Chesnara Regulatory News (CSN)

Chesnara plc - Interim Results for the six months ended 30 June 2012

2.5% increase continues dividend growth at Chesnara

31 August 2012

Chesnara today reported interim results for the half-year ended 30 June 2012. The Group remains committed to offering shareholders an attractive long-term income stream arising from the profits of its life assurance businesses.

·; IFRS profit before tax, excluding exceptional item, for the six months ended 30 June 2012 increased by 145% to £9.3m, (2011: £3.8m)

·; Earnings per share (on IFRS basis) of 6.19p, (2011: 2.79p)

·; On EEV basis pre-tax profit for the half-year of £20.3m (2011: £0.4m)

·; Shareholder equity on EEV basis (pre dividend payment) of £296.3m - £2.58p per share (31 December 2011: £294.5m - £2.56p per share)

·; Net cash generation of £12.4m compares favourably to first half of 2011 (£6.7m)

·; Capital release of £7m, arising post 30 June, following successful de-authorisation of Save & Prosper companies.

·; Group solvency ratio remains, post dividend, stable at 198% (30 June 2011: 198%)

·; Countrywide Assured's solvency ratio remains healthy at 213% (30 June 2011: 254%). Movestic's solvency ratio of 277% (30 June 2011: 189%) also remains above target

·; 6.1p interim dividend per share declared (2011: 5.95p), an increase of 2.5%

·; Board remains confident about future dividend flows

·; Search for value adding acquisition opportunities continues

Commenting on the results, Graham Kettleborough, Chief Executive said:

"Bearing in mind the market uncertainty and volatility in this period I am pleased that the resilience of our underlying business has again enabled us to deliver a strong set of results. Consequently, we are able to continue our dividend growth and declare a 2.5% increase in the interim dividend to 6.1p per share."

The Board approved this statement on 30 August 2012.

Enquiries:

Graham Kettleborough

Chief Executive, Chesnara plc 07799 407519

Michael Henman

Cubitt Consulting 0207 367 5100

Notes to editors:

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

CA is a UK life assurance subsidiary that is closed to new business. In June 2005 Chesnara acquired a further closed life insurance company - City of Westminster Assurance - for £47.8m. With effect from 30 June 2006, CWA's policies and assets were transferred into CA plc. Save & Prosper Insurance Limited, and its subsidiary, Save & Prosper Pensions Limited were acquired on 20th December 2010 for £63.5m. With effect from 31 December 2011, the business of Save & Prosper was transferred into CA. CA operates an outsourced business model.

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

Financial

·; Increase in IFRS pre-tax profits, excluding exceptional item,Note 2 of 145% to £9.3m (six months ended 30 June 2011: £3.8m).

·; Net cash generated during the first half of 2012 of £12.4mNote 3 compares favourably to the prior year (six months ended 30 June 2011: £6.7m).

·; Total EEV has increased from £294.5m at 31 December 2011 to £296.3m at 30 June 2012, after allowing for the payment of the 2011 final dividend of £12.5m during the period.

·; EEV pre-tax profit increased to £20.3m from £0.4m for the six months ended 30 June 2011, comprising:

- an increase in pre-tax operating profit to £14.1m from £0.3m for the six months ended 30 June 2011, and

- an increase in economic profit to £6.2m from £0.1m for the six months ended 30 June 2011.

·; Strong Insurance Group Directive solvency cover of 198% at 30 June 2012 (31 December 2011: 198%).

·; Proposed interim dividend increased by 2.5% to 6.1p per share.

Operational

·; Following the successful Part VII Transfer of S&P funds into CA, the S&P companies have been de-authorised, releasing £7m of capital post 30 June 2012.

·; Continued progress on Solvency II implementation.

·; Ongoing discussions relating to HCL outsourcing arrangements.

Notes

1) Throughout the Chairman's Statement, Chief Executive Review and Financial Review sections following, all results quoted at business segment level exclude the impact of consolidation adjustments relating to the amortisation of the acquired value of in-force business (AVIF). These consolidation adjustments are analysed by business segment.

2) An exceptional item of £4.8m, relating to the reclassification of policy-holder tax liabilities in the balance sheet has been charged to IFRS pre-tax profits. There is a corresponding deferred tax release to income tax of £4.8m, so that the net-of-tax impact is £nil.

3) Net cash generation in the year is defined as the net amount of the following items:

(i) The change in the excess of actual regulatory capital resource over target capital resource in respect of the CA and S&P operating segments to the extent that distribution of the excess to shareholder funds is not restricted;

(ii) Capital contributions made by the Group to the Movestic operating segment; and

(iii) Cash utilised by Parent Company operations.

Chairman's Statement

Despite challenging market conditions, I am pleased to report improved profits, good cash generation and strong solvency, which support an increased dividend.

In my statement in the 2011 full year Report and Accounts I referred to the general resilience of the Group results to economic market conditions. In particular, I noted that the results in terms of IFRS earnings, cash generation, solvency, and hence dividend paying capacity, remained resilient during difficult equity and bond market conditions.

During the first half of 2012 economic conditions have remained uncertain. UK equities, following an increase during the first quarter, subsequently fell back to levels in line with those at the beginning of the year. Swedish equity markets followed a similar course although the closing position of the key equity index (OMX 30) was marginally higher than the opening position. UK bond yields continued their recent downward trajectory with yields on medium and long-dated gilts and swaps decreasing further over the period.

In addition to the movement in equity and bond markets, general concerns over the Eurozone crisis continue to affect economic confidence. Whilst Chesnara will be influenced by the general economic impact of the Eurozone crisis I am pleased to note that the level of direct exposure is negligible. Chesnara has minimal direct investment in the sovereign debt of countries deemed to be in severe financial difficulty.

I am again reassured that during the first half of 2012 the Group result demonstrated a significant level of resilience to the economic conditions as we continue to benefit from our robust governance culture and low-risk investment model.

Although Chesnara, at a consolidated Group level, has continued to weather the economic conditions well, I recognise that the S&P results, in isolation, are sensitive to investment market strain. In particular, the cost of guarantees on its with-profit contracts rises as bond yields decline, and this has continued during the first half of 2012. Despite the increased short-term volatility associated with the S&P guarantees, I remain confident in the long-term value expected to be realised from the S&P acquisition.

Trading conditions have continued to be difficult for Movestic. The short-term focus remains on enhancing the core Pensions and Savings proposition. Residual administration issues, resulting from a systems enhancement programme, have continued to have an adverse impact on both new business volumes and policy attrition rates during the period. The immediate priority is to address all the systems migration issues so that we can begin to derive the expected benefits from the enhanced operating platform. In addition, a recently instigated policy retention programme, which is showing initial signs of success, will continue to be embedded. A new Chief Executive who will ensure swift and effective resolution of these challenges has been appointed. He is a respected figure in the Swedish Life and Pensions insurance market and as such I am confident he is well positioned to mitigate any long-term adverse impact on the relationships with IFAs arising from temporary service level issues.

The core CA book continues to generate the positive surpluses required to underpin the Chesnara dividend strategy, CA product-based surpluses being at the heart of our business model. Their continued emergence and the corresponding cash generation are encouraging.

IFRS Results

On an IFRS basis, excluding the impact of an exceptional reclassification item (see Note 5 to the IFRS financial statements), we have achieved a pre-tax profit of £9.3m. This compares well to a pre-tax IFRS profit of £3.8m for the first half of 2011. The improvement relates in the main to the more variable S&P result which has increased by £5.9m year on year. A small with-profit surplus of £0.6m, resulting from the increase in the cost of policy guarantees being less than the level of investment income, leads to a favourable comparison with the corresponding with-profit strain of £4.2m for the 6 months ended 30 June 2011.

IFRS profits arising from the core Non-profit CA book continue to emerge in line with expectation. At the heart of this source of profit are the product-based deductions, which, at £13.6m, compare well against the 2011 half-year equivalent of £12.6m. A significant part of this improvement is due to favourable mortality experience.

In addition, despite the difficult operating conditions, Movestic has posted a small pre-tax profit of £0.1m compared with a pre-tax loss of £(0.6)m during the first half of 2011.

EEV Results

On the EEV basis of reporting, we realised a profit after tax of £15.9m for the half year ended 30 June 2012, compared to a loss after tax of £(1.5)m, excluding the effect of modelling adjustments, for the half year ended 30 June 2011. This improvement in EEV profitability is due to significant improvements in both pre-tax operating and economic profits of £13.8m and £6.1m respectively.

The operating result has benefited from several factors including:

·; The Movestic result includes the impact of an upward reassessment of rebates expected from fund managers of some £5m, together with the positive effect of a £5m downward assessment of rebates payable to brokers. The combined positive impact exceeds the £5m adverse impact of a strengthening of persistency assumptions.

·; Interest and gains on S&P retained surplus have increased by £2m.

·; The CA result for the 6 months ended 30 June 2011 included a one-off £2m charge relating to the setting up of a provision to cover the potential impact of changes to the HCL outsource contract changes.

The economic result has benefited from a modest upturn in Swedish equity values, whilst in the UK the positive impact of bond capital value growth has exceeded the adverse impact of the continued decline in bond yields.

Solvency and Cash Generation

The capacity of the Group to pursue its dividend policy relies on the continuing generation of cash in the UK businesses. During the six months ended 30 June 2012 cash generation was £12.4m. This healthy outcome supports the current dividend strategy and is reinforced by a strong Group solvency ratio which has remained the same as at the end of 2011 at 198%.

We have continued to make good progress on the implementation of Solvency II requirements.

Dividend

Continuing surplus generated from CA, together with a positive result from S&P, enables the Group to continue its progressive dividend policy. The 2012 interim dividend of 6.10p per share (2011: 5.95p per share) represents a 2.5% increase and equates to a total dividend payable to shareholders of £7m.

People and Business Partners

We continue to strive to service our policyholders and shareholders well and this is based on the skill and dedication of our people and those within our outsourcing partners. Delivery of the strategic objectives of the Group, as detailed in the "Our Vision and Strategy" section, is highly dependent on the skills, professionalism and integrity of our people and, as such, I welcome the continued high levels of staff retention. Although the re-negotiation of the outsourcing contracts with HCL is taking longer than initially expected, we remain on course to agree terms that will ensure policyholders and shareholders will continue to benefit from the servicing and commercial benefits of our UK operating model for the long-term.

Business Development

Whilst the Group remains relatively strong, notwithstanding the volatility of investment markets, we remain aware of the future challenges the markets may bring and the potential economic impact that may arise from the ongoing Eurozone crisis. Therefore we continue to work to protect shareholder value whilst not unnecessarily restricting any upside the eventual recovery in markets may bring. As part of this we will continue to investigate acquisition opportunities and we will only progress these where we see value and a clear strategic fit and we will continue to apply strict financial and risk criteria when we assess them.

Outlook

Following a positive first quarter, investment markets generally reversed those gains in the second quarter with gilt yields falling further still. In recognition of the uncertainty in markets our financial and capital management procedures continue to recognise the risk of continued poor or indeed worsening economic conditions. The embedded value of the Group has remained resilient during a period of decreasing bond yields, flat equity markets and low economic confidence in the Eurozone. There remains a long-term expectation that economic conditions will improve which would have a positive impact on the Embedded Value. Recent financial results combined with the results of financial projection modelling indicate continued healthy cash generation and a solvency surplus in both the base case and in a range of adverse stress scenarios.

Peter Mason

Chairman

30 August 2012

Mission and Vision

Mission

Our mission is to deliver value for shareholders, while maximising returns to policyholders. Underpinning everything we do is a desire to maintain regulatory and legal compliance. Meeting these aims is achieved through attracting and retaining highly talented people who not only bring expertise and quality thinking into our business and industry, but also have a passion for improving outcomes for our customers and shareholders. All members of the Chesnara team share a common value in recognising their responsibility to shareholders and policyholders.

Vision

To be recognised as a responsible and profitable company engaged in the management of life and pensions books in the UK and Western Europe through:

·; Commitment to the core business of closed UK life and pensions book management.

·; Further acquisitions where they meet stringent assessment criteria.

·; Realisation of increasing economies of scale.

·; Continued delivery of competitive returns to shareholders and policyholders.

While we focus on delivering value to shareholders primarily through dividend streams arising from strong cash generation as the life and pensions books run off, we also consider the acquisition of open businesses where there is clear value enhancement and where the scale is such that our core proposition of being principally a closed book consolidator and manager does not become unbalanced.

Strategic Objectives

At Chesnara the strategic objectives, which support the fulfilment of our mission and the realisation of our vision are embedded in day-to-day business operations and underpin management decisions. At the core of the business is the recognition by the Board and Management Team of their responsibility to policyholders, shareholders and regulators so that the values and principles of management wholly align with strategic objectives. This value of responsibility is at the heart of the Chesnara business model. Our core strategic objectives are explained and evidenced on the following pages.

MAXIMISE VALUE FROM THE IN-FORCE BOOK

Why is this of strategic importance?

·; Chesnara is primarily a "closed book" operation and as such generating surplus and cash from the existing in-force books is at the heart of its investment case.

How do we deliver this strategic objective?

·; We proactively manage continuing financial exposures.

·; We operate in a manner that ensures policy attrition is as low as possible.

·; We will continue to invest in a service proposition that ensures a high level of customer satisfaction.

·; We continue to manage investment performance so as to provide a competitive level of return to our policy holders.

·; We adopt a business operating model which ensures unit expenses remain appropriate for the scale of the in-force book.

Risks associated with this strategic objective

·; Sustained adverse investment market conditions undermine our ability to manage financial risks inherent in the in-force portfolio.

·; Despite the effective cost management model, in the absence of further acquisitions or more radical management action, there remains a risk that unit costs will increase in the long term.

·; A number of factors including economic recession, adverse investment performance and a deterioration in customer servicing standards could lead to an increase in policy attrition.

ACQUIRE LIFE AND PENSIONS BUSINESSES

Why is this of strategic importance?

·; As with any business, it is important that we use our capital efficiently to provide optimum return to shareholders.

·; As a primarily "closed book" operation, further acquisitions provide a solution to the business challenge of maintaining the Group's cash flow and operational economies of scale.

How do we deliver this strategic objective?

·; We rely on acquisition opportunities being available in the market. To maximise our opportunities we have extended our target market beyond the UK, to include Western Europe.

·; We actively engage various investment bank advisers to ensure we are aware of acquisition opportunities.

·; We will leverage on our proven track record in the consolidation market. Past experience suggests we maintain a high degree of credibility with regulators, policyholders, lenders and shareholders.

·; We will not pursue opportunities which do not meet very stringent assessment criteria.

Risks associated with this strategic objective

·; If Chesnara make no further acquisitions there will be a potential strain on the per policy unit costs of the existing business.

·; Any departure from the current, stringent acquisition assessment criteria and due diligence procedures could result in an acquisition that, under certain stress scenarios, adversely impacts the financial strength of the Group.

ENHANCE VALUE THROUGH NEW BUSINESS IN SELECTED MARKETS 

Why is this of strategic importance?

·; Although the Chesnara business model primarily focuses on "closed book" consolidation, where acquisitions offer the potential to write new business at an adequate return on capital we will continue to invest in the new business operations so as to maximise value from the business.

·; Maintaining a flexible position regarding the willingness to remain open to new business will potentially increase the potential number of acquisition targets and indeed our attractiveness to such targets.

How do we deliver this strategic objective?

·; Currently the only part of the Chesnara Group writing material levels of new business is Movestic, our operation in Sweden. Movestic has a new business operation that delivers a positive new business contribution. Management receives regular information which enables a continuous assessment of the performance to ensure being open to new business continues to enhance value.

Risks associated with this strategic objective

·; New business volumes fall below levels required to ensure sufficient return on the acquisition cost base.

·; Product margins fall to unsustainable levels due to factors including; market price pressures, reduced investment growth, increased policy lapse rates and increasing maintenance unit costs.

MAINTAIN A STRONG SOLVENCY POSITION

Why is this of strategic importance?

Adequate solvency capital:

·; Protects against volatility particularly due to external economic conditions outside management control.

·; Supports potential acquisition opportunities.

·; Supports ongoing dividend capability.

How do we deliver this strategic objective?

·; We ensure the Board are furnished with high quality information regarding the solvency position. This includes information regarding the actual solvency position together with the projection of solvency under stress scenarios.

·; The management team tracks the performance of the key factors known to impact the solvency position.

·; Potential acquisitions are assessed by taking a prudent view on not only the short term impact on the Group's Solvency position but also giving full consideration of the potential risk to long term solvency.

Risks associated with this strategic objective

·; Sustained adverse economic conditions outside of "risk appetite" tolerances will erode the solvency surplus.

ADOPT GOOD REGULATORY PRACTICE AT ALL TIMES

Why is this of strategic importance?

·; Chesnara management fully recognise the benefits to both shareholders and policyholders of adherence to good regulatory practice. We comply not because the regulations insist but because the rules clearly reflect good, responsible business management and governance.

How do we deliver this strategic objective?

·; We maintain a strong internal risk management culture and regime throughout the Group and we maintain systems and controls which satisfy regulatory requirements at all levels.

·; The UK and Swedish life assurance and pensions industries are both highly regulated, in terms of both the conduct of business operations and of financial reporting. We place particular emphasis on managing our regulatory compliance through a proactive and prudent approach and on maintaining a positive relationship with regulatory bodies.

·; Significant effort is directed towards ensuring that the operations are effectively managed in terms of conduct of business regulations and of prudential solvency requirements.

How do we deliver this strategic objective?

·; We have developed a strong Governance core at the heart of the Chesnara operating model, which is operated within a robust and effective Corporate Governance framework.

Risks associated with this strategic objective

·; The key risk relating to regulatory compliance is that rules and regulations are poorly understood or implemented.

The Chesnara Business

The history of the development of the Chesnara business, together with a description of the characteristics of our operating businesses, illustrates how we have endeavoured to achieve our strategic objectives and how we have created the platform for their ongoing realisation.

The higher proportion of pension policies in the successive acquisitions made by Chesnara has progressively increased the overall longevity of its run-off portfolio, while diversifying the policy base. At 30 June 2012, the Group had 127,000 life policies and 265,000 pension policies in force.

Chesnara continues to seek to participate in the consolidation of life assurance and pensions businesses in the UK and Western Europe. We primarily target acquisitions with a value of between £50m and £200m, although other opportunities are considered. All opportunities are assessed against a number of key criteria including size, risk (including actual or potential product and financial liabilities), discount to embedded value, capital requirements and the pattern and quality of predicted profit emergence. Our strategic approach, however, remains that such potential acquisitions should not detract significantly from, and should contribute to, the primary aim of delivering a steady and attractive dividend yield, although opportunities which present a significant value uplift or growth opportunity will also be evaluated.

Business Model

The following sets out the key operating characteristics of the Chesnara business:

·; Chesnara plc and the UK business activities are based in Preston, Lancashire with a small office in the City of London. Movestic is based in Stockholm in Sweden and has an administration office in Norrköping in southern Sweden. Chesnara has 22 FTE employees in its corporate governance team in the UK. In Sweden, the headcount, across the two sites, is 123.

UK

·; The primary focus of the UK businesses is the efficient run-off of their existing life and pensions portfolios. This gives rise to the emergence of surplus which supports our primary aim of delivering an attractive long-term dividend yield to our shareholders. By the very nature of the life business assets, the surplus arising will deplete over time as the policies mature, expire or are the subject of a claim.

·; In the UK we maintain a small professional corporate governance team who are responsible for both the regulatory and operational requirements of the listed entity - Chesnara - and those of the UK businesses. Our team in the UK is intentionally small and focused in the interests of keeping the overall expense base tight. It has the capability to manage the UK businesses and to assess acquisition opportunities, but it is supplemented from time to time by temporary resource if justified by operational or strategic demands.

·; The operating model of our UK business is directed towards maintaining shareholder value by outsourcing all support activities to professional specialists. This typically embraces policy administration, systems, accounting and investment management and reduces the impact of potential fixed and semi-fixed cost issues which would otherwise occur as the income streams arising from a declining in-force portfolio diminish. By securing long-term contracts to support these activities we aim to enhance the variability of the expense base with the size of the in-force policy portfolio. This also leads to the avoidance of the full weight of systems development costs, as these will, where possible, be shared with other users of the outsourcers' platforms.

·; Oversight of the outsourced functions is a significant part of the responsibility of the central governance team. The maintenance of service and performance standards, and thereby the core interests of shareholders and policyholders, is maintained through a strict regime of service level agreements and through continuous monitoring of performance. This is reinforced by adherence to the principles and practice of treating customers fairly.

Sweden

·; The primary focus of the Swedish business is to grow market share in the company-paid and individual pensions market, whilst developing further profitable business in other areas, in particular in the risk and health market. Writing new business requires funding to support the initial costs incurred: this is provided by way of external financial reinsurance or cash contributions from Chesnara. As the in-force business portfolio grows in scale the income generated by it eventually allows the business to self-fund and become a net generator of cash. Movestic is targeted to reach this pivotal point over the next two years.

·; In Sweden, as the Movestic book is open and in a growth phase, we retain a broader-based management and operational team. Rather than outsource core functions, we believe that it is important that the drive and team ethic of Movestic is preserved as they seek to grow profitable market share in our target markets, whilst maximising the strategic and organisational opportunities presented by the acquisition of Aspis. We do, however, outsource the provision of IT infrastructure as this mitigates operational risk and, whilst Movestic manages the selection of appropriate investment funds, investment decisions are made solely by the fund managers.

Performance

Chief Executive's Review

Against the backdrop of continued reductions in bond yields in the UK and difficult operational conditions in Sweden, the general improvement in profitability, on both an IFRS and EV basis, and strong cash generation are very satisfying. The highlights are:

·; Despite difficult investment market conditions the Group has delivered an IFRS pre-tax profit of £9.3m, excluding an exceptional item of £4.8m (six months ended 30 June 2011: pre-tax profit of £3.8m).

·; EEV net-of-tax result has improved, with a profit of £15.9m comparing favourably to a loss of £(1.5)m for the first half of 2011, including, at a pre-tax level, a £13.8m improvement in operating profit and a £6.1m improvement in economic profit.

·; Cash generation of £12.4m and group solvency at 198% remain strong.

·; UK investment performance compares favourably against both 3 month and 12 month sector averages.

·; Although operational challenges continue, Movestic produced a small IFRS profit, together with a £5.7m uplift in EEV.

Review of the period

Insurance Group Directive Solvency 30 June 2012* 198% (31 December 2011: 198%)

Group IFRS Pre-tax Profit, excluding exceptional item £9.3m* (six months ended 30 June 2011: £3.8m)

Group EEV Net-of-tax Result £15.9m* (six months ended 30 June 2011: £(1.5)m loss**)

* unaudited

**excluding the impact of EEV modelling adjustments (£5.3m reduction in EEV).

Both IFRS and EEV results during the 6 months ended 30 June 2012 are strong and continue to demonstrate the robustness of the Chesnara business model. It is particularly encouraging to see the S&P operation generate a significant IFRS surplus, thereby contributing further to cash generation, over and above the significant levels of cash released during 2011, as a direct benefit of the Part VII Transfer of S&P policies into CA. Whilst gilt yields have continued to decline, in general the level of economic volatility during the 6 months ended 30 June 2012 was less significant than during 2011. Cash generation from the UK books has proved to be resilient during a period of adverse market conditions.

UK product-based surpluses remain at the heart of our business model. The continued emergence of such surpluses is dependent upon the level of operational customer service and investment management performance. In light of this, I am particularly pleased to report that our operational and investment management outsource partners have performed well during the 6 months ended 30 June 2012. In addition to delivering excellent customer service, our operational outsource partners are now well engaged in the Solvency II programme and are making progress in accordance with our project plans. All of our UK Investment Managers have delivered investment returns better than sector averages.

Maintaining strong and sustainable business relationships with our outsource partners is key to the success of the business. Discussions continue with HCL to extend the current outsource arrangements and I believe that we are making good progress towards reaching a mutually beneficial conclusion.

Whilst the Movestic results show a period-on-period improvement, management is keenly aware that the key performance indicators, as reported in the Swedish Business Review section, highlight that the underlying operational performance is not as positive. It is a key priority of the Swedish management team to arrest the current level of policy lapse and to rebuild new business volumes. I am confident that the newly appointed Movestic Chief Executive has the experience and drive to ensure the business recovers from the short-term dip in performance.

The Group and subsidiary solvency positions remain strong, which enables us to continue with our progressive dividend policy.

We continue to have minimal exposure to Euro-denominated sovereign debt.

As ever, we continue to search for and investigate potential acquisition opportunities. In this period we have seen a handful of European opportunities, but these have lacked the scale to make them of any interest to us. However, it is notable that some of these potential divestments are being driven by Solvency II-related restructuring and this indicates that further, potentially more attractive, opportunities may arise.

UK Business Review

Core product based surpluses continue to emerge as expected and these are complemented by a small positive S&P IFRS with-profit result. Product surplus is underpinned by strong operational and investment performance.

Highlights:

·; Core CA product based surpluses of £9.1m emerge at a higher level than the prior year equivalent of £8.6m.

·; S&P with-profit positive result of £0.6m compared to a strain of £4.2m during the first half of 2011.

·; Bond capital growth drives significant and increased levels of S&P investment return which exceeds the adverse impact of declining bond yields on the cost of with-profit guarantees.

·; Investment performance is ahead of sector average.

·; Negotiations to extend the terms of the HCL outsource arrangements are ongoing.

·; Outsourcer operational performance levels remain strong.

·; EEV net-of-tax profit of £10.7m compares favourably with prior period level of £5.4m.

Review of the Period

This period has been focused on four areas - delivering a continued high level of customer and investment management service, management of shareholder assets, completing the integration of S&P and seeking longevity as regards our outsourcing arrangements.

Management of Assets

The acquisition of S&P has resulted, as signalled at the time of acquisition, in an increased level of earnings volatility for the UK business. S&P has a proportion of its product base that provides guaranteed returns. As asset values fall the cost of guaranteeing those returns increases, with a consequential impact on profitability. The converse of this is that as asset values rise, as might be expected in the medium term, the cost of the guarantees will fall. Linked to the cost of guarantees is the return we use in calculating our liabilities to policyholders - which in turn is linked to the yield curve. As the yield curve falls the rate we can use to discount the liabilities to meet those guarantees also falls. During 2011 these factors resulted in a large with-profit strain as the rise in the capital value of the matching assets was outweighed by the effect of the yield drop in calculating the future returns. During the 6 months ended 30 June 2012 these factors continued to apply but their impact was reversed: that is, the rise in asset values exceeded the effect of the yield drop in calculating the future returns. Whilst our capital management policy and decisions are mindful of the impact of any asset mix changes to the valuation interest rate, and hence the cost of S&P guarantees, investment decisions are taken primarily with a view to maximising long-term investment performance and are not influenced by the potential short-term volatility of accounting profits. The continued earnings stability from the CA book, mitigates the impact of short term S&P earnings volatility, such that, on a UK consolidated basis, the Board remains confident that the long-term value from the S&P acquisition will significantly outweigh short-term volatility experience.

Key Performance Indicators six months ended 30 June 2012 (unaudited):

IFRS Pre-tax Profit* £12.6m (six months ended 30 June 2011: £9.0m) *Excluding AVIF amortisation and exceptional items

Cash Generated £13.8m (six months ended 30 June 2011: £8.0m)

EEV Result Net of Tax £10.7m profit (six months ended 30 June 2011: £5.4m)

Annualised Policy Attrition Rate

Fund Performance year ended 30 June 2012 (unaudited)

Relative outperformance in the unit-linked funds helps promote policy retention and, when positive, increases the embedded value of the Group as future management charges received will be of a higher magnitude. Returns on all funds for the year ended 30 June 2012 have exceeded the sector average. In addition the most recent performance, based on the 3 months ended 30 June 2012, also demonstrates a continued outperformance of the sector average.

Integration of S&P

As a final stage of the integration of S&P, the two S&P companies were deregulated subsequent to 30 June 2012. This leads to an additional cash generation of £7m, which has not been reflected in cash generation for the six months ended 30 June 2012, but which will be reflected in the full-year result.

Outsourcing Arrangements

We continue to seek an extension to our existing outsourcing arrangements for the CA contract, which is due to expire in 2015, and to combine it with the S&P arrangements, which have no fixed termination date. It has not been possible to finalise the agreement during this period but we continue to believe that adjustments to expense assumptions made during last year are realistic.

Unit-linked Funds Under Management

The continuing level of unit-linked funds under management is an indicator of the ongoing level of profitability of the UK businesses as fund-related charges are an important component of profit. The movement in the value of unit-linked funds under management is driven by:

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

ii) received and invested premiums; and

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

The combined impact of these three drivers has resulted in unit-linked assets under management remaining unchanged at £2,194m.

Other

With regard to Solvency II implementation, a significant and increasing amount of work means that our progress remains in line with plans.

Cash generation, despite uncertain investment market influences, remains strong. S&P surplus has contributed positively to the strong underlying cash generation from CA.

Swedish Business Review

IFRS and EEV profits remain positive despite difficult underlying operational conditions.

Highlights:

·; IFRS pre-tax profit of £0.1m (H1 2011: £(0.6)m loss) before consolidation adjustments.

·; Positive EEV development.

·; Successful launch of new single premium product.

·; Measures introduced to reduce policy attrition.

Review of the period

After a more stable start in early 2012, the turmoil in European financial markets affected the investment market performance during the second quarter. Investor confidence has been dented and, in turn, affected Movestic's business opportunities. In addition, administration issues, following the systems migration carried out in 2011, led to a reduction in IFA support and have continued to challenge. Intense efforts are being made to strengthen IFA confidence. It is, therefore, particularly pleasing that we are able to report a profit on an IFRS pre-tax basis of £0.1m (H1 2011: £(0.6)m loss). The EEV measure, where the net of tax profit of £5.7m has improved from a loss of £(6.3)m for the 6 months ended 30 June 2011, is also strong.

Despite the general improvement in EEV earnings, the profits from new business have suffered as a direct result of operational and market conditions. New business volumes and margins have suffered to the extent that during the period ended 30 June 2012 there was a new business loss of £(0.3)m as compared to a £2m profit for the 6 months ended 30 June 2011.

A detailed breakdown of the constituents of this is provided in the Financial Review.

Our market intelligence indicates that a number of Swedish insurers have seen a fall in new business and, therefore, although our new business premiums have reduced, our market share has increased when compared to the first quarter.  This demonstrates the strength of our business model and is particularly pleasing bearing in mind the systems and associated administration issues, which caused the loss of market share in the first quarter. In September 2011 we introduced measures aimed at reducing the attrition in the business and initial indications showed that they were proving to be successful, but, with turbulent market conditions and the administration issues, the anticipated effect of these measures is yet to be fully reflected in the reported figures.

Looking forward we continue to seek to build on the good relationships that we have with IFAs. In particular we have received a higher rating for our fund range with one of the larger IFA organisations and we maintain close relationships with all the key broker organisations. As for new initiatives, we will continue to research new fund and investment opportunities, and we have successfully launched a new single premium product in the second quarter of 2012 and are also planning revisions and new offerings within our risk and health portfolio.

KEY PERFORMANCE INDICATORS six months ended / as at 30 June 2012 (unaudited):

IFRS Pre-tax Profit *£0.1m (six months ended 30 June 2011: £(0.6)m loss) *Excluding AVIF amortisation

EEV Result Net of Tax £5.7m (six months ended 30 June 2011: £(6.3)m* loss) *Excluding modelling adjustments

Funds Under Management £1,235.2m (31 December 2011: £1,272.6m)

The value of funds under management is a key reference point for establishing the ongoing profit-earning capacity of the business, as fees are received based on those values. Whilst the fall in assets under management is disappointing, when taken in the context of the relatively flat equity markets and the short-term increase in policy attrition due to temporary administration issues, it is reassuring that the asset base has remained broadly consistent.

Total Premium Income

Premium income, in the form of new business and continuing premiums into existing contracts, is important to the success of Movestic. Policy attrition combined with a reduction in new business volumes during the period has resulted in the reduction in total premiums earned.

New Business Premiums

New business markets have been difficult during the year and the gradual reduction in new Pensions and Savings volumes in part reflects a general decline in total market size. The 2012 figures do, however, show a marginal improvement compared with the second half of 2011.

New Business Market Share

Movestic's primary target market is that of unit-linked pension business and, within that, company-paid contribution business. A small recovery in market share in the second quarter is welcome, following the reversals in the first quarter, which followed a period of administration issues consequent upon a systems migration. This is a strong testament to our product offering and the effectiveness of the sales and marketing teams.

Fund Performance

One of Movestic's key differentiators is its approach to selecting the funds available to investors. Rather than adopt mainstream funds, which, in Sweden, are those predominantly managed by subsidiaries of banks which also have life assurance subsidiaries, they select a limited number of funds from a wide range of independent fund managers.

The funds selected are, in general, actively managed funds with a value approach. The performance of all funds is closely monitored and regular contact is undertaken with managers to ensure that the underlying reason for the performance, whether positive or negative, is fully understood. Funds that do not perform favourably compared to the relevant index are wholly replaced if there are no acceptable strategies for improvement in the returns. During the first half of the year further funds were added to fill perceived gaps in the range, primarily low cost index products and various absolute return funds. This enables Movestic to offer a more complete fund offering with a clear distinction between active and passive fund management, but still with a limited number of funds.

However, the general weighting towards Swedish equities, value and emerging markets together with the historically low bond yields affected general performance. The natural corollary of this is that funds would be expected to perform strongly as markets recover.

Annual Policy Attrition Rate

The longer that insurance and investment contracts remain in force, the more profit accrues to the business. Different policy product types will be subject to surrender, transfer or lapse to varying extents.

Relatively high rates of attrition, to which volatile investment markets and negative sentiment in 2011 contributed, have continued and they have been compromised by administration issues following the systems migration.

In order to counter the rate of attrition a team was established to research and review the reasons behind policy attrition. Acting on their findings we introduced transfer penalties on pensions, which are in line with the market norm and we also instigated procedures that require a policyholder to confirm their desire to transfer and advising them of the consequences of transfer before processing the request. This was introduced in September 2011 and the early results are encouraging.

In addition, the team review individual IFA accounts for levels of attrition in this area which is then followed up.

Financial Review

Key Financial Performance Indicators - six months ended / as at 30 June 2012 (unaudited)

 The Group's key financial performance indicators as at 30 June 2012 and for the six months ended on that date demonstrate the financial performance and strength of the Group as a whole. A summary of these is shown below and further analysis is provided in the following sections:

IFRS Pre-tax Profit, excluding exceptional item £9.3m (six months ended 30 June 2011: £3.8m)

The presentation of the results in accordance with International Finance Reporting Standards (IFRS) aims to smooth the recognition of profit arising from written business over the life of insurance and investment contracts. For businesses in run-off the reported profit is closely aligned with, and a strong indicator of, the emergence of surpluses arising within the long-term insurance funds of those businesses. 

Highlights

·; IFRS pre-tax profit of £9.3m shows a significant improvement over the comparative period for the prior year. 

·; Profits from the core CA closed book at £7.5m (six months ended 30 June 2011: £9.8m) have remained relatively resilient to book run-off and investment market conditions.

·; Despite continued volatility in bond markets, the S&P business has generated a surplus, excluding an exceptional item, of £5.1m compared with a loss of £(0.8)m for the period ended 30 June 2011.

·; There was a £0.7m improvement in the Movestic result which has moved from loss to a small profit.

EEV Earnings, Net of Tax

£15.9m profit (six months ended 30 June 2011: £(1.5)m loss, excluding £5.3m reduction in EEV following modelling adjustments)

In recognition of the longer-term nature of the Group's insurance and investment contracts, supplementary information is presented in accordance with European Embedded Value 'EEV' principles. By recognising the net present value of expected future cash flows arising from the contracts (in-force value), a different perspective is provided in the performance of the Group and on the valuation of the business.

The principal underlying components of the EEV result are:

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

ii) value added by the writing of new business.

iii) variations in actual experience from that assumed in the opening valuation.

iv) the impact of restating assumptions underlying the determination of expected cash flows.

Highlights

·; Operating profit has improved by £13.8m, year on year.

·; Economic profit of £6.2m compared to small prior year profit of £0.1m.

·; An economic profit of £3.2m for Movestic, driven by a 3% increase in key equity markets.

·; An economic profit of £2.3m for S&P, in the main driven by asset value growth.

Cash Generation £12.4m (six months ended 30 June 2011: £6.7m)

Cash generation is a key measure, because it is the net cash flows to the Chesnara Parent Company from its Life and Pensions businesses which support Chesnara's dividend capacity. The dominating aspect of cash generation is the change in amounts freely transferable from the operating businesses, taking into account target statutory solvency requirements which are determined by the boards of the respective businesses. It follows that cash generation is not only influenced by the level of surplus arising but also by the level of target solvency capital.

Highlights

·; At £6.4m cash generation in CA continues to be robust and this is complemented by £7.4m cash generation in S&P.

·; Net cash generation of £12.4m at the Group level is considerably in excess of £6.7m for the corresponding period in 2011.

European Embedded Value (EEV) £296.3m (as at 31 December 2011: £294.5m)

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

Highlights

·; EEV increase achieved after allowing for £12.5m dividend payment and £1.6m foreign exchange loss.

·; Good balance of EEV across the operating segments.

·; Good product diversification within value in-force.

IFRS Pre-tax Profit, excluding exceptional item, (unaudited) £9.3m (six months ended 30 June 2011: £3.8m)

Executive summary

The IFRS results by business segment reflect the natural dynamics of each line of business. In summary the current financial model has 3 major components which can be characterised as: the "stable core", the "variable element", and the "growth operation". The results and financial dynamics of each segment are analysed further as follows:

Stable Core

At the heart of surplus, and hence cash generation, is the CA Non-profit business which is in run off. The requirement of this book is to provide a predictable and stable platform for the financial model and dividend strategy. As a closed book, the key is to sustain this income source as effectively as possible. The IFRS results during the first half of 2012 very much support this objective, with product-based surpluses of £9.1m, continuing to emerge in a predictable fashion and at a level that compares well against the prior year equivalent of £8.6m.

Variable Element

The S&P with-profit book has introduced an element of IFRS earnings volatility, as the costs of policy guarantees are sensitive to movements in the valuation interest rate. Continued reductions in bond yields have resulted in a further £2.3m increase in the cost of guarantees during the period ended 30 June 2012. During the first half of 2011 the with-profit strain, arising from the cost of guarantees, was £5.1m. However, during the first half of 2012, investment income of £2.9m on shareholder assets in the with-profit fund was sufficient to compensate for the increased cost of guarantees, thereby generating a small positive with-profit result of £0.6m. Investment income was significantly lower during the 6 months ended 30 June 2011 and at £1m only partially offsets the cost of guarantees, resulting in a net with-profit strain of £4.2m. This resulted from a less favourable investment mix at that time, with a higher proportion of cash-based investments.

Growth Operation

Although, at its current scale, Movestic has posted a small IFRS profit, the long-term financial model is based on growth. Levels of new business are targeted to more than offset the impact of policy attrition, leading to a general increase in assets under management and, hence management fee income. The results for the 6 months ended 30 June 2012 show a small reduction in assets under management as a result of difficult new business markets, a short-term increase in policy attrition offset by the effect of a relatively benign equity market.

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

The adjustments arising on consolidation are analysed below.

Note 1 - As explained in Note 5 to the IFRS financial statements, an exceptional item of £4.8m relating to the reclassification of policyholder tax liabilities within S&P segment has been charged to IFRS profits. There is a corresponding deferred tax release to income tax of £4.8m included in the item above. The net of tax impact of these adjustments, which were made to align the treatment within the S&P segment with that within the CA segment is accordingly £nil.

CA

Despite continued run off of the CA in-force book and the ongoing volatility of investment market conditions during 2012, the CA pre-tax IFRS result has held up well. There are a number of complex aspects to the IFRS result but the primary drivers of the reduction in profit for the six monthly periods 2011 to 2012 are illustrated as follows:

Note 1 - The improvement in product-based deductions is primarily due to an increase in mortality surplus, reflecting favourable mortality experience.

Note 2 - The 2011 result included the impact of setting up a £2m reserve to cover the estimated future impact of the revised HCL outsource contract.

Note 3 - Lower investment returns reflect lower yields on fixed interest investments.

Note 4 - The increase in renewal expenses reflects the proposed revised terms of the HCL outsource contract currently under renegotiation.

The key components of the 2012 IFRS result for the six months ended 30 June 2012 are summarised as follows:

Note 1 - Product-based deductions and returns on retained surplus remain significantly in excess of recurring renewal expenses.

Note 2 - Investment market movements during the period resulted in the movement in policyholder liabilities exceeding the movement in the underlying matching assets.

Note 3 - Statutory economic basis changes including inflation and unit growth assumptions have resulted in an increase in actuarial reserves.

S&P

S&P posted a pre-tax IFRS profit, excluding an exceptional item, of £5.1m for the six months period ended 30 June 2012. This represents a £5.9m improvement compared with the six months ended 30 June 2011, analysed as follows:

Note 1 - A with-profits fund strain for the six months ended 30 June 2012 of £2.3m has arisen due to the increased cost of guarantees, albeit this is at a significantly lower level than the strain of £5.1m arising in the corresponding period for 2011.

During both periods the cost of guarantees increased as reductions in bond yields led to a corresponding reduction in valuation interest rates. Further, during the 6 months ended 30 June 2011, the impact of valuation interest rate reductions was compounded by a shift in investment mix towards lower yielding cash-based holdings. During 2012 the level of investment return, driven predominantly by the increase in bond capital values, exceeded the increased cost of guarantees, leading to a small with-profits surplus.

The profit before tax (excluding the impact of an exceptional item) for the six months ended 30 June 2012 comprises:

Movestic

The improvement in the Pensions and Savings result in comparison to the prior year equivalent is primarily due to a £0.5m increase in fund rebate income. This has been delivered despite a modest reduction in funds under management and reflects a general increase in average rebate rates.

The Risk and Health result has deteriorated marginally as compared to the first half of 2011. Earned premiums, net of reinsurance are down £0.3m (3%). Claims net of reinsurance remain constant period on period at £3.3m.

Cash Generation (unaudited) £12.4m (six months ended 30 June 2011: £6.7m)

The Group's cash flows are generated principally from the interest earned on capital, the release of excess capital as the life funds run down, policyholder charges and management fees earned on assets under management. The Group's closed life funds provide predictable fund maturity and liability profiles, creating stable long-term cash flows for distribution to shareholders and for repayment of outstanding debt. Cash flow generation will naturally decline over time as the UK businesses run off.

Although investment returns are less predictable, a significant portion of the investment risk is borne by policyholders. However, the acquisition of S&P, while extending the longevity of cash generation within the Group, has introduced an element of volatility over shorter periods. This arises from the impact of investment market movements and the cost to shareholders of guarantees within the S&P with profits funds. Although the short-term measure of this cost follows the fortunes of investment markets, we proactively manage the risk taking a longer-term perspective.

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

This information illustrates that net cash generation within the Group remains robust. Key aspects underpinning the outcome are:

·; Continuing strong emergence of surplus in CA.

·; S&P surplus of £4.8m together with a reduction in the target capital requirement of £2.6m give rises to an S&P total cash generation of £7.4m. On a cumulative basis this adds to the significant beneficial effects realised in 2011 arising from the Part VII Transfer, reflected through significant solvency capital synergies.

·; During the 6 months ended 30 June 2012 no Movestic capital contributions have been necessary.

·; In addition to the above a further cash generation of £7m will arise during the second half of 2012, as a result of the de-authorisation of the S&P companies subsequent to the Part VII Transfer.

EEV Earnings Net of Tax excluding modelling adjustments (unaudited) £15.9m (six months ended 30 June 2011: £(1.5)m loss)

EEV Result

Summary

The headline EEV result for six months ended 30 June 2012 has improved significantly compared to the result for the six months ended 30 June 2011. The following chart shows the major components of the year-on-year improvement in the EEV net-of-tax result.

The key year-on-year variances are analysed as follows:

i) The Movestic existing business operating result has improved by £7.2m. While persistency related losses increased by some £5m, as continued adverse experience variances resulted in a general strengthening in the long term assumptions in 2012, the 2012 result has benefited from some £10m of assumption changes, relating to broker and investment manager fee rebates.

ii) Investment market performance during the six months ended 30 June 2012 gave rise to economic profits in both S&P and Movestic, being £2.3m and £3.2m respectively, contributing to a total economic result of £6.2m. The total economic result for the six months ended 30 June 2011 was £0.1m.

iii) Experience variances improved by £2.5m in CA, principally due to favourable persistency and mortality experience and by £3.1m in S&P, principally due to favourable investment market effects.

iv) The CA result for the 6 months ended 30 June 2011 included a £2m exceptional item, reflected in operating assumption changes, relating to the setting up of a provision to cover the potential impact of changes to the HCL outsource contract charges.

v) An increase in interest and gains on S&P retained surplus accounts for the majority of the improvement in return on shareholder net worth.

vi) Operational and market pressures have led to a reduction in Movestic new business volumes and margins, resulting in a £2.5m reduction in profits from new business.

vii) 'Other' includes the effect on tax of the general increase in profits compared to 2011, which resulted in an increase in the tax charge of £2.5m.

The following tables analyse the Group EEV result by operating segment and by profit category:

Economic result

As indicated above, the EEV result is sensitive to economic conditions. Economic experience and assumption variances contribute a profit in 2012 of £6.2m as compared to a profit in 2011 of £0.1m. During the first half of 2012 UK equity markets remained flat and gilt yields continued to decline: the Chesnara result is sensitive to both these factors. The impact of these investment market effects on each operating segment is illustrated below:

The Movestic business is sensitive to the movement in equity markets due to its core income stream being dependent upon management charges deducted from equity funds under management. Swedish equity values improved by some 3% during the 6 months ended 30 June 2012.

The S&P result is sensitive to movements in valuation interest rates because the cost of guarantees on with-profit contracts increases when valuation interest rates decline, as they have during the 6 months ended 30 June 2012. The resulting increase in cost of guarantees of £2.3m is more than offset by economic experience variances, primarily associated with movements in bond capital values. During the 6 months ended 30 June 2011 a general shift in the yield curve resulted in a reduction in the cost of guarantees of £2.6m. The full year S&P economic loss for the year ended 31 December 2011 reflected a more significant reduction in the valuation interest rate, as bond yields fell sharply.

The CA result is less volatile.

New business contribution

The new business contribution relates primarily to the Movestic Pensions and Savings business. Movestic also writes Risk and Health business, but this is reported as uncovered business and hence does not contribute to the new business result. The new business operation has suffered from both market and operational administration pressures, which have resulted in a marked decline in both new business volumes and margins. The reduction in acquisition margins combined with a broadly fixed cost base has resulted in a Movestic new business loss of £(0.3)m. It is anticipated that this will be temporary and that new business volumes will begin to recover as administration problems are resolved and new business markets recover.

Experience variances

The CA 2012 experience variance relates to policy persistency and mortality experience being £4.6m better than assumed.

The S&P 2012 experience variance arises principally from favourable investment market effects.

The Movestic experience variance for all the reporting periods is dominated by the impact of policy lapses being worse than assumed. This is anticipated to be a temporary issue, driven by short term administration service performance and general economic uncertainty. However, as at 30 June 2012 an element of the current adverse experience has been reflected in the Movestic long term lapse assumptions (see below).

Operating assumption changes

The CA 2011 figures include £(2.0)m relating to an increase in expense assumptions as a direct result of ongoing renegotiation of the HCL outsource arrangements during the year.

During the 6 months ended 30 June 2012 Movestic strengthened its persistency assumptions with an adverse EEV impact of some £5m. This is more than offset by positive assumption changes relating to broker and fund manager rebates totalling some £10m.

Uncovered business and other group activities

The result includes Chesnara parent company costs relating to corporate governance and business development, which, as such, are not attributable to the covered business results.

The Movestic result includes £0.3m of Risk and Health business profit which is not modelled as covered business.

European Embedded Value (EEV) as at 30 June 2012 (unaudited) £296.3m (31 December 2011: £294.5m)

Movement in EEV

The following summarises the movement in EEV:

EEV at 30 June 2012 is stated before recognition of the interim dividend of £7.0m (30 June 2011: £6.8m; 31 December 2011: final dividend of £12.5m).

The profit/(loss) for the period before modelling adjustments is commented on in the preceding section.

The foreign exchange reserve movements arise from the impact of a 1.6% depreciation of the Swedish Krona against Sterling during the six months ended 30 June 2012, following its appreciation of 3.7% during the 6 months ended 30 June 2011 and its depreciation of 1% over the full year ended 31 December 2011.

Composition of EEV

The tables below show the composition of EEV by operating segment:

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