Chesnara Regulatory News (CSN)

5 Sep 2007 07:00

CHESNARA PLC - INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2007

4% increase continues strong dividend growth at Chesnara

5 September 2007

Chesnara today reported interim results for the first half of 2007. The Group is committed to offering shareholders an attractive long-term income stream arising from the profits of its closed life assurance business.

* Profit (on IFRS basis) before tax for the six months ended 30 June 2007

increased by 17% to ‚£12.4m, (2006 half-year profit before tax: ‚£10.6m)

* Earnings per share (on IFRS basis) increased by 32% to 9.68p, (2006

half-year earnings per share: 7.34p)

* On EEV basis pre-tax result for the half-year increased by 63% to ‚£11.1m

(half-year 2006: ‚£6.8m) * Significant reduction in mortgage endowment complaints allows provision release of ‚£1.8m * Persistency and mortality improvements add ‚£4.8m to embedded value

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

‚£188.4m (30 June 2006: ‚£175.7m, 31 December 2006: ‚£189.1m)

* Life company solvency ratio improves to 267% (30 June 2006: 219%). Group

solvency ratio increases to 267% post interim dividend (30 June 2006: 188%)

* 5.25p interim dividend per share proposed: increased by 4%

* Board confident about future dividend flows

* Search for value adding acquisition opportunities continues

Graham Kettleborough, Chief Executive said:

'This has been another strong first half performance resulting from improvementin fundamental areas - lower endowment complaints, better persistency andimproved mortality, supported by positive economic factors. The business is ingood shape from all the key perspectives - operational, regulatory andfinancial. We continue to search for value-enhancing acquisitions in our targetrange and if no suitable opportunities are identified the possibility of, andpreferred methodology for, a return of surplus capital will be considered.The further improvement in our financial strength allows the Board to deliver,once again, on our promise of delivering a reliable and progressive dividendstream by proposing a 4% increase in the interim dividend to 5.25p per share.

The Board approved this statement on 4 September 2007.

Enquiries

Graham KettleboroughChief Executive, Chesnara plc 07799 407519Michael HenmanJohn Beresford-Peirse,Cubitt Consulting 0207 367 5100

Notes to editors:

Chesnara plc, which listed on the London Stock Exchange in May 2004, is theowner of Countrywide Assured plc ("CA"). CA is a life assurance subsidiary thatis substantially closed to new business. In June 2005 Chesnara acquired afurther closed life insurance company - City of Westminster Assurance ("CWA") -for ‚£47.8m. With effect from 30 June 2006, CWA's policies and assets weretransferred into CA plc. Chesnara's operating model is to maintain a relativelysmall governance team and outsource the majority of its back office functions. CHESNARA plc INTERIM FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 30 June 2007 CHESNARA plcNote on Terminology

On 30 June 2006 the long-term business of City of Westminster Assurance Company Limited, a Group subsidiary acquired on 2 June 2005, was transferred, under the provisions of Part VII of the Financial Services and Markets Act 2000, to the Group's other principal operating subsidiary, Countrywide Assured plc, in which the whole of the 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.

CHESNARA plc

INTERIM FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 30 JUNE 2007

Financial Highlights 6 months ended Year ended 30 June 31 December 2007 2006 2006 IFRS basis Operating profit 13.0 11.5 26.5 Financing costs (0.6) (0.6) (1.2) Loss on sale of subsidiary company - (0.3) (0.3) ---------- ---------- ---------- Profit before income taxes ‚£12.4m ‚£10.6m ‚£25.0m ---------- ---------- ---------- Basic earnings per share 9.68p 7.34p 18.41p Dividend per share 5.25p 5.05p 13.1p Shareholders' net equity ‚£116.0m ‚£108.0m ‚£114.3m ---------- ---------- ----------

European Embedded Value basis (EEV)

Operating profit 6.0 5.9 15.0 Investment variances and economic 5.1 0.9 15.6assumption changes ---------- ---------- ---------- Profit before tax ‚£11.1m ‚£6.8m ‚£30.6m ---------- ---------- ---------- Covered Business Shareholder net worth 77.1 71.9 84.5 Value of in-force business 105.6 108.7 109.9 ---------- ---------- ---------- Embedded value 182.7 180.6 194.4

Acquired embedded value financed by debt (12.6) (16.8) (16.8)

Shareholders' equity in other Group companies 18.3 11.9 11.5 ---------- ---------- ---------- Shareholders' equity on EEV basis ‚£188.4m ‚£175.7m ‚£189.1m ---------- ---------- ---------- Life annual premium income (AP) ‚£52.3m ‚£58.7m

‚£113.4m

Life single premium income (SP) ‚£17.8m ‚£19.3m

‚£54.8m

Life annualised premium income ‚£54.1m ‚£60.6m ‚£118.9m(AP + 1/10 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. Investment variances and economic assumption changes for thesix months ended 30 June 2006 and for the year ended 31 December 2006 arestated net of a ‚£0.3m loss arising on the sale of a subsidiary company.

CHAIRMAN'S STATEMENT

I am pleased to present the fourth 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.Countrywide Assured plc now manages a portfolio of some 215,000 life assuranceand pension policies and is substantially closed to new business. It writes asmall amount of Guaranteed Bond and protection business and accepts top-ups toexisting contracts. As a substantially closed book it is expected that theembedded value of the business will decline over time as the number of policiesin force reduces and as the surplus emerging in the business is distributed byway of dividends. As the portfolio runs off, the regulatory capital supportingit may also be reduced and returned to shareholders.In order to prolong the yield delivery Chesnara seeks to acquire similarbusinesses. We believe, however, that such potential acquisitions should notdetract from our key objective of delivering a steady and attractive dividendyield. Review of the BusinessWith the recent lack of value-enhancing acquisition opportunities in the closedlife sector in our target value range of ‚£50m to ‚£200m, we have, during thefirst half of 2007, concentrated on enhancing shareholder value in the existingbusiness. As the business matures such opportunities reduce. However, it isparticularly pleasing that in this half year the key business drivers have alldemonstrated positive trends.In particular our recent experience of mortgage endowment misselling complaintshas been more positive. The number of complaints has reduced significantly andan increasing proportion of those received are time barred in line with FSArules. Whilst we do not believe that this issue has fully run its course we dofeel able to reduce our redress provisions, whilst maintaining an element ofconservatism, by ‚£1.8m, based on our revised expectation of future complaintactivity.

Policy lapse experience has also demonstrated better trends than we had anticipated and, whilst we do not plan to reset our baseline assumptions until we have a greater degree of certainty, the experience to the half-year adds

‚£3.3m to our embedded value.

Similarly, mortality experience has also proved positive leading to an additionof ‚£1.5m to the embedded value while favourable economic assumption changeshave added a further ‚£1.4m (largely due to hardening long-term interest rates).Against this we have, as part of our ongoing Treating Customers Fairly projectand the ongoing work to migrate our policy bases to our outsourcers systems,made some changes to our practice and procedures. Whilst, in the main, thesehave not involved any significant project work or customer compensation we haveidentified one issue worthy of mention. This relates to our unit pricing systemfor the CA business which we are migrating to an updated system. Due to a dataerror in the indexation of costs, estimates of capital gains tax wereincorrect. This has led to overdeductions from unit-linked funds for capitalgains tax and we have initiated a project to make restitution to the funds andto recompense policyholders. Accordingly, we have established a provision of ‚£2.3m (‚£1.8m net of tax) in respect of this exposure. Overall, though, theunderlying positive performance of the key business drivers has more thancompensated for the adverse impact of this one-off charge to IFRS and EEVprofits.

On the IFRS basis we have posted a pre-tax profit of ‚£12.4m for the half-year ended 30 June 2007 compared with ‚£10.6m for the corresponding period last year.

On the European Embedded Value ("EEV") basis of reporting, the Group recognisesa pre-tax profit of ‚£11.1m for the half-year ended 30 June 2007 compared to a ‚£6.8m profit for the same period in 2006.Total shareholder equity, as stated on an EEV basis, pre interim dividendappropriation has increased, despite the reducing policy base, from ‚£175.7m (‚£1.68p per share) at 30 June 2006 to ‚£188.4m (‚£1.80p per share) at 30 June 2007.Countrywide Assured plc's capital solvency ratio at 267% is at a healthypremium to the target set by the Board of 150% having increased from 219% atthe corresponding point last year. The Group's solvency ratio has alsostrengthened to 267% from 188% as at 30 June 2006, stated after allowing forproposed dividend payments.The strength of these results allows the Board to recommend an interim dividendof 5.25p (2006:5.05p), which represents an increase of 4.0% and equates to atotal interim dividend of ‚£5.5m.

Outlook

Experience in the key areas of mortgage endowment complaints and persistencyhas proved favourable with the added and welcome improvements in mortality.This leads the Board to continue to look to the future with some optimism. Weremain aware of the importance of these issues and, in particular, of moves bysome complaint handling companies to legally challenge the time bar rules asthey relate to mortgage endowment complaints. The key outsourcing providers areachieving excellent levels of service and, importantly for shareholders,certainty of cost. During the first half of 2007 investment performanceprovided a positive underpin to our results although recent volatility servesto remind us that this cannot be taken for granted.Value-enhancing acquisition opportunities have been notable by their absencealthough we continue to pursue possible deals in this space, as we believe itis a matter of when, not if, companies will come to market. In addition wecontinue to seek other opportunities which could leverage value from ourexisting capabilities. If there is no clearly superior investment alternativethen the possibility of a return of surplus capital to shareholders willreceive increasing focus.We believe we are well placed to fulfil our stated objective of continuing todeliver a reliable and progressive dividend flow and we wish to thank all ouremployees for their contribution to the Company realising this aim.Christopher SporborgChairman4 September 2007

CHIEF EXECUTIVE OFFICER'S STATEMENT

Background

Chesnara plc ("Chesnara") seeks to participate in the consolidation of theclosed life business sector in the UK. In 2004, at the same time that we listedon the London Stock Exchange, we acquired Countrywide Assured plc on itseffective demerger from the estate agency business which now forms the core ofthe operations of Countrywide plc, while in 2005 we acquired City ofWestminster Assurance Company Limited from Irish Life and Permanent plc. In2006 we merged the long-term business of the two companies in order to realisesignificant financial and operational synergies.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 seek to acquire similar businesses.

Review of the Business

During the first half of 2007 Chesnara has continued, in the absence of anycompelling acquisition opportunities, to concentrate on its policy ofdelivering enhanced value to shareholders through focusing on the efficientrun-off of its Life business. The strong emergence of surplus has contributed,despite the reducing policy base, to a further improvement in profit asreported on the IFRS basis, compared with the corresponding position in 2006,and to a very healthy regulatory solvency position.Underlying the strength of the surplus emergence is positive performance in thefundamental drivers of the business. Investment markets were strong up to thehalf-year position (albeit some volatility has been evident latterly),improvement in the rate of policy attrition has continued and mortalityexperience has been better than expected. Overall, financial exposures -including the provision for mortgage endowment misselling redress costs - have,apart from one exception, provided positive returns while regulatory issueshave not given rise to any significant concerns or costs and the expense basehas remained under tight control. These key areas are reviewed in more detailin the following sections.Investment FundsSuperior performance in the unit-linked funds helps promote policy retentionand increases the embedded value of the Group as future management charges willbe of a higher magnitude. The CA Managed Fund, which represents a significantproportion of the CA policyholder funds under management, returned 4.47% duringthe six months ended 30 June 2007 while the CWA Global Managed Fund, whichrepresents a significant proportion of CWA policy funds under management,returned 5.82% over the same period. These returns compare favourably with theaverage of 4.38% achieved by the ABI Life Balanced Managed Funds sector.The Company has noted recent equity market volatility as a result ofdevelopments in the credit markets. Whilst shareholders do not have any directexposure to the sub-prime market this recent market volatility will haveaffected fund values and consequently, the embedded value. Guidance as to thesensitivity of embedded value to market movements is provided on page 27.

The Board continue to have a conservative approach to the investment of shareholder funds, which underpins our strong solvency position. The benchmark of 70% cash and 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 2006 year-end we reported that the rate of policyattrition had decreased. This improvement has been sustained and furtherreduction in policy cessation rates has been evident. Should this persistthrough to the year-end then a positive re-rating of the value of the in-forcepolicies, and consequently of the embedded value, through a restatement ofpersistency assumptions, is likely to occur.

Mortality

As would be expected of a life assurance company a significant part of ourbusiness comprises policies that offer a payment on death. Should the rate ofclaim in this regard be less than expected then profits will increase. Thiswill be offset to a degree by annuity business where payments are made on aregular basis until death occurs. In the first half of 2007 we have experienceda lower rate of claim than allowed for, with a consequent positive contributionto the results.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's portfolios have very littleexposure to the impact of investment market performance on options andguarantees, it does have significant exposure to potential misselling ofpolicies sold in connection with an endowment mortgage. We are required to makeredress to a subset of mortgage endowment policyholders who have been missoldtheir product and to write to policyholders on a biennial basis setting outtheir potential returns based on specified growth rates. In the past there hasbeen significant media attention and aggressive advertising by claimsmanagement firms. This activity has continued to decline in the first half ofthe year as more potential claims become time-barred from making a successfulcomplaint. A number of the claims management firms, whose business has beensignificantly affected by the time-bar rules, are raising a challenge to thelegality of these rules. However, at the present time, over 70% of our mortgageendowments are time-barred and this is expected to rise to approximately 80% bythe end of 2008 with the balance of the population carrying little, if any,potential liability to compensation. We are pleased to report that, during thefirst half of 2007, the number of complaints we have received, despite arelatively heavy mailing schedule, has reduced significantly and this, combinedwith the number of complaints that we are rejecting under the time-barringrules, has led us to review the provision we hold for future claims. Whilstmaintaining a degree of prudence, we have reduced the provision for futureredress costs by ‚£1.8m pre-tax (‚£1.3m net of tax).The ongoing work we have been doing on the FSA's Treating Customers Fairly("TCF") initiative and the migration of our two life assurance books ofbusiness to third party outsourcing firms has provided an excellent opportunityfor us to undertake a thorough review of our practice and procedures. As mightbe expected a number of improvements to our processes have been identified. Themajority of these have already been rectified with little financial effect anda significant number of the remainder can be resolved as we migrate to ouroutsourcers' systems.One issue has, however, been identified in the pricing of our unit-linkedfunds, whereby, due to a data error in the indexation of the costs of ourunderlying investment holdings, we have overstated our estimate of capitalgains chargeable to tax. As a result, we have made greater deductions fromunit-linked funds than would otherwise have been the case. The effect of thishas become more significant over the last two years as investment markets haverecovered: prior to this, the effect was masked by previously accumulatedcapital gains tax losses. To rectify the position, we will make restitution tothe linked funds and will also compensate policyholders who may have sufferedloss. Accordingly, we have established a provision of ‚£2.3m (‚£1.8m net of tax)as at 30 June 2007.

Together, the net effect of the provision adjustments in respect of the two exposures detailed above has led to a net charge of ‚£0.5m to pre-tax profit on both the IFRS and EEV bases (‚£0.4m net of tax).

Regulatory Issues

The key focus on the regulatory front in the first part of the year was toensure we met the FSA's target of being 'substantially into the implementationstage' of the TCF project. I am pleased to say that we met that target and havemade significant progress since. We note that the FSA has issued two new TCFtargets for the industry which relate to the development of ManagementInformation by March 2008 and the ability to demonstrate full TCF compliance byDecember 2008. We believe we are in good shape to meet these targets.We have also been the subject of an FSA Arrow Lite review. This was undertakenin early July and, although we have not yet received formal feedback from theFSA, we are not expecting any significant requirements in the Risk MitigationProgramme. We have been informed that we will now be on a three-year cycle forfuture Arrow assessments. We have also submitted an updated Individual CapitalAssessment to the FSA, as is required on an annual basis, and, although weawait written confirmation of their review, we expect that our currentregulatory capital resources requirement (as set out on Page 9) will continueto be adequate. We believe that these outcomes are a strong testament to ourregulatory compliance ethos and our strong risk management culture andprocesses.

We continue to receive and review Good Practice Guides as issued by the Association of British Insurers and, where we believe it appropriate to our business, amend our practice to comply with the guidance.

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. As reported at the year-end we finalised anarrangement with Capita Life and Pension Services Limited ("Capita") for theoutsourcing of the CWA book early in 2007. The resultant migration project,which will transfer the business to their systems, is well under way and hasenabled us to develop our plans for the closure, in Q2 2008, of the inheritedLuton operation which will, as a result of the outsourcing, reduce headcount bythe equivalent of 7 employees. Service levels from both Capita and LiberataFinancial Services Limited, who are managing the CA book of business and itstransition to their systems, are in line with agreed standards.

IFRS Result

The following summarises information reflected in the IFRS Income Statement, showing the contribution from the constituent members of the Group

CA CWA Parent Amortis- Total company ation of AVIF ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 Six months ended 30 June 2007 Operating profit 8,892 5,803 30 (1,751) 12,974 Financing costs - - (579) - (579) ---------- ---------- ---------- ---------- ---------- Profit before income 8,892 5,803 (549) (1,751) 12,395 taxes ========== ========== ========== ========== ========== Six months ended 30 June 2006 Operating profit 7,367 5,714 136 (1,751) 11,466 Financing costs - - (628) - (628) Loss on sale of (248) - - - (248)subsidiary company ---------- ---------- ---------- ---------- ---------- Profit before income 7,119 5,714 (492) (1,751) 10,590 taxes ========== ========== ========== ========== ========== Year ended 31 December 2006 Operating profit 17,184 12,506 313 (3,502) 26,501 Financing costs - - (1,206) - (1,206) Loss on sale of (248) - - - (248)subsidiary company ---------- ---------- ---------- ---------- ---------- Profit before income 16,936 12,506 (893) (3,502) 25,047 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 postacquisition charge to profits of the write down of the acquired value of CWAin-force business, as measured at the acquisition date. The pattern ofamortisation is broadly intended to match the pattern of surplus arising fromthe run off of the underlying CWA insurance and investment contract portfolios.Overall, the result for the six months ended 30 June 2007 reflects thecontinuing strong emergence of surplus in both CA and CWA, as the underlyingin-force insurance and investment contracts run off. Strong investmentperformance over the period, together with favourable policy lapse andmortality experience, particularly in CA, have led to a situation where bothprincipal businesses have posted results in excess of the prior year first halfperiod, notwithstanding that the in-force policy base is smaller. Within CA,this outcome has absorbed the net adverse pre-tax impact of ‚£0.8m in respect ofthe financial exposures described in the 'Review of the Business' above, whilethe CWA result recognises the release of ‚£0.3m pre-tax in respect of itsmortgage endowment mis-selling claims provision.

EEV Result

Supplementary information prepared in accordance with EEV principles is set outon pages 19 to 29 and is presented to provide alternative information to thatprovided under IFRS.

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

Year ended 6 months ended 30 June 31 December 2007 2006 2006 ‚£000 ‚£000 ‚£000 Operating profit of covered business 6,498 6,386 15,684 Other operational result (549) (492) (699) ---------- ---------- ---------- Operating profit before tax 5,949 5,894 14,985

Variation from longer term investment

return (571) 487 6,307 Economic assumption changes 5,697 407 9,284 ---------- ---------- ---------- Profit before tax 11,075 6,788 30,576 ========== ========== ==========

Profit before tax at ‚£11.1m for the six months ended 30 June 2007 is significantly greater than the underlying return of ‚£5.2m expected to arise from the unwind of the risk discount rate within the embedded value. The principal factors which have contributed to the net excess are:

i. Favourable policy lapse experience of ‚£3.3m; ii. Favourable mortality experience of ‚£1.5m; and iii. Net favourable assumption changes of ‚£1.4m following largely from an

increase of some 0.8% in risk-free rates over the period as longer-term interest rates have hardened, together with the consequential impact on projected investment returns; offset by:

iv.The net adverse impact of ‚£0.5m in respect of the financial exposures

described in the 'Review of the Business' above.

Although the life businesses are substantially closed to new business, therewas a net new business contribution of ‚£0.6m to the operating profit of thecovered business.

The prospective reduction in the rate of CorporationTax from 30% to 28% has given rise to a reduction in the deferred tax liability for future profits of ‚£2.1m with a consequential reduction in the reported tax charge for the period.

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

The consolidated balance sheet prepared in accordance with EEV principles maybe summarised as: 30 June 31 December 2007 2006 2006 ‚£000 ‚£000 ‚£000 Value of in-force business 105,607 108,703 109,941 Other net assets 82,807 67,046 79,167 ---------- ---------- ---------- 188,414 175,749 189,108 Represented by: ========== ========== ==========

Embedded value ("EV") of covered 182,669 180,589 194,401 business

Less: amount financed by borrowings (12,600) (16,800) (16,800) ---------- ---------- ----------

EV of covered business attributable to 170,069 163,789 177,601

shareholders Net equity of other Group companies 18,345 11,960 11,507 ---------- ---------- ---------- Shareholders' equity 188,414 175,749 189,108 ========== ========== ==========

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

30 June 31 December 2007 2006 2006 Number of policies 000 000 000 Endowment 70 80 75 Protection 80 93 86 Annuities 4 4 4 Pensions 52 54 53 Other 9 10 10 ---------- ---------- ---------- Total 215 241 228 ========== ========== ========== 30 June 31 December 2007 2006 2006 Value in-force ‚£m ‚£m ‚£m Endowment 68.1 72.8 70.3 Protection 70.3 72.3 73.1 Annuities 2.7 3.5 2.8 Pensions 41.9 37.9 41.7 Other 0.3 4.9 0.8 ---------- ---------- ---------- Total at product level 183.3 191.4 188.7 Valuation adjustments Holding company expenses (21.2) (23.8) (21.7) Other (16.0) (22.2) (16.9) Cost of capital (3.0) (3.1) (3.4) ---------- ---------- ---------- Value in-force pre-tax 143.1 142.3 146.7 Taxation (37.5) (33.6) (36.8) ---------- ---------- ---------- Value in-force post-tax 105.6 108.7 109.9 ========== ========== ==========

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, before and after making provision for dividendpayments from the Life company to Chesnara, which were approved after therespective period ends. There were no such dividends relating to 30 June 2007or 30 June 2006. 30 June 31 December 2007 2006 2006 ‚£m ‚£m ‚£m Pre-dividend Available capital resources ("CR") 77.1 71.9 84.4 ---------- ---------- ----------

Long-term insurance capital requirement

("LTICR") 26.9 30.5 28.8 Resilience capital requirement ("RCR") 2.0 2.4 2.6 ---------- ---------- ---------- Total capital resources requirement 28.9 32.9 31.4("CRR") ---------- ---------- ---------- Target capital requirement cover 42.3 48.1 45.8 ---------- ---------- ---------- Excess of CR over target requirement 34.7 23.8 38.6 ---------- ---------- ---------- Ratio of available CR to CRR 267% 219% 269% ---------- ---------- ---------- Post dividend Available capital resources ("CR") 77.1 71.9 64.4 ---------- ---------- ----------

Long-term insurance capital requirement 26.9 30.5 28.8

("LTICR") Resilience capital requirement ("RCR") 2.0 2.4 2.6 ---------- ---------- ---------- Total capital resources requirement 28.9 32.9 31.4("CRR") ---------- ---------- ---------- Target capital requirement cover 42.4 48.1 45.8 ---------- ---------- ---------- Excess of CR over target requirement 34.7 23.8 18.6 ---------- ---------- ---------- Ratio of available CR to CRR 267% 219% 205% ---------- ---------- ---------- It can be seen from this information that Chesnara, which relies on dividenddistributions from its life company, is currently in a favourable position toservice its loan commitments and to continue to pursue a progressive dividendpolicy. Insurance Group DirectiveIn accordance with the EU Insurance Group Directive, the Group calculates theexcess of the aggregate of regulatory capital employed over the aggregateminimum solvency requirement imposed by local regulators. The following setsout these calculations pre and post the recognition of interim and finaldividends for the financial year, but approved by the Board and paid to Groupshareholders after the respective dates: 30 June 31 December 2007 2006 2006 ‚£m ‚£m ‚£m Pre-dividend Available group capital resources 82.8 67.0

79.2

Group regulatory capital requirement (28.9) (32.9) (31.4) ---------- ---------- ---------- Excess 53.9 34.1 47.8 ========== ========== ========== Cover 287% 204% 252% ========== ========== ========== Post-dividend Available group capital resources 77.3 61.7

70.8

Group regulatory capital requirements (28.9) (32.9) (31.4) ---------- ---------- ---------- Excess 48.4 28.8 39.4 ========== ========== ========== Cover 267% 188% 225% ========== ========== ==========

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

Individual Capital Assessments

As stated above, we have submitted an updated Individual Capital Assessment tothe FSA. This was based on risk conditions prevailing at the end of 2006 and,for the first time, covered the CA and CWA businesses on a combined basis.Although we have not yet received written confirmation from the FSA as to theresult of their review, we believe that the effective current and medium-termcapital requirement constraints on distributions to Chesnara will continue tobe made on the basis set out under 'Regulatory Capital Resources andRequirements' above.

Developments

In the second half of the year Chesnara will continue to search forconsolidation or other value-enhancing acquisition opportunities, work with ouroutsource partners to ensure continuing delivery of acceptable service levelsand progress towards the transition of the policy base to their systems. Wewill also continue our strong progress on the Treating Customers Fairly projectand maintain our focus on mortgage endowment and persistency issues.

Consolidation

We remain convinced that opportunities for consolidation of suitably sized lifeassurance companies will arise. However, whilst there has been activity at thetop end of the market, as measured by Embedded Value, there has been little, ifany opportunity in our ‚£50m to ‚£200m target range.

Regulatory

With our TCF project on track, our Arrow Lite requirements expected to bemanageable and our Individual Capital Assessment indicating that, at present,we have no requirement to hold additional regulatory capital, we will look toensure that we build on our progress to date and ensure we maintain strong andfocussed management of our regulatory and risk programmes.

Mortgage Endowments and Persistency

Notwithstanding the positive results in both these areas for the first half ofthe year we remain aware that they are both primary drivers of both current andfuture profitability. Therefore they will, necessarily, receive ongoingfocussed management attention.

Outlook

The results for the first six months have benefited from the positive effects of a release from the mortgage endowment misselling provision and further improvement in policy attrition rates.

Whilst we have released ‚£1.8m from the mortgage endowment misselling redressprovision we still retain an element of conservatism within it. As stated inprevious reports the level of this provision could be affected by macroeconomicfactors, as could policy attrition rates. We have purposefully not implementedthe full financial effects of the improvement in the policy attrition rate asit is too early to assess the mid to longer-term effects of increases ininterest rates, which test policyholders' budgets, and of the recent stockmarket volatility, which affects policyholder sentiment and policy values.On the acquisition front we will continue to search for opportunities forconsolidation in the small to medium sector. In the absence of value-enhancingtransactions we will continue to seek other opportunities which could leveragevalue from our existing capabilities. If no clearly superior investmentalternative is identified in the second half of the year the possibility of,and preferred methodology for, a return of surplus capital will be considered.

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.

DividendWe 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 areable to recommend an interim dividend of 5.25p, which represents an increase of4.0% over the 2006 interim payment.Graham KettleboroughChief Executive Officer4 September 2007

CONSOLIDATED INTERIM INCOME STATEMENT FOR THE SIX MONTHS ENDED 30 JUNE 2007

Unaudited Year ended 6 months ended 30 June 31 December 2007 2006 2006 Note ‚£000 ‚£000 ‚£000 Insurance premium revenue 52,669 57,267 112,800 Insurance premium ceded to reinsurers (9,453) (11,216) (22,194) ---------- ---------- ---------- Net insurance premium revenue 43,216 46,051 90,606 Fee and commission income Insurance contracts 19,770 22,539 43,519 Investment contracts 4,570 4,161 9,085 Investment income 83,290 38,885 151,470 ---------- ---------- ----------

Total revenue (net of reinsurance

payable) 150,846 111,636 294,680 Other operating income 543 504 1,195 ---------- ---------- ---------- Net Income 151,389 112,140 295,875 ---------- ---------- ----------

Policyholder claims and benefits 3

incurred (102,809) (85,566) (218,541)

Reinsurers' share of claims and

benefits incurred 15,837 13,412 32,761 ---------- ---------- ----------

Net policyholder claims and benefits

incurred (86,972) (72,154) (185,780) ---------- ---------- ---------- Change in investment contract liabilities (40,875) (14,968) (58,905)

Reinsurers' share of investment

contract liabilities 1,341 579 1,304 ---------- ---------- ----------

Net change in investment contract

liabilities (39,534) (14,389) (57,601) ---------- ---------- ---------- Fees, commission and other acquisition costs (790) (1,865) (2,881) Administrative expenses (8,750) (10,081) (17,184) Other operating expenses

Charge for amortisation of intangible

assets (1,889) (1,915) (3,773) Reinsurance recapture premium - - (1,374) Other (480) (270) (781) ---------- ---------- ---------- Total expenses (138,415) (100,674) (269,374) ---------- ---------- ---------- Operating profit 12,974 11,466 26,501 Financing costs (579) (628) (1,206)

Loss on sale of subsidiary company - (248)

(248) ---------- ---------- ---------- Profit before tax 12,395 10,590 25,047 Income tax expense (2,275) (2,913) (5,791) ---------- ---------- ---------- Profit for the period 5 10,120 7,677 19,256 ========== ========== ========== Basic earnings per share 4 9.68p 7.34p 18.41p ========== ========== ========== Diluted earnings per share 4 9.68p 7.34p 18.41p ========== ========== ==========

The Group considers that it has no product or distribution based segmentation and, as it only has significant business activity within the UK, it has no geographic segmentation. Accordingly, no segmented reporting is presented.

CONSOLIDATED INTERIM BALANCE SHEET AT 30 JUNE 2007

Unaudited 30 June 31 December 2007 2006 2006 Note ‚£000 ‚£000 ‚£000 Assets Intangible assets Deferred acquisition costs 10,088 11,508 10,687

Acquired value of in-force business

Insurance contracts 20,762 23,495 22,144 Investment contracts 13,135 14,152 13,644 Reinsurers' share of insurance contract 211,097 198,835 207,279provisions Amounts deposited with reinsurers 62,126 61,455 63,721 Investment properties 19,935 26,982 27,750 Financial assets

Equity securities at fair value through

income 850,876 684,551 738,487

Holdings in collective investment schemes 411,083 335,278 342,352

at fair value through income Debt securities at fair value through 312,775 372,012 350,524income Loans and receivables including insurance 6 49,847 24,679 17,310receivables Derivative financial instruments 25,610 16,788 30,642 ---------- ---------- ---------- Total financial assets 1,650,191 1,433,308 1,479,315 ---------- ---------- ---------- Reinsurers share of accrued policyholder 5,631 5,072 4,191claims Income taxes 153 147 260 Cash and cash equivalents 247,802 282,537 301,218 ---------- ---------- ---------- Total assets 2,240,920 2,057,491 2,130,209 ---------- ---------- ---------- Liabilities Insurance contract provisions 1,134,689 1,065,270 1,115,197 Financial liabilities Investment contracts at fair value through 798,671 794,902 812,979income Borrowings 7 12,425 16,496 16,574 Derivative financial instruments 367 371 1,421 ---------- ---------- ---------- Total financial liabilities 811,463 811,769 830,974 ---------- ---------- ---------- Provisions 537 1,237 597 Deferred tax liabilities 12,862 13,327 13,946 Reinsurance payables 2,192 1,935 3,059 Payables related to direct insurance and 25,974 25,037 24,927investment contracts Deferred income 17,276 19,159 18,231 Income taxes 4,626 2,788 2,023 Other payables 6 115,345 9,011 7,000 ---------- ---------- ---------- Total liabilities 2,124,964 1,949,533 2,015,954 ---------- ---------- ---------- Net assets 115,956 107,958 114,255 ========== ========== ========== Shareholders' equity Share capital 41,501 41,501 41,501 Share premium 20,458 20,458 20,458 Other reserves 50 50 50 Retained earnings 5 53,947 45,949 52,246 ---------- ---------- ---------- Total shareholders' equity 115,956 107,958 114,255 ========== ========== ========== CONSOLIDATED INTERIM STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED 30 JUNE2007 Unaudited Year ended 6 months ended 30 June 31 December 2007 2006 2006 ‚£000 ‚£000 ‚£000 Profit for the year 10,120 7,677 19,256 Adjustments for: Amortisation of deferred acquisition 599 1,492 2,312costs Amortisation of acquired in-force value 1,891 1,914 3,772 Tax expense 2,275 2,913 5,791 Interest receivable (12,357) (13,672) (26,331) Dividends receivable (17,681) (18,472) (30,266) Interest expense 579 628 1,206 Change in fair value of investment (1,682) (1,560) (2,328)properties Fair value losses/(gains) on financial 918 15,275 (54,154)assets

Loss on sale of subsidiary company 248

248 Interest received 9,876 13,534 28,981 Dividends received 19,107 14,175 27,099

Changes in operating assets and

liabilities

(Increase)/ decrease in financial assets (129,760) 3,986 20,039

(Increase)/decrease in reinsurers share of insurance contract provisions (5,258) 466

(7,097)

Decrease / (increase) in amounts 1,595 1,242 (1,024)deposited with reinsurers (Increase) / decrease in other loans and (31,482) (434) 2,932receivables Increase / (decrease) in insurance 19,492 (5,871) 44,056contract provisions (Decrease) / increase in investment (14,308) (8,244) 9,833contract liabilities (Decrease) in provisions (60) (196) (836) (Decrease) / increase in reinsurance (867) (114) 1,010payables

Increase in payables related to direct insurance and investments contracts 1,047 1,171

1,061

Increase / (decrease) in other payables 106,518 415 (1,650) ---------- ---------- ---------- Cash (utilised by) / generated from (39,438) 16,573 43,910 operations Income tax paid (645) (3,418) (6,470) ---------- ---------- ---------- Net cash (utilised by) / generated from (40,083) 13,155 37,440 operating activities

Cash flows from investing activities ========== ========== ==========

Disposal of subsidiary, net of cash - (295)

(295)disposed of ---------- ---------- ----------

Net cash utilised by investing activities - (295) (295)

Cash flows from financing activities ========== ========== ========== Repayment of borrowings (4,200) (4,200) (4,200) Dividends paid (8,419) (7,986) (13,268) Interest paid (714) (589) (911) ---------- ---------- ---------- Net cash utilised by financing activities (13,333) (12,775) (18,379) ========== ========== ==========

Net (decrease) / increase in cash and

cash equivalents (53,416) 85 18,766 Cash and cash equivalents at beginning of 301,218 282,452 282,452 period ---------- ---------- ---------- Cash and cash equivalents at end of 247,802 282,537 301,218 period ========== ========== ========== Consolidated Interim Statement of Changes in Equity for the six months ended 30June 2007 Unaudited Six months ended 30 June 2007 Capital Share Share redemption Retained capital premium reserve earnings Total ‚£000 ‚£000 ‚£000 ‚£000 ‚£000

Equity shareholders' funds at

1 January 2007 41,501 20,458 50 52,246 114,255 Profit for the period

representing total recognised

income and expenses - - - 10,120 10,120 Dividends paid - - - (8,419) (8,419) ---------- --------- ---------- --------- --------- Equity shareholders' funds at 30 June 2007 41,501 20,458 50 53,947 115,956 ========== ========= ========== ========= ========= Unaudited Six months ended 30 June 2006 Capital Share Share redemption Retained capital premium reserve earnings Total ‚£000 ‚£000 ‚£000 ‚£000 ‚£000

Equity shareholders' funds at 1

January 2006 41,501 20,458 50 46,258 108,267 Profit for the period

representing total recognised

income and expenses - - - 7,677 7,677 Dividends paid - - (7,986) (7,986) ---------- ---------- ---------- -------- ------- Equity shareholders' funds at 30 June 2006 41,501 20,458 50 45,949 107,958 ========== ========== ========== ======== ======= Year ended 31 December 2006 Capital Share Share redemption Retained capital premium reserve earnings Total ‚£000 ‚£000 ‚£000 ‚£000 ‚£000

Equity shareholders' funds at 1

January 2006 41,501 20,458 50 46,258 108,267 Profit for the period

representing total recognised

income and expenses - - - 19,256 19,256 Dividends paid - - (13,268)(13,268) ---------- ---------- ---------- --------- ------- Equity shareholders' funds at 31 December 2006 41,501 20,458 50 52,246 114,255 ========== ========== ========== ========= =======

Notes to the Consolidated Interim Financial Statements

1. Basis of preparation

The financial information presented herein has been prepared in accordance withthe accounting policies used for the Chesnara plc Annual Report and Accountsfor the year ended 31 December 2006.

The financial information shown in this half year review is unaudited and does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985.

The comparative figures for the financial year ended 31 December 2006, 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. Transfer of long-term business fund

On 30 June 2006, under the provisions of Part VII of the Financial Services andMarkets Act 2000, the long-term business of City of Westminster Assurance Ltd("CWA") was transferred to Countrywide Assured plc ("CA"). As a result, thewhole of the FSA regulated activity of the Group effectively subsists within CAwith effect from that date.

The transfer gives rise to a number of recognised and prospective benefits within the combined CA entity, including the determination of the capital requirement of the business, savings on operational expenses and the relief of some accumulated tax losses in CA.

3. Policyholder claims and benefits incurred

Policyholder claims and benefits incurred for the six months ended 30 June 2006include an amount of ‚£1,116,882 representing a recovery under a professionalindemnity insurance policy of previously recognised misselling complaintsadministration costs.

4. Earnings per share

Earnings per share is based on the following:

Unaudited Year ended 6 months ended 31 December 30 June 2007 2006 2006 Profit for the period (‚£000) 10,120 7,677 19,256 ---------- ---------- ---------- Weighted average number of ordinary 104,588,785 104,588,785 104,588,785shares ---------- ---------- ---------- Basic earnings per share 9.68p 7.34p 18.41p ---------- ---------- ---------- Diluted earnings per share 9.68p 7.34p 18.41p ========== ========== ==========

The weighted average number of ordinary shares in respect of the six months ended 30 June 2007, the six months ended 30 June 2006 and the year ended 31 December 2006 is based on 104,588,785 shares in issue at the beginning and end of all related periods.

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 the periods reported.

5. Retained earnings Unaudited Year ended 6 months ended 31 December 30 June 2007 2006 2006 ‚£000 ‚£000 ‚£000 Balance at 1 January 52,246 46,258 46,258 Profit for Period 10,120 7,677 19,256 Dividends

Final approved and paid for 2005 - (7,986) (7,986)

Interim approved and paid for 2006 - (5,282) Final approved and paid for 2006 (8,419) - - ---------- ---------- ----------

Balance at 30 June/31 December 53,947 45,949 52,246

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

The final dividend in respect of 2005, approved and paid in 2006 was paid at the rate of 7.55p per share.

The interim dividend in respect of 2006, approved and paid in 2006, was paid at the rate of 5.05p per share.

The final dividend in respect of 2006, approved and paid in 2007 was paid at the rate of 8.05p per share, so that the total dividend paid to the equity shareholders of the parent company in respect of the year ended 31 December 2006 was 13.1p per share.

An interim dividend of 5.25p per share in respect of the year ending 31December 2007 payable on 12 October 2007 to equity shareholders of the parentcompany registered at the close of business on 14 September 2007, the dividendrecord date, was approved by the Directors after 30 June 2007. The resultinginterim dividend of ‚£5.5m has not been provided in these financial statements.

The following summarises dividend per share information in respect of the year ended 31 December 2006 and the year ending 31 December 2007:

2007 2006 Interim dividend 5.25p 5.05p ========= Final dividend 8.05p ---------- Total for the year 13.10p ==========

6. Loans and receivables / other payables

Included in loans and receivables and other payables as at 30 June 2007 areamounts of ‚£30,071,000 and ‚£109,745,000 respectively, which result from achange in investment policy whereby the Group repositioned a significantportion of its financial assets portfolio. These amounts were subsequentlysettled for cash. 7. Borrowings Unaudited 31 December 30 June 2007 2006 2006 ‚£000 ‚£000 ‚£000 Bank Loan 12,425 16,496 16,574 ========== ========== ========== 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 2007 was ‚£12,600,000 (30 June 2006 and 31 December 2006: ‚£16,800,000)

8. 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.9. Approval of interim report

This interim report was approved by the Board of Directors on 4 September 2007. A copy of the report will be available to the public at the company's registered office, Harbour House, Portway, Preston PR2 2PR, UK and at www.chesnara.co.uk.

Supplementary Information - European Embedded Value Basis

Summarised Consolidated Interim Income Statement for the six months ended 30 June 2007 (unaudited) Year ended Six months ended 30 June 31 December 2007 2006 2006 Note ‚£000 ‚£000 ‚£000 Operating profit of covered 6 business 6,498 6,386 15,684 Other operational result (549) (492) (699) ---------- ---------- ---------- Operating profit 5,949 5,894 14,985 Variation from longer-term investment return (571) 487 6,307

Effect of economic assumption

changes 5,697 407 9,284 ---------- ---------- ---------- Profit before tax 11,075 6,788 30,576 Tax (3,350) 774 (4,373) ---------- ---------- ---------- Profit for the period 7,725 7,562 26,203 ========== ========== ========== Earnings per share Based on profit for the period 7.39p 7.23p 25.05p ---------- ---------- ---------- Diluted earnings per share Based on profit for the period 7.39p 7.23p 25.05p ---------- ---------- ----------

Supplementary Information - European Embedded Value Basis

Summarised Consolidated Interim Balance Sheet as at 30 June 2007 (unaudited) 30 June 31 December 2007 2006 2006 Note ‚£000 ‚£000 ‚£000 Assets Value of in force business 5,8 105,607 108,703 109,941

Reinsurers' share of insurance

contract provisions 186,853 173,426 183,033 Amounts deposited with reinsurers 61,230 59,738 62,794 Investment properties 19,935 26,982 27,750 Deferred tax assets 122 122 121 Financial assets

Equity securities at fair value

through income 850,876 684,551 738,487

Holdings in collective investment

schemes at fair value through income 411,083 335,278 342,352

Debt securities at fair value

through income 312,775 372,012 350,524

Loans and receivables including

insurance receivables 49,847 24,679 17,310 Derivative financial instruments 25,610 16,788 30,642 ---------- ---------- ---------- Total financial assets 1,650,191 1,433,308 1,479,315 ---------- ---------- ----------

Reinsurers' share of accrued policy

claims 5,631 5,072 4,191 Income taxes 153 147 260 Cash and cash equivalents 247,802 282,537 301,218 ---------- ---------- ---------- Total assets 2,277,524 2,090,035 2,168,623 ---------- ---------- ---------- Liabilities Insurance contract provisions 1,111,109 1,046,071 1,091,889 Financial liabilities

Investment contracts at fair value

through income 816,535 811,340 832,025 Borrowings 12,425 16,496 16,574

Derivative financial instruments 367 371

1,421 ---------- ---------- ---------- Total financial liabilities 829,327 828,207 850,020 ---------- ---------- ---------- Provisions 537 1,237 597 Reinsurance payables 2,192 1,935 3,059

Payables related to direct insurance

and investment contracts 25,974 25,037 24,927 Income taxes 4,626 2,788 2,023 Other payables 115,345 9,011 7,000 ---------- ---------- ---------- T Total liabilities 2,089,110 1,914,286 1,979,515 ---------- ---------- ---------- Net assets 188,414 175,749 189,108 ========== ========== ========== Shareholders' equity Share capital 41,501 41,501 41,501 Share premium 20,458 20,458 20,458 Other reserves 50 50 50 Retained earnings 126,405 113,740 127,099 ---------- ---------- ---------- Total shareholders' equity 5,8 188,414 175,749 189,108 ========== ========== ==========

Supplementary Information - European Embedded Value Basis

Summarised Consolidated Interim Statement of Changes in Equity for the six months ended 30 June 2007 (unaudited)

Year Ended Six months ended 30 June 31 December 2007 2006 2006 ‚£000 ‚£000 ‚£000

Shareholders' equity at 1 January 189,108 176,173 176,173

Profit for the period representing total recognised income and expense 7,725 7,562 26,203 Dividends paid (8,419) (7,986) (13,268) ---------- ---------- ----------

Shareholders' equity at 30 June/

31 December 188,414 175,749 189,108 ========== ========== ==========

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 these

Group financial statements which are supplementary to the Group's primary

financial statements which have been prepared in accordance with

International Financial Reporting Standards ("IFRS"). These financial

statements have been prepared in accordance with the European Embedded

Value ("EEV") principles issued in May 2004 by the European CFO Forum and

supplemented by Additional Guidance on EEV Disclosures issued by the same

body in October 2005. The principles provide a framework intended to

improve comparability and transparency in embedded value reporting across

Europe.

2. Covered business

The Group uses EEV methodology to value its individual life assurance,

pension and annuity business, which has been written, with only

insignificant exceptions, in the UK ("covered business"). This business

comprises the Group's long-term business operations, being those contracts

falling under the definition of long-term insurance business for UK regulatory purposes. The Group has no business activities other than those relating to the

covered business. In particular, the operating activities of the holding

company, Chesnara plc, are treated as an integral part of the covered

business. Under EEV principles no distinction is made between insurance and

investment contracts, as there is under IFRS, which accords these classes

of contracts different accounting treatments.

On 30 June 2006, under the provisions of Part VII of the Financial Services

and Markets Act 2000, the long-term business of City of Westminster

Assurance Company Limited, the principal operating subsidiary of CWA Life

Holdings plc, was transferred to Countrywide Assured plc, the primary

operating subsidiary company of the Group. As a result, the whole of the

covered business of the Group effectively subsists within Countrywide

Assured plc with effect from that date. The transfer gives rise to benefits

which have been recognised within the covered business, including

determination of the capital requirement of the covered business on a

combined basis and reduced costs relating largely to audit and consultancy

fees. The impact of these, together with the consequential relief of tax

losses in Countrywide Assured plc, which had not hitherto been recognised

in the cash flow projections relating to the value of business in force,

were recognised in the comparative financial statements as at 30 June 2006

and for the six months then ended.

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 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 that theshareholder can diversify away any uncertainty where the impact of variationsin experience on future cash flows is symmetrical. For those risks that areassumed to be diversifiable no adjustment to the risk margin has been made. Forany remaining risks that are considered to be non-diversifiable risks there isno risk premium observable in the market and therefore a constant margin of 50basis points has been added to the risk margin. The RDR is determined byequating the results from the traditional embedded value approach, includingthe assumed actual investment returns and traditional cost of capital, to thatderived using the market-consistent method, this process being known ascalibration of the RDR. The risk margin is then the difference between thederived RDR and the risk-free rate. The selection of the assumed actualinvestment returns and the reported cost of capital will have no impact on thereported result, as changes in these produce corresponding changes in the 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.

The risk margin established on the basis set out above is normally calculated at each financial year-end. At interim periods, the discount rate normally remains consistent with the investment return assumptions. The margin over investment return assumptions is, however, reassessed if market conditions change significantly.

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; andiii. 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; andii. 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 2006. 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 allocated to the covered business as the whole business of the ChesnaraGroup is the transaction of life assurance business through the subsidiarycompanies. Hence the expense assumptions used for the cash flow projectionsinclude 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 2006 are consideredto be best estimate and, consequently, no further adjustments are required,except for the persistency assumptions relating to one particular product,where, following recent observed experience, it has been considered prudent tostrengthen the assumptions. The assumptions required in the calculation of thevalue of the annuity rate guarantee on pension business have been set equal

tobest-estimate assumptions.4. Assumptions

a. Investment Returns (pre tax)

The assumed future pre-tax returns on fixed interest and RPI linked

securities are set by reference to redemption yields available in the

market at the end of the reporting period. The corresponding return on

equities and property is equal to the fixed interest gilt assumptions plus

an appropriate risk margin. For linked business the aggregate return has

been determined by reference to the benchmark asset mix within the Managed Funds. 30 June 31 December Operating profit/(loss) before tax 2007 2006 2006 Equity risk premium 2.7% 2.7% 2.7% Property risk premium 2.7% 2.7% 2.7% Investment return Fixed Interest 5.3% 4.7% 4.6% Equities 8.0% 7.4% 7.3% Property 8.0% 7.4% 7.3% Inflation RPI 3.2% 2.9% 3.1% 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 Rate

The risk-free rate is set by reference to the sterling bid swap rates

available in the market at the end of the reporting period. Where, however,

non-linked business is substantially backed by government bonds, the yields

on these assets have been used.

An explicit constant margin of 50 basis points is added to the risk-free rate

to 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 2007 2006 2006 Risk-free rate 5.6% 4.8% 4.8% Non-diversifiable risk 0.5% 0.5% 0.5% Risk margin 0.7% 0.9% 0.8% Risk discount rate 6.8% 6.2% 6.1%

5. Analysis of shareholders' equity

30 June 31 December 2007 2006 2006 ‚£000 ‚£000 ‚£000 Covered business Required capital 42,314 48,120 45,792 Free surplus 34,748 23,766 38,668 ---------- ---------- ---------- Shareholder net worth 77,062 71,886 84,460 Value of in-force business 105,607 108,703 109,941 ---------- ---------- ---------- Embedded value of covered 182,669 180,589 194,401 business Less: amount financed by (12,600) (16,800) (16,800) borrowings ---------- ---------- ---------- Embedded value of covered business attributable to shareholders 170,069 163,789 177,601 Net equity of other Group 18,345 companies 11,960 11,507 ---------- ---------- ---------- Total shareholders' equity 188,414 175,749 189,108 ========== ========== ========== The movement in the value of in-force business comprises: Value at beginning of period 109,941 109,961 109,961 Amount charged to operating (4,334) (1,258) (20) profit ---------- ---------- ---------- Value at end of period 105,607 108,703 109,941 ========== ========== ==========

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, as stated in Note 2, was subsequentlytransferred to Countrywide Assured plc and it follows that the embedded valueof the covered business is not attributable to equity shareholders of the Groupto the extent of the outstanding balance on the loan account at each balancesheet date. The loan is repayable in five equal annual instalments on theanniversary of the draw-down date, the funds for the repayment effectivelybeing provided by way of the realisation of the underlying value of in-forcebusiness of the covered business. In accordance with this, a further ‚£4.2m ofthe loan was repaid on 2 June 2007, leaving principal outstanding at that dateof ‚£12.6m.

6. Analysis of profit of covered business

Six months ended Year Ended 30 June 31 December 2007 2006 2006 ‚£000 ‚£000 ‚£000 New business contribution 615 444 1,599 Return from in-force business Expected return 5,217 5,477 10,386 Experience variances 4,092 2,511 7,459 Operating assumption changes (4,242) (3,060) (5,072) Return on shareholder net worth 816 1,014 1,312 ---------- ---------- ---------- Operating profit 6,498 6,386 15,684 Variation from longer-term (571) 487 6,307investment return Effect of economic assumption 5,697 407 9,284changes ---------- ---------- ---------- Profit before tax 11,624 7,280 31,275 Tax (3,350) 774 (4,496) ---------- ---------- ---------- Profit after tax 8,274 8,054 26,779 ========== ========== ========== 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 tax pertaining thereto, which is included in "other tax".The variation from longer-term investment return for the six months ended 30 June 2006 and for the yearended 31 December 2006 is stated net of a loss of ‚£248,000 arising on the sale of a subsidiary company.

7. Sensitivities to alternative assumptions

The following table shows the sensitivity of the embedded value of the coveredbusiness as reported at 30 June 2007 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 June2007 as the reported level of new business contribution is not considered to bematerial (see Note 3a) above). It largely relates to guaranteed bond business,where a close asset/liability matching approach leaves values largelyinsensitive to changes in experience.Embedded Value ("EV") of covered business as at 30 June 2007 ‚£182.7m ----------- Change in EV (‚£m) Economic sensitivities 100 basis point increase in risk discount rate (5.1) 100 basis point reduction in yield curve (3.3) 10% decrease in equity and property values (2.8) Operating sensitivities 10% decrease in maintenance expenses 2.4 10% decrease in lapse rates 3.3 5% decrease in mortality/morbidity rates Assurances 2.0 Annuities (0.5) Reduction in the required capital to statutory 0.8 minimum

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 6.8% RDR increases

to 7.8%;

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 2007 2006 2006 ‚£000 ‚£000 ‚£000 Shareholders' equity on the IFRS basis 115,956 107,958 114,255 Adjustments Deferred acquisition costs Insurance contracts - (234) - Investment contracts (9,488) (10,647) (10,074) Deferred income 16,309 18,141 17,239 Adjustment to provisions on investment contracts, net of amounts deposited with reinsurers (18,393) (17,915) (19,596) Adjustments to provisions on insurance contracts, net of reinsurers' share (664) (59) (936) Acquired in-force value (24,544) (27,292) (25,933) Deferred tax 3,631 3,094 4,212 Reinsurer default reserve - (6,000) - ---------- ---------- ----------

Group shareholder net worth 82,807 67,046 79,167 Value of in-force business 105,607 108,703 109,941 ---------- ---------- ---------- Shareholders' equity on the EEV basis 188,414 175,749 189,108 ========== ========== ==========

Group shareholder net worth

comprises: Shareholder net worth in covered business 77,062 71,886 84,460 Shareholder's equity in other Group companies 18,345 11,960 11,507 Debt finance (12,600) (16,800) (16,800) ---------- ---------- ---------- Total 82,807 67,046 79,167 ========== ========== ========== The reinsurer default reserve adjustment as at 30 June 2006 relates to areserve which was established for FSA prudential reporting and which wasrecognised for reporting on the EEV basis, but not for reporting on the IFRSbasis. The reserve was not recognised for reporting in accordance with IFRS asthe events to which they related were, in the opinion of the Directors,considered to be remote or uncertain. However, the reserve was charged to theshareholder net worth component of the embedded value of the covered business,as this was held to be consistent with the market-consistent valuation approachadopted in accordance with EEV principles. The reserve was maintained againstthe effect of possible default by a major reinsurer, Guardian Assurance plc,which is a subsidiary of Aegon NV. As a result of mitigating action that wastaken during 2006, the reserve was no longer required at 31 December 2006.

Independent review report by KPMG Audit Plc to Chesnara plc

Introduction

We have been instructed by the Company to review the financial information forthe six months ended 30 June 2007, which comprises the Consolidated incomestatement, the Consolidated balance sheet, the Consolidated statement ofchanges in equity, the Consolidated statement of cash flows and the relatednotes ("the Financial Information") and to review the EEV basis supplementaryinformation for the six months ended 30 June 2007, which comprises theSummarised consolidated income statement, the Summarised consolidated balancesheet, the Summarised consolidated statement of changes in equity and therelated notes ("the Supplementary Information").The Supplementary Information has been prepared in accordance with the EuropeanEmbedded Value Principles issued in May 2004 by the European CFO Forum assupplemented by the Additional Guidance on European Embedded Value Disclosuresissued in October 2005 (together ' the EEV Principles') using the methodologyand assumptions set out in notes 3 and 4 to the Supplementary Information.

We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with either the Financial Information 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 ListingRules of the Financial Services Authority and also to provide a reviewconclusion to the Company on the Supplementary Information. Our reviews havebeen undertaken so that we might state to the Company those matters we arerequired to state to it in this report and for no other purpose. To the fullestextent permitted by law, we do not accept or assume responsibility to anyoneother than the Company for our review work, for this report, or for theconclusions we have reached.

Directors' responsibilities

The interim report, including the Financial Information and the SupplementaryInformation contained therein, is the responsibility of, and has been approvedby, the Directors. The Directors are responsible for preparing the FinancialInformation in accordance with the Listing Rules of the Financial ServicesAuthority which require that the accounting policies and presentation appliedto the interim figures should be consistent with those applied in preparing thepreceding annual financial statements except where any changes, and the reasonsfor them, are disclosed. The directors have accepted responsibility forpreparing the Supplementary Information in accordance with the EEV Principlesand for determining the assumptions used in the application of thoseprinciples.

Review work performed

We conducted our review of the Financial Information in accordance withguidance contained in Bulletin 1999/4 issued by the Auditing Practices Boardfor use in the UK. We conducted our review of the Supplementary Informationhaving regard to that Bulletin. A review consists principally of makingenquiries of group management and applying analytical procedures to theFinancial Information, the Supplementary Information and underlying financialdata and, based thereon, assessing whether the accounting policies andpresentation have been consistently applied unless otherwise disclosed. Areview excludes audit procedures such as tests of controls and verification ofassets, liabilities and transactions. It is substantially less in scope than anaudit performed in accordance with International Standards on Auditing (UK &Ireland) and therefore provides a lower level of assurance than an audit.Accordingly we do not express an audit opinion on the Financial Information orthe Supplementary Information.

Review conclusions

On the basis of our reviews we are not aware of any material modifications that should be made either to the Financial Information or to the EEV basis Supplementary Information as presented for the six months ended 30 June 2007.

KPMG Audit Plc 4 September 2007Chartered AccountantsSt James SquareManchester M2 6DS