 2005 under a facility madeavailable on 4 May 2005, is unsecured and is repayable in five equal annualamounts on the anniversary of the draw-down date. The outstanding principal onthe loan bears interest at a rate based on the London Inter-bank Offer Rate andis payable in arrears over a period which varies between one and six months atthe option of the borrower.

The fair value of the bank loan at 30 June 2009 was 4,200,000 (30 June 2008 and 31 December 2008: 8,400,000).

7. Events after the reporting period - acquisition of Moderna Forsakringar Liv AB

On 23 July 2009, Chesnara plc acquired the entire issued share capital of Moderna ForsakringarLiv AB ('Moderna) from Moderna Finance AB for a total consideration of SEK 250m ( 20m), payable in cash.

Moderna is a Stockholm-based unit-linked life insurance company whichspecialises in corporate and personal pension arrangements and life assurancepolicies. Primarily it aggregates client funds into a range of investmentproviders and provides policy wrappers. It, primarily, sells through theindependent financial adviser channel, has, approximately, 9% per cent marketshare of the Swedish unit-linked pension business and also operates in Norway.It was set up in 2000, with the unit-linked business being launched in 2002 andcurrently has 65 employees. The business was acquired from Moderna Finance ABwhich is owned by Glitnir Bank in Iceland. Fair value considerations in accordance with 'IFRS 3: Business Combinations'will be disclosed in the annual financial statements of Chesnara plc for theyear ended 31 December 2009.8. ContingenciesPast sales

The Group has made provision for the estimated cost of settling complaints inrespect of past sales of endowment mortgages. Although the provisions areregularly reviewed, the final outcome could be different from the provisionsestablished as these costs cannot be calculated with certainty and areinfluenced by external factors beyond the control of management. In particular,uncertainty exists in relation to future regulatory actions and to the outcomeof ongoing cases which have been referred to the Financial Ombudsman Service.The outcome of such referrals may lead to a review of other similar cases andthe financial effect of these cannot be assessed with any certainty until thecases, which the Company continues to contest, have been concluded.

9. Forward-looking statements

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

10. Approval of condensed consolidated report for the six months ended 30 June 2009

This condensed consolidated report was approved by the Board of Directors on 27August 2009. A copy of the report will be available to the public at theCompany's registered office, Harbour House, Portway, Preston PR2 2PR, UK and atwww.chesnara.co.uk.

SUPPLEMENTARY INFORMATION - EUROPEAN EMBEDDED VALUE BASIS

SUMMARISED CONSOLIDATED INTERIM INCOME STATEMENT FOR THESIX MONTHS ENDED 30 JUNE 2009 Unaudited Six months ended Year ended 30 June 31 December 2009 2008 2008 Note GBP000 GBP000 GBP000

Operating profit / (loss)of covered

business 6 10,075 (5,334) 25,521 Other operational result 152 665 385 ---------- ---------- ---------- Operating profit / (loss) 10,227 (4,669) 25,906

Variation from longer-term investment

return (2,710) 428 (16,831) Effect of economic assumption changes 293 (950) 6,951 ---------- ---------- ---------- Profit / (loss) before tax 7,810 (5,191) 16,026 Tax (1,433) 7,226 (1,200) ---------- ---------- ---------- Profit for the period 6,377 2,035 14,826 ========== ========== ========== Earnings per share Based on profit for the period 6.28p 1.95p 14.25p ---------- ---------- ---------- Diluted earnings per share Based on profit for the period 6.28p 1.95p 14.25p ---------- ---------- ----------

SUPPLEMENTARY INFORMATION - EUROPEAN EMBEDDED VALUE BASIS SUMMARISED CONSOLIDATED INTERIM BALANCE SHEET AS AT 30 JUNE 2009

Unaudited 30 June 31 December 2009 2008 2008 Note GBP000 GBP000 GBP000 Assets Value of in force business 5,8 80,153 85,939 84,940

Reinsurers' share of insurance

contract provisions 165,377 177,575 165,648 Amounts deposited with reinsurers 21,584 24,039 21,404 Investment properties 3,272 3,673 3,432 Deferred tax assets - 82 - Financial assets

Equity securities at fair value

through income 356,387 443,155 363,879

Holdings in collective investment schemes at fair value through income 589,530 634,228 576,502 Debt securities at fair value through income 258,410 247,457 279,104 Insurance and other receivables 9,812 13,008 11,056 Prepayments 2,920 269 1,600 Derivative financial instruments 2,410 8,338 5,570 ---------- ---------- ---------- Total financial assets 1,219,469 1,346,455 1,237,711 ---------- ---------- ----------

Reinsurers' share of accrued policy

claims 3,519 4,356 4,100 Income taxes - - - Cash and cash equivalents 178,789 244,810 192,381 ---------- ---------- ---------- Total assets 1,672,163 1,886,929 1,709,616 ---------- ---------- ---------- Liabilities Bank Overdrafts 2,074 1,506 1,094 Insurance contract provisions 893,908 989,974 907,071 Financial liabilities

Investment contracts at fair value

through income 549,063 666,811 573,955 Borrowings 4,194 8,326 8,358

Derivative financial instruments 746 2,474

70 ---------- ---------- ---------- Total financial liabilities 554,003 677,611 582,383 ---------- ---------- ---------- Provisions 2,580 3,494 3,397 Deferred tax liabilities 14 - - Reinsurance payables 1,772 1,942 1,397

Payables related to direct insurance

and investment contracts 24,948 24,023 23,891 Income taxes 6,956 2,643 1,181 Other payables 7,023 6,688 6,494 ---------- ---------- ---------- Total liabilities 1,493,278 1,707,881 1,526,908 ---------- ---------- ---------- Net assets 178,885 179,048 182,708 ========= ========== ========== Shareholders' equity Share capital 41,501 41,501 41,501 Share premium 20,458 20,458 20,458 Treasury shares (3,379) - (3,379) Other reserves 50 50 50 Retained earnings 120,255 117,039 124,078 ---------- ---------- ---------- Total shareholders' equity 5,8 178,885 179,048 182,708 ========== ========== ========== SUPPLEMENTARY INFORMATION - EUROPEAN EMBEDDED VALUE BASISSUMMARISED CONSOLIDATED INTERIM STATEMENT OF CHANGES IN EQUITY FOR THE SIXMONTHS ENDED 30 JUNE 2009 Unaudited Year Ended Six months ended 30 June 31 December 2009 2008 2008 GBP000 GBP000 GBP000 Shareholders' equity at 1 January 182,708 187,315 187,315 Purchase of treasury shares - - (3,379)

Profit for the period representing total

recognised income and expense 6,377 2,035 14,826 Dividends paid (10,200) (10,302) (16,054) ---------- ---------- ----------

Shareholders' equity at 30 June/31

December 178,885 179,048 182,708 ========== ========== ==========

SUPPLEMENTARY INFORMATION - EUROPEAN EMBEDDED VALUE BASIS NOTES TO THE SUPPLEMENTARY INFORMATION (UNAUDITED)

1. Basis of presentation

This section sets out the detailed methodology followed for producing thisGroup financial information which is supplementary to the Group's primaryfinancial statements which have been prepared using accounting policiesconsistent with International Financial Reporting Standards ('IFRS') and inaccordance with International Accounting Standard 34 as adopted by the EU. Thisfinancial information has been prepared in accordance with the EuropeanEmbedded Value ('EEV') principles issued in May 2004 by the European CFO Forumand supplemented by Additional Guidance on EEV Disclosures issued by the samebody in October 2005. The principles provide a framework intended to improvecomparability and transparency in embedded value reporting across Europe.

2. Covered business

The Group uses EEV methodology to value its individual life assurance, pensionand annuity business, which has been written, with only insignificantexceptions, in the UK ('covered business'). This business comprises the Group'slong-term business operations, being those contracts falling under thedefinition of long-term insurance business for UK regulatory purposes.The Group has no business activities other than those relating to the coveredbusiness. In particular, the operating activities of the holding company,Chesnara plc, are treated as an integral part of the covered business. UnderEEV principles no distinction is made between insurance and investmentcontracts, as there is under IFRS, which accords these classes of contractsdifferent accounting treatments.3. Methodologya) Embedded ValueOverview

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

New business

Much of the covered business is in run-off and is, accordingly, substantiallyclosed to new business. The Group does still sell guaranteed bonds but,overall, the contribution from new business to the results established usingEEV methodology is not material. Accordingly, not all of those items related tonew business values, which are recommended by the EEV guidelines, are reportedin this supplementary financial information.

Value of in-force business

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

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

Taxation

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

The value of the in-force business has been calculated on an after-tax basisand is grossed up to the pre-tax level for presentation in the incomestatement. The amount used for the grossing up is the amount of shareholder taxpayable in the policyholder fund plus any direct tax charge within theshareholder fund.

Cost of capital

The cost of holding the required capital to support the covered business (see3b below) is reflected as a deduction from the value of in-force business andis determined as the difference between the amount of the required capital andthe projected release of capital and investment income.

Financial options and guarantees

The principal financial options and guarantees are (i) guaranteed annuity ratesoffered on some unit-linked pension contracts and (ii) a guarantee offeredunder Timed Investment Funds that the unit price available at the selectedmaturity date (or at death, if earlier) will be the highest price attained overthe policy's life. The cost of these options and guarantees has been assessed,in principle, on a market-consistent basis, but, in practice, this has beencarried out on approximate bases, which are appropriate to the level ofmateriality of the results.

Allowance for risk

Allowance for risk within the covered business is made by:

1. Setting required capital levels by reference to the Directors' assessment of

capital needs;

2. Setting the risk discount rate, which is applied to the projected cash flows

arising on the in-force business, at a level which includes an appropriate risk

margin; and

3. Explicit allowance for the cost of financial options and guarantees and, where

appropriate, for reinsurer default.

b) Level of Required Capital

The level of required capital of the covered business reflects the amount ofcapital that the Directors consider necessary and appropriate to manage thebusiness. In forming their policy the Directors have regard to the minimumstatutory requirements and an internal assessment of the market, insurance andoperational risks inherent in the underlying products and business operations.The capital requirement resulting from this assessment represents 150% of thelong-term insurance capital requirement ('LTICR') together with 100% of theresilience capital requirement ('RCR'), as set out in FSA regulations.

The required capital is provided by the retained surplus in the long-term business fund and the retained earnings and issued share capital in the shareholder fund.

c) Risk Discount Rate

The risk discount rate ('RDR') is a combination of the risk-free rate and arisk margin. The risk-free rate reflects the time value of money and the riskmargin reflects any residual risks inherent in the covered business and makesallowance for the risk that future experience will differ from that assumed. Inorder to reduce the subjectivity when setting the RDR, the Board has decided toadopt a 'bottom up' market-consistent approach to allow explicitly for marketrisk.Using the market-consistent approach each cash flow is valued at a discountrate consistent with that used in the capital markets: in accordance with this,equity-based cash flows are discounted at an equity RDR and bond-based cashflows at a bond RDR. In practice a short-cut method known as the 'certaintyequivalent' approach has been adopted. This method assumes that all cash flowsearn the risk-free rate of return and are discounted at the risk-free rate. Ingeneral, and consistent with the market's approach to valuing financialinstruments for hedging purposes, the risk-free rate is based on swap yields.Where, however, non-linked business is substantially backed by governmentbonds, the yields on these assets have been taken.Within the risk margin, allowance also needs to be made for non-market risks.For some of these risks, e.g. mortality and expense risk, it is assumed thatthe shareholder can diversify away any uncertainty where the impact ofvariations in experience on future cash flows is symmetrical. For those risksthat are assumed to be diversifiable no adjustment to the risk margin has beenmade. For any remaining risks that are considered to be non-diversifiable risksthere is no risk premium observable in the market and therefore a constantmargin of 50 basis points has been added to the risk margin. The RDR isdetermined by equating the results from the traditional embedded valueapproach, including the assumed actual investment returns and traditional costof capital, to that derived using the market-consistent method, this processbeing known as calibration of the RDR. The risk margin is then the differencebetween the derived RDR and the risk-free rate. The selection of the assumedactual investment returns and the reported cost of capital will have no impacton the reported result, as changes in these produce corresponding changes inthe RDR.A market-consistent valuation approach also generally requires consideration of'frictional' costs of holding shareholder capital: in particular, the cost oftax on investment returns and the impact of investment management fees canreduce the face value of shareholder funds. In the Group's case, the expensesrelating to corporate governance functions eliminate any taxable investmentreturn in shareholder funds, while investment management fees are not material.

d) Analysis of Profit

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

(i) New business;(ii) Return from in-force business; and(iii) Return from shareholder net worth.

Additional contributions to profit arise from:

(i) Variances between the actual investment return in the period and the assumed

long-term investment return; and(ii) The effect of economic assumption changes.The contribution from new business represents the value recognised at the endof each period in respect of new business written in that period, afterallowing for the cost of acquiring the business, the cost of establishing therequired technical provisions and after making allowance for the cost ofcapital.

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

(i) The expected return, being the unwind of the discount rate over the period

applied to establish the value of in-force business, at the beginning of the

period;

(ii) Variances between the actual experience over the period and the assumptions

made to establish the value of business in-force at the beginning of the

period; and

(iii) The net effect of changes in future assumptions, made prospectively at the end

of the period, from those used in establishing the value of business in-force

at the beginning of the period, other than changes in economic assumptions.

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

e) Assumption Setting

There is a requirement under EEV methodology to use best estimate demographicassumptions and to review these at least annually with the economic assumptionsbeing determined at each reporting date. The current practice is detailedbelow.Each year the demographic assumptions are reviewed as part of year-endprocessing and hence were last reviewed in December 2008. For mid-yearreporting, the previous year-end assumptions are usually considered in light ofrecent experience, particularly persistency, to ensure robustness, but are notnecessarily expected to change.The detailed projection assumptions, including mortality, morbidity,persistency and expenses reflect recent operating experience. Allowance is madefor future improvement in annuitant mortality based on experience andexternally published data. Favourable changes in operating experience,particularly in relation to expenses and persistency, are not anticipated untilthe improvement in experience has been observed. Holding company expenses (forthe Chesnara Group such expenses relate largely to listed company functions)are principally allocated to the covered business to reflect effort expendedwithin the holding company relating to the transaction of life assurancebusiness through the subsidiary companies. Hence the expense assumptions usedfor the cash flow projections include the full cost of servicing this business.The economic assumptions are reviewed and updated at each reporting date basedon underlying investment conditions at the reporting date. The assumed discountrate and inflation rates are consistent with the investment return assumptions.In addition, the demographic assumptions used at December 2008 are consideredto be best estimate and, consequently, no further adjustments are required. Theassumptions required in the calculation of the value of the annuity rateguarantee on pension business have been set equal to best-estimate assumptions.

4. Assumptions

(a) Investment Returns (pre tax)

The assumed future pre-tax returns on fixed interest and RPI linked securitiesare set by reference to redemption yields available in the market at the end ofthe reporting period. The corresponding return on equities and property isequal to the fixed interest gilt assumptions plus an appropriate risk margin;for equities, the return is split between franked income and capital gainsbased on a best estimate of long-term average dividend yields. For linkedbusiness the aggregate return has been determined by reference to the benchmarkasset mix within the Managed Funds. 30 June 31 December 2009 2008 2008 Equity risk premium 2.7% 2.7% 2.7% Property risk premium 2.7% 2.7% 2.7% Investment return Fixed Interest 3.9% 5.2% 3.6% Equities 6.6% 7.9% 6.3% Property 6.6% 7.9% 6.3% UK equities dividend yield 3.1% 4.1% 3.1% Inflation RPI 2.4% 3.9% 1.5% (b) Actuarial Assumptions

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

(c) Taxation

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

(d) Expenses

The expense levels are based on internal expense analysis investigations and are appropriately allocated to the new business and policy maintenance functions. These have been determined by reference to:

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

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

iii) Corporate governance costs relating to the covered business.

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

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

(e) Risk Discount RateThe risk-free rate is set by reference to the sterling mid swap rates availablein the market at the end of the reporting period. Where, however, non-linkedbusiness is substantially backed by government bonds, the yields on theseassets have been used.An explicit constant margin of 50 basis points is added to the risk-free rateto cover any remaining risks that are considered to be non-market,non-diversifiable risks, as there is no risk premium observable in the market.This margin gives due recognition to the fact that:

i) The covered business is substantially closed to new business;

ii) There is no significant exposure in the with-profits business, which is wholly reassured;

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

iv) For much of the Life business the Group has the ability to vary risk charges made to policyholders.

30 June 31 December 2009 2008 2008 Risk-free rate 4.3% 5.6% 3.6% Non-diversifiable risk 0.5% 0.5% 0.5% Risk margin 1.0% 2.2% 2.2% Risk discount rate 5.8% 8.3% 6.3%

The risk margin is derived as a result of the calibration of the Risk Discount Rate, as explained in Note 3e above. The significant reduction between 31 December 2008 and 30 June 2009 reflects the fact that:

(i) changes in economic factors that underlie key investment assumptions have

reduced the tax margins which make up part of the risk that the calibration

process adjusts for; and

(ii) between 31 December 2008 and 30 June 2009 the yields on UK government bonds and

swap rates have not moved in tandem: this impacts the Risk Discount Rate as,

where business is substantially backed by government bonds, the yields on these

are used for the discount rate, as explained in Note 3e above.

5. Analysis of shareholders' equity

30 June 31 December 2009 2008 2008 Covered business GBP000 GBP000 GBP000 Required capital 33,494 36,962 35,615 Free surplus 21,528 20,104 33,774 ---------- ---------- ---------- Shareholder net worth 55,022 57,066 69,389 Value of in-force business 80,153 85,939 84,940 ---------- ---------- ---------- Embedded value of covered business 135,175 143,005

154,329

Less: amount financed by borrowings (4,194) (8,326) (8,358) ---------- ---------- ----------

Embedded value of covered business

attributable to shareholders 130,981 134,679 145,971 Net equity of other Group companies 47,904 44,369 36,737 ---------- ---------- ---------- Total shareholders' equity 178,885 179,048 182,708 ========== ========== ==========

The movement in the value of in-force

business comprises: Value at beginning of period 84,940 94,007 94,007 Amount charged to operating profit (4,787) (8,068) (9,067) ---------- ---------- ---------- Value at end of period 80,153 85,939 84,940 ========== ========== ==========

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, by way of debt finance, a purchase of part of the underlying valuein force within that company, which was subsequently transferred to CountrywideAssured plc on 30 June 2006 under the provisions of Part VII of the FinancialServices and Markets Act 2000. It follows that the embedded value of thecovered business is not attributable to equity shareholders of the Group to theextent of the outstanding balance on the loan account at each balance sheetdate. The loan is repayable in five equal annual instalments on the anniversaryof the draw-down date, the funds for the repayment effectively being providedby way of the realisation of the underlying value of in-force business of thecovered business. In accordance with this, a further 4.2m of the loan wasrepaid on 2 June 2009, leaving principal outstanding at that date of 4.2m.

6. Analysis of profit of covered business

Six months ended Year ended 30 June 31 December 2009 2008 2008 GBP000 GBP000 GBP000 New business contribution 188 549 715 Return from in-force business Expected return 3,965 5,389 10,445 Experience variances 6,651 (9,894) 9,166 Operating assumption changes (218) -

4,590

Return on shareholder net worth (511) (1,378)

605 ---------- ---------- ---------- Operating profit 10,075 (5,334) 25,521 Variation from longer-term (2,710) 428 (16,831)investment return Effect of economic assumption 293 (950) 6,951changes ---------- ---------- ---------- Profit before tax 7,658 (5,856) 15,641 Tax (1,392) 7,232 (1,376) ---------- ---------- ---------- Profit after tax 6,266 1,376 14,265 ========== ========== =========== 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', and in respect of any taxpertaining thereto, which is included in 'other tax'.Experience variances for the six months ended 30 June 2008 reflect the impactof significant adverse global investment market conditions over that period.There was a concomitant significant reduction in the estimate of future taxpayable, as this was dependent, to a significant extent, on the associatedprojection of investment returns and franked investment income.

7. Sensitivities to alternative assumptions

The following table shows the sensitivity of the embedded value of the coveredbusiness at relevant period end dates to variations in the assumptions adoptedin the calculation of the embedded value. Sensitivity analysis is not providedin respect of the new business contribution for the six months ended 30 June2009 as the reported level of new business contribution is not considered to bematerial (see Note 3(a) above). It largely relates to guaranteed bond business,where a close asset/liability matching approach leaves values largelyinsensitive to changes in experience. 30 June 31 December 2009 2008 2008 Embedded Value ('EV') of covered business GBP135.2m GBP143.0m GBP154.2m Change in EV GBPm GBPm GBPm Economic sensitivities

100 basis point increase in risk discount rate (4.9) (4.8) (5.0)

100 basis point reduction in yield curve 1.0 2.2

2.9

10% decrease in equity and property values (3.9) (5.1) (4.8) Operating sensitivities

10% decrease in maintenance expenses 1.9 2.2

2.0 10% decrease in lapse rates 3.2 3.6 3.2

5% decrease in mortality/morbidity rates

Assurances 2.1 1.6 1.7 Annuities (0.9) (0.8) (0.9) Reduction in the required capital to statutory minimum 1.7 1.9 1.7

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

Economic sensitivities

(i) 100 basis point increase in the risk discount rate. The 5.8% RDR increases to

6.8%; (ii) 100 basis point reduction in the yield curve. The fixed interest

return is reduced by 1% and the equity/property returns are also reduced by 1%,

thus maintaining constant equity/property risk premiums. The rate of future

inflation has also been reduced by 1% so that real yields remain constant. In

addition the risk discount rate has also reduced by 1%; and

(iii) 10% decrease in the equity and property values. This gives rise to a situation

where, for example, a Managed Fund unit liability with a 60% equity holding

would reduce by 6% in value.

Operating sensitivities

(i) 10% decrease in maintenance expenses, giving rise to, for example,

a base assumption of 20 per policy pa reducing to 18 per policy pa;

(ii) 10% decrease in persistency rates giving rise to, for example, a base

assumption of 10% of policy base lapsing pa reducing to 9% pa;

(iii) 5% decrease in mortality/morbidity rates giving rise to, for example, a base

assumption of 100% of the parameters in a selected mortality/morbidity table

reducing to 95% of the parameters in the same table; and

(iv) The sensitivity to the reduction in the required capital to the statutory

minimum shows the effect of reducing the required capital from 150% of the

LTICR plus 100% RCR to the amounts of 100% LTICR plus 100% RCR, being the

minimum requirement prescribed by FSA regulation.

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

The sensitivities to changes in the assumptions in the opposite direction willresult in changes of similar magnitude to those shown in the above table but inthe opposite direction.8. Reconciliation of shareholders' equity on the IFRS basis to shareholder equity on the EEV basis 30 June 31 December 2009 2008 2008 GBP000 GBP000 GBP000 Shareholders' equity on the IFRS basis 124,457 123,542 126,368 Adjustments Deferred acquisition costs Investment contracts (7,590) (8,595) (8,047) Deferred income 12,938 14,674 13,705

Adjustment to provisions on investment contracts, net of amounts deposited with

reinsurers (13,967) (17,248) (15,863)

Adjustments to provisions on insurance contracts, net of reinsurers' share (126) (294)

(610) Acquired in-force value (19,636) (22,386) (21,020) Deferred tax 2,656 3,416 3,235 ---------- ---------- ---------- Group shareholder net worth 98,732 93,109

97,768

Value of in-force business 80,153 85,939 84,940 ---------- ---------- ---------- Shareholders' equity on the EEV basis 178,885 179,048 182,708 ========== ========== ==========

Group shareholder net worth comprises:

Shareholder net worth in covered business 55,022 57,066 69,389

Shareholder's equity in other Group

companies 47,904 44,369 36,737 Debt finance (4,194) (8,326) (8,358) ---------- ---------- ---------- Total 98,732 93,109 97,768 ========== ========= ==========

INDEPENDENT REVIEW REPORT BY KPMG AUDIT PLC TO CHESNARA PLC

Introduction

We have been engaged by the Company to review the condensed set of financialstatements in the half-yearly financial report for the six months ended 30 June2009, which comprises the Condensed Consolidated Statement of ComprehensiveIncome, the Condensed Consolidated Balance Sheet, the Condensed ConsolidatedStatement of Cash Flows, the Condensed Consolidated Statement of Changes inEquity and the related explanatory notes and to review the European EmbeddedValue Basis Supplementary Information for the six months ended 30 June 2009which comprises the Summarised Consolidated Interim Income Statement, theSummarised Consolidated Interim Balance Sheet, the Summarised ConsolidatedInterim Statement of Changes in Equity and the related explanatory notes ("theSupplementary Information").

We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements or the Supplementary Information.

This report is made solely to the Company in accordance with the terms of ourengagement to assist the Company in meeting the requirements of the Disclosureand Transparency Rules ("the DTR") of the UK's Financial Services Authority("the UK FSA") and also to provide a review conclusion to the Company on theSupplementary Information. Our review of the condensed set of financialstatements has been undertaken so that we might state to the Company thosematters we are required to state to it in this report and for no other purpose.Our review of the Supplementary Information has been undertaken so that wemight state to the Company those matters we have been engaged to state in thisreport and for no other purpose. To the fullest extent permitted by law, we donot accept or assume responsibility to anyone other than the Company for ourreview work, for this report, or for the conclusions we have reached.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has beenapproved by, the directors. The directors are responsible for preparing thehalf-yearly financial report in accordance with the DTR of the UK FSA. Thedirectors have accepted responsibility for preparing the SupplementaryInformation contained in the half-yearly financial report in accordance withthe European Embedded Value Principles issued in May 2004 by the European CFOForum and supplemented by the Additional Guidance on European Embedded ValueDisclosures issued in October 2005 (together the 'EEV Principles') and fordetermining the methodology and assumptions used in the application of thoseprinciples.As disclosed in Note 1 to the Condensed Consolidated Financial Statements , theannual financial statements of the Group are prepared in accordance with IFRSsas adopted by the EU. The condensed set of financial statements included inthis half-yearly financial report has been prepared in accordance with IAS 34Interim Financial Reporting as adopted by the EU.The Supplementary Information has been prepared in accordance with the EEVPrinciples, using the methodology and assumptions set out in Notes 3 to 4 tothe Supplementary Information. The Supplementary Information should be read inconjunction with the Group's condensed set of financial statements which areset out on pages 16 to 23. Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements and the Supplementary Information in the half-yearly financial report based on our review.

Scope of review

We conducted our reviews in accordance with International Standard on ReviewEngagements (UK and Ireland) 2410 Review of Interim Financial InformationPerformed by the Independent Auditor of the Entity issued by the AuditingPractices Board for use in the UK. A review of interim financial informationand Supplementary Information consists of making enquiries, primarily ofpersons responsible for financial and accounting matters, and applyinganalytical and other review procedures. A review is substantially less in scopethan an audit conducted in accordance with International Standards on Auditing(UK and Ireland) and consequently does not enable us to obtain assurance thatwe would become aware of all significant matters that might be identified in anaudit. Accordingly we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us tobelieve that the condensed set of financial statements in the half-yearlyfinancial report for the six months ended 30 June 2009 is not prepared, in allmaterial respects, in accordance with IAS 34 as adopted by the EU and the DTRof the UK FSA.

Based on our review, nothing has come to our attention that causes us to believe that the Supplementary Information for the six months ended 30 June 2009 is not prepared, in all material respects, in accordance with the EEV Principles, using the methodology and assumptions set out in notes 3 to 4 to the Supplementary Information.

JM Holt For and on behalf of KPMG Audit PlcChartered AccountantsSt James SquareManchesterM2 6DS27August 2009