Chesnara Regulatory News (CSN)

CHESNARA PLC - INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2013

Strong results underpin 2.5% increase in dividend at Chesnara

30 August 2013

Chesnara today reported interim results for the half-year ended 30 June 2013. 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, for the six months ended 30 June 2013 increased by 134% to £21.8m (30 June 2012: £9.3m excluding exceptional item)

- Increase of 8.5% in EEV to £337.4m (31 December 2012: £311.1m)

- Increase of 122.6% in EEV post-tax profit to £35.4m (30 June 2012: £15.9m), excluding modelling adjustments

- Strong and increased cash generation of £21.9m (30 June 2012: £12.4m)

- Group solvency ratio remains, post dividend, strong at 232% (30 June 2012: 198%)

- Subsidiary solvency ratios also strong and above targets. CA at 244% (30 June 2012: 213%) and Movestic at 309% (30 June 2012: 277%)

- Movestic increases IFRS pre-tax profit to £1.0m (30 June 2012: £0.1m)

- Shareholder equity on EEV basis now £2.94p per share (31 December 2012: £2.71p per share)

- Earnings per share (on IFRS basis) of 15.01p (30 June 2012: 6.19p)

- 6.25p interim dividend per share declared (2012: 6.1p), an increase of 2.5%

- Board remains focused on offering shareholders an attractive dividend flow

- Search for value adding acquisition opportunities continues

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

"Good investment market performance, underpinned by the resilience of our underlying UK business and good progress in Sweden have, again, enabled us to deliver a strong set of results. Consequently, I am very pleased we are able to continue our dividend growth and declare a 2.5% increase in the interim dividend to 6.25p per share."

The Board approved this statement on 29 August 2013.

Enquiries:

Notes to editors:

Chesnara plc ('Chesnara'), 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.

OVERVIEW & STRATEGY

HIGHLIGHTS - SIX MONTHS ENDED 30 JUNE 2013

CHAIRMAN'S STATEMENT

I am pleased with the levels of profit and cash generated during the first half of 2013 from UK operations. In addition, the advances in Movestic's operational effectiveness have driven a marked improvement in its results and I am increasingly confident that Movestic is well positioned to deliver significant value to our stakeholders.

Chesnara has delivered a strong set of financial results benefitting in part from generally favourable investment market conditions during the half year.

Whilst we have benefitted from investment market conditions throughout 2012 and into the first half of 2013, the Board remains mindful that the financial strength and hence dividend paying capacity remain sensitive to economic conditions and, as such, the management of market risk remains a key priority. To this end the management of market risk and capital management have remained a key focus of the Board and Executive Management during the period, in particular through:

- Executive Management track key economic variables against Board approved "triggers" on a continuous basis with matters reported to the Board as appropriate.

- A Financial Condition Report and an Internal Capital Assessment Report have been reviewed by the Board during the period.

- We continue to set internal solvency targets that require surplus capital significantly in excess of statutory requirements.

- Financial projections are regularly updated and are subject to Board review and assessment.

- Investment Committee terms of reference ensure the Group actively manages asset holdings to ensure an optimal balance between asset performance and risk exposure. The Committee continues to adopt a generally risk averse bias regarding investment decisions.

- The Board has made improvements to its business planning processes to ensure that strategic and operational plans actively consider the risk profile of the Group with specific consideration to market risk.

The ongoing improvements in our management of market risk give me comfort regarding the ability of the Group to weather any foreseeable adverse market conditions that may arise.

Financial review

Executive summary

Within the Financial Review section of the 2012 Annual Report and Accounts the Chesnara financial model was characterised as having three major components identified as: the "stable core", the "variable element" and the "growth operation". The results for the six months to 30 June 2013 very much support this characterisation of the financial dynamics of the business.

The "stable core", namely the CA business, has continued to deliver a significant and consistent level of both IFRS profit and cash. This is underpinned by continued positive levels of product-based deductions. The requirement from this book is to provide a predictable and stable platform for the financial model and dividend strategy as has continued to be the case during the first half of the year.

S&P is recognised as having more variable earnings, in particular due to the cost of product guarantees and its sensitivity to movements in investment markets. The results for the six months to 30 June 2013 clearly illustrate this level of variability, with a pre-tax IFRS profit of £17.2m being positively impacted by a significant reduction in the reserve for the cost of guarantees resulting from favourable investment market conditions.

Movestic is the "growth operation" and in light of this it is encouraging to report positive performance in many key measures.

In particular Movestic's assets under management and new business both show significant levels of growth.

Despite the difficult operating conditions experienced during 2012 the funds under management grew by 10.2% with a further 8.5% growth during the first half of 2013. New business volumes have increased by 39.1% in 2013 compared with the first half of 2012.

IFRS

On an IFRS basis, we have achieved a pre-tax profit of £21.8m. This compares well to a pre-tax IFRS profit of £9.3m, excluding exceptional items, for the first half of 2012. The improvement relates in the main to the more variable S&P result which has increased by £12.1m period on period. During the first half of 2013 we have seen a reduction in the cost of guarantees resulting from the positive impact of investment market conditions whereas during the corresponding period of 2012 there was a small increase in the cost of guarantees.

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 £14.4m, compare well against the 2012 half-year equivalent of £13.6m.

In addition, the Movestic IFRS result continues to move in the right direction. Movestic has posted a pre-tax profit of £1.0m compared with a pre-tax profit of £0.1m during the first half of 2012.

EEV

On the EEV basis of reporting, we realised a profit after tax of £35.4m for the half year ended 30 June 2013, compared with a profit after tax of £15.9m for the half year ended 30 June 2012. This improvement in EEV profitability is primarily due to a £26.9m improvement in economic profits which have benefitted from an upturn in UK and Swedish equity values, and an increase in UK bond yields.

The Movestic result includes £2.3m of new business profit compared with a loss of £0.3m for the first half of 2012. Whilst the short term impact of this turn-around in context of the overall Group results is relatively modest, the fact that Movestic has demonstrated it can generate acquisition profits is of strategic relevance.

Business review

I noted in my statement in the 2012 Annual Report and Accounts that following a difficult period, I was encouraged that there were signs of recovery in the Movestic business. I am delighted to report that those early positive signs have resulted in a significant recovery in IFA support of the Movestic business during the first half of the year.

This is illustrated by the 39.1% increase in new business volumes compared with the first half of 2012. This growth has been achieved without a deterioration in profit margin nor has it required any increase in the acquisition cost base. As a result, the results show a significant new business contribution for the six months to 30 June 2013. From this profitable base and with the level of momentum and positive sentiment to the new business proposition, I expect Movestic to make an increasingly significant contribution to the Embedded Value of the Group from its new business operations in the future.

The demonstrable return in IFA support has not, unfortunately, resulted in an improvement in the level of policy transfers out and surrenders. We believe this indicates that the levels of persistency experienced during the first half of 2013 are reflective of the dynamics of the IFA market, rather than being a direct reflection of the recent dip in customer service levels within Movestic. Whilst transfers between providers remains a feature of the industry, it is the ratio between transfers out and transfers in that is a key measure we can directly influence. In light of this, I am pleased to report that although there has been no improvement in the absolute level of business transferring out from Movestic, there has been a significant improvement in the ratio between transfers out and transfers in.

M&A

During the first half of the year a general sense of increased economic stability, as illustrated by improving economic growth indicators, a gradual recovery of the banking industry, equity market growth and a perception that the Eurozone is perhaps slightly less volatile than during recent years, has begun to have a positive impact in terms of levels of M&A activity in the sector.

I see the signs of an increase in M&A market activity as a positive indicator for the delivery of our stated strategy to "Acquire Life and Pensions Businesses".

Solvency and cash generation

The capacity of the Group to pursue its dividend policy relies on the continuing generation of cash in the UK business. During the six months ended 30 June 2013 cash generation was £21.9m. This healthy outcome supports the current dividend strategy and is reinforced by a strong Group solvency ratio which was 232% at 30 June 2013.

We have continued to make progress on the implementation of Solvency II requirements and further information on this is provided in the "Focus on Solvency II" section below.

Dividend

Continuing surplus generated from CA, together with a positive result from S&P, enables the Group to continue its attractive dividend policy. The 2013 interim dividend of 6.25p per share (2012: 6.10p per share) represents a 2.5% increase and equates to an interim dividend payable to shareholders of £7.2m.

Corporate Governance

As reported in the 2012 Report & Accounts, the first half of the year has seen a significant change to our Board. I am pleased to report that the transition has worked extremely effectively and I am confident that the refreshed Board's mix of skills and experience creates the ideal platform to take the Group forward.

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 has not been finalised, 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.

Outlook

Recent UK 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. In addition, the recent improvements in Movestic, support the target EEV growth model and continued improvements in IFRS profit expectations. The existing businesses therefore continue to support the Chesnara investment proposition. The UK business continues to support the strategy to pay attractive dividends and the Movestic business will ensure we minimise the Embedded Value decline that will inevitably occur in an otherwise closed book environment. The long-term strategy remains focused on making further value-adding acquisitions and the outlook regarding potential opportunities is more positive than has been the case for the past few years.

Peter Mason

Chairman

29 August 2013

OUR VISION & STRATEGY

STRATEGIC OBJECTIVES

MAXIMISE VALUE FROM THE IN-FORCE BOOKS

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 proposition.

How do we deliver this strategic objective?

We proactively manage continuing financial exposures:

- Significant financial exposures in life and pensions portfolios typically arise in the areas of onerous policy options and guarantees and of compensation claims for past mis-selling of products. The Group's portfolios have, historically, had very little exposure to the impact of investment market performance on options and guarantees. However, just over 29% of the policies managed by S&P, which was acquired in December 2010, contain guarantees to policyholders and therefore the Group's exposure has increased. Furthermore, the Group continues to have exposure to market falls by way of the impact on policyholders' linked funds, from which surplus is generated. We seek to minimise this exposure by regular review of investment asset holdings and by adjusting investment manager guidelines where appropriate and within the boundaries of our obligations to policyholders.

We operate in a manner that aims to ensure that policy attrition is as low as possible, as this is a key determinant of our future profitability and of the level and longevity of the emergence of surplus, which underpins our dividend-paying capacity.

We continue to maintain a focus on the retention of policies where it is in the interest of customers to continue with their arrangements.

We continue to manage investment performance so as to provide a competitive level of return to our policyholders. The CA funds are primarily managed by Schroder Investment Management Limited while the CWA funds continue to be managed by Irish Life Investment Managers Limited. The S&P funds are managed by JPMorgan Asset Management (UK) Ltd in order to maintain continuity for policyholders. We meet formally with fund managers on a quarterly basis to assess past performance and future strategy.

The Movestic funds are managed by a carefully selected range of fund managers who have strong performance records in the relevant sector. Performance is monitored very closely and regular meetings are held with fund managers. Should under performance continue then an alternative manager is sourced and appointed to manage the relevant assets. Where a new market niche or specific opportunity is identified new funds may also be added.

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

- UK operations are predominantly outsourced, with contract charging structures that ensure a significant element of the cost base is variable with run off of the business.

- Acquisitions are integrated into the Chesnara Group in a manner to ensure optimum operational and financial synergies.

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 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 can maintain and increase the Group's cash flow and operational economies of scale.

How do we deliver this strategic objective?

Ultimately we rely on acquisition opportunities being available in the market: our target market being the UK and Western Europe.

We actively engage with various investment bank advisers (including Canaccord Genuity Limited on a retained basis) to ensure we are aware of acquisition opportunities.

We will leverage our proven track record in the consolidation market. Past experience suggests we maintain a high degree of credibility with regulators, policyholders, lenders and shareholders. All prior acquisitions have been delivered with no adverse impact in terms of treating customers fairly, regulatory standing or our reputation in the life and pensions consolidation market.

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

Risks associated with this strategic objective

- If Chesnara makes 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.

ENHANCED VALUE THROUGH NEW BUSINESS IN SELECTED MARKETS

Why is this of strategic importance?

- The Chesnara business model primarily focuses on "closed book" consolidation. However, 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 for the Group.

- Maintaining a flexible position regarding the willingness to remain open to new business will potentially increase the 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 Swedish business. Movestic has a new business operation that delivers a positive new business contribution. There are detailed business plans in place that aim to increase new business profits through a combination of new product launches and improvements to operational effectiveness. Local and group management receive management information to enable 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.

- Ensures compliance with regulatory requirements.

- Supports potential acquisition opportunities.

- Supports ongoing dividend capability.

How do we deliver this strategic objective?

We ensure the Board is 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. Trigger points are set and documented such that management action will be instigated should any of the key trigger points be reached. The setting and review of trigger points is an integral component of the Group's risk appetite model.

Potential acquisitions are assessed by taking a prudent view on not only the short-term impact on the Group's Solvency position but also on 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.

- Changes in legal or regulatory requirements e.g. Solvency II.

ADOPT GOOD REGULATORY PRACTICE AT ALL TIMES

Why is this of strategic importance?

Chesnara management fullyrecognisesthe 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 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 our principal regulators, the Financial Conduct Authority ('FCA'), the Prudential Regulation Authority ('PRA') and the Finansinspektionen ('FI').

Accordingly, significant effort is directed towards ensuring that the operations are effectively managed in terms of conduct of business regulations and of prudential solvency requirements and towards the significant change that is required in the business to implement Solvency II and to ensure continuing compliance with its requirements.

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

- All governance roles, with direct impact on regulatory compliance, are carried out by people with significant industry experience.

- The level of investment in the Governance team is fully reflective of the Board's recognition and understanding of the implications and challenges of effective adherence to all regulatory best practice.

- The Chesnara culture ensures other objectives do not conflict with the objective of adopting good regulatory practice at all times.

Risks associated with this strategic objective

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

Deliver value to stakeholders on a responsible and balanced basis

Underlying the fulfillment of strategic objectives is the core value shared by the Board and Management Team of recognising responsibilities to all stakeholders on a balanced basis.

Often decisions are required that may have conflicting impacts on the different stakeholders. Maintaining a balanced view across the stakeholder groups is critical to ensuring management continue to make decisions that will benefit all stakeholders in the longer term.

The general governance framework ensures controls and procedures are in place to protect all stakeholders.

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 pensions policies in the successive acquisitions made by Chesnara has progressively increased the overall longevity of its run-off portfolio, while diversifying the long-term policy base. At 30 June 2013, the Group had 256,000 pension policies and 112,000 life 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 an attractive dividend yield, although opportunities which present a significant value uplift or growth opportunity will also be evaluated.

BUSINESS MODEL

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, while Movestic is based in Stockholm in Sweden. Chesnara has 22 full-time equivalent employees in its corporate governance team in the UK. In Sweden, the headcount is 119.

UK

- The primary focus of the UK business 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 business. 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 business 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 Movestic manages the selection of appropriate investment funds, investment decisions are made solely by the fund managers.

PERFORMANCE

chief executive's revIew

HIGHLIGHTS

- Growth in IFRS pre-tax profits to £21.8m (six months ended 30 June 2012: £9.3m, excluding exceptional items).

- Continued growth in total funds under management has contributed to an increase in Movestic IFRS profit to £1.0m (six months ended 30 June 2012: £0.1m).

- Cash generation and Group solvency remain strong.

- Recovery in Movestic new business volumes results in a new business profit of £2.3m (six months ended 30 June 2012 £0.3m loss).

- Increase in Group EEV by £26.3m since 31 December 2012, after recognition of the dividend payment of £12.9m.

- Interim dividend increased by 2.5% to 6.25p per share.

- 4.3% increase in total Group Funds under Management since 31 December 2012.

- General increase in M&A activity in the sector.

Business review

Financial

Group IFRS pre-tax profit £21.8m

Six months ended 30 June 2012: £9.3m*

*Excluding exceptional item

Group EEV earnings net of tax £35.4m*

Six months ended 30 June 2012: £15.9m

*Excluding modelling adjustments

Insurance Group Directive Solvency 30 June 2013 232%

31 December 2012: 244%

First and foremost I am extremely pleased with the levels of earnings on both the IFRS and EEV bases. The UK IFRS result underpins cash generation and cash transfers to the Chesnara parent company.

As has been the case in both 2011 and 2012 the level of cash generation in the UK continues to be more than sufficient to support the continuation of our attractive dividend strategy.

The total cash generated during the six months to 30 June 2013 of £21.9m is equivalent to 110% of the total 2012 dividend payment.

The surplus cash generation will have a positive effect in terms of sustaining our dividend strategy through any potential short-term reductions in IFRS earnings.

UK

Good policy retention combined with strong investment performance has resulted in an increase in total funds under management compared with the end of 2012.

Given that the UK business is in run-off it is particularly pleasing to report the growth in funds under management as they are the key source of product-based revenues. This increase will help ensure the longevity of surpluses from the UK closed business.

Whilst policy retention and fund performance are to a great extent outside the direct control of management, they are both significantly influenced by the performance levels of our administration and asset management partners. In light of this, I am pleased to report that all our outsource partners have out-performed their respective targets and benchmarks.

Negotiations on a revised outsource contract with HCL have recently recommenced and we believe we can take these through to a satisfactory conclusion.

Sweden

I have continued to give significant attention to the Movestic business during the period and am pleased to report that the early signs of a recovery in support from the IFA community seen towards the end of 2012 have gained significant momentum in 2013.

Significant growth in levels of new business has been achieved with neither a reduction in margin nor an increase in total acquisition costs.

In light of the recent administration performance issues I am particularly encouraged that re-engineered processes have coped well with the sharp increase in new business volumes.

Changes to the senior management structure together with the transfer of certain IFA-critical processes to Stockholm have had a positive impact and ensure the operating model is now appropriate to support the acquisition and marketing proposition.

There is a positive management environment which means staff are well motivated and there is a strong collective sense of commitment to continue with improvements required to fully recover and consolidate its market position. I made the statement in the 2012 Annual Report and Accounts that "The business foundations are significantly stronger than last year and from this improved base I am confident that Movestic can begin to deliver longer-term financial benefits to the Chesnara Group". I am now able to reiterate the statement but with an increased level of confidence, given the strong recovery as evidenced by the results for the first six months of 2013.

Group outlook

The Group continues to investigate further acquisition opportunities and we will progress these where we see value and a clear strategic fit. We remain open-minded as to location in the UK and Western Europe and, as ever, we will continue to apply our strict financial and risk criteria when we assess them.

I share the view of the Chairman that there is a general sense of increased activity in the M&A market. This, together with our flexible financing capability, a strong regulatory record and a proven track record of implementing previous acquisitions to the mutual benefit of all stakeholders, means I remain optimistic as regards our ability to make further value-adding acquisitions.

That said, whilst growth through acquisition remains a key strategic objective, projections do indicate that the Group remains able to deliver its core objectives, in the medium term, without any further acquisitions.

UK BUSINESS revIeW

Good operational performance, together with a positive investment market impact, results in strong financial performance in terms of IFRS and EEV earnings, cash transfer to Chesnara and CA Solvency.

HIGHLIGHTS

- Pre-tax IFRS profits of £24.0m (six months ended 30 June 2012: £12.6m, excluding AVIF amortisation and exceptional items).

- £24.5m cash generation (six months ended 30 June 2012: £13.8m).

- £29.1m increase in EEV since 31 December 2012 (excluding impact of dividend payments).

- Increase in solvency ratio to 244% (31 December 2012: 199%).

- Core product-based deductions remain resilient to book run-off.

- Good regulatory compliance record continues, with no complication resulting from the transition to the new regulatory regime.

IFRS pre-tax profit £24.0m

Six months ended 30 June 2012: £12.6m

(excluding AVIF amortisation and exceptional items)

Cash generated £24.5m

Six months ended 30 June 2012: £13.8m

EEV result net of tax £29.1m

Six months ended 30 June 2012: £10.4m

Annualised policy attrition rate

The annualised policy attrition rates for the two components of the UK business have increased slightly when compared with the same period in 2012, driven by slightly higher endowment maturities being seen in both components.

Fund Performance

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.

Review of the period

As the integration of the S&P business is complete, we now focus on three key areas - management of the assets, regulatory compliance and ensuring we continue to provide a high quality service to policyholders in terms of administration service levels and investment return.

Management of assets

The acquisition of S&P, as signalled at the time of the acquisition, results in an increased level of earnings volatility for the UK business. S&P has a proportion of its product base that provides guaranteed returns. The probability of guarantees being of value to policyholders increases when the value of assets held to match the policy liabilities fall or when, particularly for those guarantees expressed as an amount of pension, bond yields fall. To mitigate this risk, to some extent, assets held by shareholders to provide security for these guarantees are invested in cash and long bonds. As a consequence, our results will be vulnerable to (a) falls in equity and property values, which impact assets backing policyholder liabilities; and (b) falls in bond yields, which impacts the cost of providing the guarantees.

Policyholder service and investment return

Our administration and asset management outsource partners have all performed well in the first half of 2013 and generally exceeded service level arrangements and relevant benchmarks.

Regulation and legal

As ever in this highly regulated industry there have been a number of new and ongoing initiatives that have led to various levels of attention and challenge. We are pleased to report that none of these has given rise to significant issues and below I set out a list of the key activities and a little background.

Solvency II

- Continued commitment to this project means that our progress remained in line with our plans. As the implementation date has, as widely expected, been postponed to 2016 this has given us the opportunity to review necessary progress, whilst bearing in mind that interim measures will be introduced. Therefore, we are continuing to develop the key aspects of the prospective regulations as they stand. Further information on our Solvency II project is provided in section "Focus on Solvency II".

PRA/FCA

- Interaction with the new regulatory bodies has been limited to date, as we would have expected, bearing in mind our regulatory track record. The contact that has occurred has given rise to the establishment of good relationships and no issues of concern. We maintain our commitment to maintaining a compliant operating model and a good relationship with our regulators.

Treating Customers Fairly

- We have continued to monitor performance against, and to continue the development of, our TCF measures. The results are discussed, where relevant, with our outsourcing partners and are reviewed by senior management and reported to the CA Board. No issues of significance have arisen.

Gender Neutral Rates

- We have decided not to introduce gender neutral rates (other than for annuities). This, to some degree, limits previously available flexibility in some product lines. To date this has not had any significant effect on policy cessation. We will continue to monitor this closely and have the option to introduce gender neutral rates if it is felt necessary in the future.

Complaints

- On the underlying business, complaints have remained at reasonable levels, with no discernible change in the number of complaints referred to the Financial Ombudsman or the percentage of such referred complaints being successful. However, the absolute number of complaints remains slightly higher than we might have expected due to Complaints Management Companies submitting complaints to us alleging that we mis-sold Payment Protection Insurance (PPI). Although we have never sold PPI policies and, therefore, cannot have any possible liability, we are still required to open a complaint file and formally respond.

New life tax regime

- A new regime pertaining to the taxation of Life Assurance companies came into effect at the end of last year. The planning we undertook for this change has proved successful and the models we developed are working efficiently.

Retail Distribution Review

- Although significant in the wider market this regulation, which essentially moves IFA's to a fee-charging model by banning commission by providers, has, as expected, had little effect on our closed books of business.

Policyholder Investment Funds

- The CA Investment Committee has continued its oversight of policyholder funds through regular meetings with the investment managers. We continue to work with our managers in order to ensure the underlying investment mix is the most appropriate for policyholders. In particular, the programme to move the ex-S&P Pension Property Fund from direct investment to collective funds over an eighteen-month period is going to plan.

Cash generation

- Cash generation remains strong. This is due in the main to the core product based surpluses remaining resilient although a reduction in the cost of S&P guarantees has also made a significant cash contribution.

The S&P book has made a significant contribution of £20.3m to the 2013 cash generation. This is consistent with the fact that the S&P surplus is sensitive to investment market performance, which was generally favourable during the six months to 30 June 2013.

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 a function of:

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

ii) received and invested premiums; and

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

The combined impact of these three drivers has resulted in an increase in unit-linked assets under management from £2,221m at the end of 2012 to £2,270m at 30 June 2013.

swedish BUSINESS revIew

IFA support of the Movestic proposition has continued to gain momentum as evidenced by a 39.1% increase in new business volumes compared with the same period in 2012. Importantly the re-engineered servicing processes have held up well to the significant increase in processing volumes and none of the issues that caused the IFA dissatisfaction during 2012 have been seen during the period.

HIGHLIGHTS

- Increase in IFRS pre-tax profit to £1.0m (six months ended 30 June 2012: £0.1m) before amortisation of intangibles.

- Strong growth in funds under management.

- Positive EEV development, despite a further modest strengthening of lapse assumptions, which generated a £2.4m loss in the period.

- Process re-engineering programme has successfully mitigated the servicing problems experienced during 2011 and 2012.

- 39.1% increase in new business volumes compared with the same period in 2012.

- The ratio of transferred in business to transferred out has improved from 1:4 during 2012 to 2:4 for the six months to 30 June 2013.

- Continued recovery in new business market share throughout the period.

IFRS pre-tax profit* £1.0m

Six months ended 30 June 2012: £0.1m

*excluding consolidation adjustments

EEV result net of tax £8.0m

Six months ended 30 June 2012: £6.1m

Funds under management £1,519m

31 December 2012: £1,399m

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.

Premiums (£m)

Premium income, in the form of new business and continuing premiums into existing contracts, is important to the success of Movestic. The increase in total premiums primarily reflects the increase in new business volumes during the period.

New business premium income

New business markets have remained challenging. The unit-linked market continues to be less strong than the market for more traditional investment products, which have a lower risk profile and continue to offer guarantees, which we believe to be unsustainable. Despite this ongoing external factor, the operational improvements in Movestic have resulted in an increase in total new business premium income for the six months to 30 June 2013, when compared with the same period in 2012.

Fund performance

The increase in the number of funds out-performing their indices is a testament to our investment and fund selection strategy. One of Movestic's key differentiators is its approach to selecting the funds available to investors. Rather than adopt mainstream funds, which, in Sweden, are those predominantly managed by subsidiaries of banks which also have life assurance subsidiaries, we select a limited number of funds from a wide range of independent fund managers.

The funds selected are, in general, actively managed funds with a value approach. The performance of all funds is closely monitored and regular contact is made with managers to ensure that the underlying reason for fund performance, whether positive or negative, is fully understood. Funds that do not perform favourably compared to the relevant index are wholly replaced if there are no acceptable strategies for improvement. Where applicable we continue to add further funds to fill perceived gaps in the range.

Relative fund performance

New business market share

Movestic's primary target market is unit-linked pensions business and, within that, company-paid contribution business. The servicing issues during 2011 which continued into 2012 resulted in a loss of average market share compared with 2011, although as can be seen below new business market share during the first half of 2013 has shown signs of improvement.

This performance should be seen in the context of some of the traditional product providers having undertaken campaigns to move customers to 'new' unit-linked policies to address the challenges inherent in traditional guaranteed return products.

Total unit-linked pension business market share (excluding 'tick the box' market)

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.

We have continued with relatively high rates of attrition throughout the first half of 2013, although we have seen improvements in lapses when compared with the same period in 2012.

The percentages for transfers are based on the capital amount surrendered or transferred, divided by the amount of capital potentially transferable. For lapses, they are the annual premium of lapsed policies, divided by the total annual premium in force at the start of the period.

Review of the period

Financial results

Despite difficult operating conditions in 2012 the business ended the year relatively unscathed in terms of its core financial foundation. Continued positive investment conditions, compounded by more positive business performance during 2013, have resulted in significant improvements in the financial strength of the business:

- given that the revenue model is largely dependent on the level of unit-linked funds under management, it is pleasing to report that these have increased by 10.2% during the first half of 2013 and by 19.6% since the start of 2012.

- the Embedded Value of the business has increased by £10.9m (10.9%), including modelling adjustments and foreign currency translation reserve movements of £0.8m and £2.9m respectively during the six months to 30 June 2013.

- the business has generated c.£5m of new business profits on an annualised basis.

Business review

New business

New business volumes have increased by 39.1% compared with the six months to 30 June 2012. A key driver of this is the recovery in IFA sentiment towards Movestic following the significant improvements in service levels when compared with prior periods. The monthly trend is upwards and we expect new business growth to continue.

Policy attrition

The return in IFA support, as demonstrated by the increase in new business volumes, has not resulted in a corresponding improvement in the level of policy transfers out and surrenders. We believe this indicates that the levels of persistency experienced during the first half of 2013 are reflective of the broader dynamics of the IFA market, rather than being a direct reflection of the recent dip in customer service levels within Movestic. In light of this, the persistency assumptions have been further strengthened at 30 June 2013. The embedded value and the value of new business, as reported within the results to 30 June 2013, therefore now broadly align to current levels of persistency. The embedded value therefore assumes no early improvement in persistency. Management still believes that, in time, the impact of continued improvements in service levels, together with general external market developments, should have a positive impact on the long term persistency levels, but the positive impact will only be recognised if improvements are seen in actual lapse rates.

Despite there being no improvements in persistency levels, the ratios of transferred in business to transferred out has improved from 1:4 during 2012 to 2:4 during the six months to 30 June 2013.

Fund performance

The relative fund performance measure adopted within the KPI's above focuses on the number of funds under or over performing their relevant indices. An alternative and well established fund performance measure, produced by a respected industry magazine, compares the value of savers' average fund holdings. This measure best reflects the investment performance from a policyholder perspective. Movestic's fund range had the best performance over the period 2005 to 2010 and the second best performance for the period 2006 to 2011. The results for the period ended 31 December 2012 are not published until the second half of 2013.

Outlook

Funds under management are growing, new business operations are profitable and the servicing processes are proving to be "fit for purpose". Improvements in the financial and operating foundations of the business, when combined with renewed IFA support and a focused and positive management, team suggest the outlook for Movestic is good and much improved from 2012.

Movestic saw a gradual recovery in its market share of the company-paid pension market during the second half of 2012. During the first half of 2013 the share of the company paid pension market increased sharply to 12.4% from a 2012 average of 8.2%.

Economic conditions in Sweden have remained sound and it has proved to be relatively immune to economic pressures experienced across the rest of Europe. However, there remains a general sense of uncertainty that has resulted in consumer preference for more traditional investment products than for equity-based unit-linked investments. Movestic remains committed to the unit-linked market and believes that, in time, as equity market confidence recovers and that as the traditional investment offerings become less sustainable for providers, there will be a general shift back towards unit-linked investments.

financial revIew

The Group's key financial performance indicators as at 30 June 2013 and for the period 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 £21.8m

Six months ended 30 June 2012: £9.3m (excluding exceptional item)

The presentation of the results in accordance with International Financial Reporting Standards (IFRS) aims to smooth the recognition of profit arising from written business over the life of insurance and investment contracts. 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 £21.8m, shows a 134% improvement from the six months ended 30 June 2012 of £9.3m, excluding exceptional items.

- Profits from the core CA closed book remain significant, and have increased compared with the six months ended 30 June 2012 (six months ended 30 June 2013: £22.5m; six months ended 30 June 2012: £10.5m). The increase is predominately due to investment market movements, with the core underlying product based-surplus remaining resilient to book run-off.

- The 2013 result includes a £16.8m profit from the S&P business. This compares favourably with the profit for the six months ended 30 June 2012 of £4.7m, largely as a result of a reduction on the cost of guarantees driven by favourable investment market movements.

- There was a £0.9m improvement in the Movestic result when compared with the same period in 2012.

Cash generation £21.9m

Six months ended 30 June 2012: £12.4m

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 £4.2m cash generation in CA continues to be strong (six months ended 30 June 2012: £6.4m).

- S&P has contributed £20.3m cash in generation in the six months ended 30 June 2013 results compared with £7.4m for the equivalent period in 2012.

- Movestic has required no capital support during the six months to 30 June 2013 (six months to 30 June 2012: nil).

EEV earnings, net of tax* £35.4m profit

Six months ended 30 June 2012: £15.9m loss

*excluding modelling adjustments of £0.8m in 2013 (six months ended 30 June 2012: nil)

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

- Significant economic profit of £33.1m (six months ended 30 June 2012: £6.2m).

- Decrease in operating profit to £4.6 m (six months ended 30 June 2012: £14.0m).

- Movestic has generated a £7.2m EEV profit despite modest strengthening of lapse assumptions.

- Movestic has generated a new business contribution of £2.3m in the period.

EEV £337.4m

31 December 2012: £311.1m

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

- £39.2m increase in EEV before recognition of dividend payments.

- Model enhancements generated a £0.8m increase in EEV in the period (six months ended 30 June 2012: £nil; six months ended 31 December 2012: £3.6m).

- Good balance of EEV across the operating segments.

- Good product diversification within the value in-force.

- A strengthening of Swedish Krona against sterling has contributed to a £2.9m increase in Embedded Value in the period.

ifrs pre-tax profit £21.8m Six months ended 30 June 2012 £9.3m (excluding exceptional item)

Executive summary

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

Stable core

At the heart of surplus, and hence cash generation, 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 six months to 30 June 2013 support this objective, with product-based deductions of £14.4m continuing to emerge in a predictable fashion and at a level that compares favourably against the equivalent period in 2012 of £13.6m. This level of product-based deductions has underpinned CA's ability to generate a significant level of IFRS pre-tax profit at £6.8m. Results show a 3.9% increase in assets under management since 31 December 2012.

Variable element

The S&P component brings an element of earnings volatility to the Group, with the results being particularly sensitive to investment market movements. This is illustrated by a material reduction in the reserve for costs of guarantees since the start of the year, giving rise to a £14.2m economic benefit to the result during the period. In addition to this, market movements have also given rise to a negative return of £2.2m on the shareholder assets within the with-profits funds, predominantly driven by the reduction in bond values compared with year end, and also a reduction in sterling and expenses reserves, realising a benefit of £3.4m in the period.

Growth operation

Although, at its current scale, Movestic has posted a small and increasing, 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. There has been an increase in funds under management of 8.5% since 31 December 2012.

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

Note 1 - As explained in Note 5 to the IFRS financial statements, an exceptional item of £4.8m was reported in the six months to 30 June 2012 relating to the reclassification of policyholder tax liabilities within the 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 tax 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.

Note 2 - The S&P results for the period include £12.2m arising from the impact of movements in investment markets on the cost of guarantee reserve.

The adjustments arising on consolidation are analysed below:

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

CA

Despite a slight increase in product-based deductions, the core source of IFRS earnings, the overall CA IFRS result has declined slightly as compared with the same period in 2012. There are a number of complex aspects to the IFRS result but the primary drivers of this slight decline is the impact of market movements compared with the same period in 2012, as illustrated below:

Profit before tax movement

Six months ended 30 June 2012 to six months ended 30 June 2013 (£m)

Note 1 - Product-based deductions continue to remain strong and are a core source of profit. The deductions during the first half of 2013 slightly exceeded the same period in 2012 primarily driven by higher policyholder tax deductions.

Note 2 - Gains and interest on the retained surplus has fallen when compared with the same period in 2012, largely driven by a fall in bond values since the 31 December 2012.

Note 3 - The CA book has experienced some negative movements as a result of market movements since the year end, primarily as a result of mismatch losses, tax reserve increases and other reserve increases.

The key components of the IFRS result for the six months ended 30 June 2013 are summarised as follows:

Note 1 - Product-based deductions and returns on retained surplus remain significantly in excess of recurring administration expenses. The total level of product-based deductions has increased slightly when compared with the same period in 2012 despite the run-off of the book.

Note 2 - The impact of investment market conditions is generally relatively muted for the CA book compared with S&P. The first six months of 2013 includes the impact of some mismatch losses, tax reserve increases and some other reserve changes, all of which contribute to the £4.2m adverse impact of market movements seen during the period.

Note 3 - During the year ended 31 December 2012 complaint costs included the impact of the strengthening of the mortgage endowment mis-selling reserve. No further strengthening has been required to this reserve during the six months to 30 June 2013.

S&P

The S&P pre-tax profit has increased significantly compared with the six month period of 30 June 2012:

Profit before tax movement

Six months ended 30 June 2012 to six months ended 30 June 2013 (£m)

S&P posted a pre-tax IFRS profit of £17.2m for the six months ended 30 June 2013, the key components of the result being:

Note 1 - Product-based deductions have held up well as the book runs off, aided to some extent by the impact of capital growth on funds under management. Product deductions exceed administration expenses by £3.3m and £2.5m in the six months to 30 June 2013 and 2012 respectively.

Note 2 - The income on with-profits shareholder funds is driven by investment market performance. The 2013 result includes the impact of the reduction in bond values that has been witnessed during the period which did not occur during the same period in 2012.

Note 3 - During the six months ended 30 June 2013 the impact of movements in reserves for the cost of guarantees was positive, resulting in an £13.0m benefit to the IFRS result (six months ended 30 June 2012: £2.3m loss). The key drivers of this benefit in 2013 were a combination of increases in bond yields and increases in equity values since the year end.

A small lapse experience loss has been recognised in 2013 driven by observed lapses being slightly less than assumed at the start of the period.

Note 4 - Sterling and expense reserves are sensitive to both the expense base and to investment market movements. As investment markets improve, the level of sterling reserves (which provide against situations where future policy-based revenue does not cover future administration costs) reduces. The profit of £3.4m in the first six months of 2013 is predominantly driven by investment market movements.

Movestic

Note 1 - The Pensions and Savings business model is directly dependent upon fees and rebates earned on funds under management (FUM). The average FUM has increased during six months to 30 June 2013 resulting in a £1.0m (9%) increase in fee and rebate income. This is partly offset by a £0.7m (8%) increase in expenses and brokerage fees. Reinsurance financing costs have also made a positive contribution to the year on year improvement, having reduced by £0.6m.

Note 2 - The Risk and Health business, although not the core target growth operation, is significant to the Movestic financial and operating model. Unlike the longer-term Pension and Savings business the Risk and Health business tends to be cash generative in the short-term, thereby providing a source of internal funding. Further, the Risk and Health business is operationally significant due to the size of the book, there being 390,662 short-term policies in force as at 30 June 2013, which generated £41.4m of gross annual premiums in the first six months of 2013. The improvement in pre-tax profit compared with the six months to 30 June 2012 has been achieved despite a 4% reduction in gross premiums and is principally due to a 21% (£0.7m) reduction in claims net of reinsurance.

Note 3 - The "Other" component includes the results of the associate, Modernac, Movestic investment income and the impact of fair value adjustments to the Financial Reinsurance liability. The Modernac and Movestic investment income results have improved by £0.2m and £0.1m respectively half year on half year. The financial reinsurance fair value adjustment for the first half of 2013 has generated a £1.2m loss compared with a £0.6m loss for the first half of 2012. All of these movements are predominately a consequence of investment market conditions.

cash generation £21.9m Six months ended 30 June 2012 £12.4m

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.

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

HIGHLIGHTS

- Net cash generation in the UK run-off businesses, has increased by £10.7m in the half year compared with the same period in 2012, driven by more favourable investment markets.

- The pause in Movestic funding has continued, although this funding is anticipated to resume at a modest level in the second half of 2013.

The Group's closed life funds provide predictable fund maturity and liability profiles, creating stable long-term cash flows for distribution to shareholders and for repayment of outstanding debt. Cash flow generation will ultimately naturally decline over time as the UK businesses run off, despite the increase in cash generation in the first six months of 2013 when compared with the same period in 2012.

Although investment returns are less predictable, a significant portion of the investment risk is borne by policyholders. However, the S&P segment continues to demonstrate short-term volatility. This arises from the impact of investment market movements and the cost to shareholders of guarantees within the S&P with profits funds. Although the short-term measure of this cost follows the fortunes of investment markets, we 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):

eev earnings, excluding MODELLING ADJUSTMENTS £35.4m profitSix months ended 30 June 2012: £15.9m profit

EEV result

Summary

The headline EEV result has improved significantly during the six months to 30 June 2013. The majority of the improvement relates directly to investment market conditions. The results benefit from both economic experience and assumption profits, which have benefitted predominately from equity market growth and an increase in the yield curve respectively.

The operating result, upon which management has the most direct and immediate influence, represented a more significant proportion of the total earnings during 2012. The 2012 comparatives include some £13m due to positive assumption changes relating to broker and fund manager rebates in Movestic that have not been replicated to the same degree during 2013.

A significant proportion of the operating profit is also directly the result of investment market movements. The return on shareholder net worth loss of £2.3m reflects a reduction in bond capital values. During the six months to 30 June 2012 reducing bond yields led to a corresponding £3.6m profit.

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

Profit after tax movement

Six months to 30 June 2012 to six months to 30 June 2013 (£m)

Analysis of the EEV result in the period by business segment

Analysis of the EEV result in the period by earnings source

Economic conditions

As indicated above, the EEV result is sensitive to economic conditions. Economic experience and assumption changes contributed a profit of £33.1m in the six months to 30 June 2013 compared with a profit of £6.2m for the six months to 30 June 2012. The results are sensitive to both equity markets and bond yields (further sensitivity analysis is provided in Note 7 of EEV Supplementary Information). The economic assumption profit is dominated by bond yield movements, which following a period of decline during 2012, have increased relatively sharply during 2013. The "variation from longer term investment return" profit is predominantly due to continued equity market growth. The impact of these effects on each operating segment is illustrated below:

The S&P profit in 2013 includes an experience profit of £6.9m together with a £11.2m assumption profit. Both items are largely due to a general reduction in the cost of guarantee reserve which has reduced by £11.2m in the period. Of the total reduction in the cost of guarantees, 75% relates to the increase in assumed level of the risk-free rate of return.

The Movestic business is sensitive to movements in equity markets (predominantly Swedish) due to its core income stream being dependent upon management charges levied on funds under management, which are primarily equity-based. The majority (£7m) of the Movestic profit relates to equity growth in the period. An increase in longer-term investment yield assumption has added a further £1.5m of profit. The CA result is relatively less sensitive to investment market movements although during the six months to 30 June 2013 the results have benefitted from tax deductions and movements in tax liabilities that are a direct result of investment market performance.

New business contribution

The new business contribution relates primarily to the Movestic Pensions and Savings business. Movestic also writes Risk and Health policies, but due to its more short-term nature the Risk and Health business is reported as uncovered business and hence does not contribute to the new business result. The Movestic contribution is £2.3m, of which £0.9m relates to the value of premium increments received on existing policies. Profits on "new contract" business of £1.4m, have recovered significantly compared with the 2012 equivalent of £0.2m. The 2013 results remain lower than the profit during the first half of 2011 of £3.1m, which illustrates the potential further upside opportunity. The recent recovery is due to a 39.1% increase in new business volumes following the rectification of the 2012 servicing issues that arose from a 2011 systems migration.

Experience variances

The CA favourable variances relate to policy persistency and mortality experience being better than assumed. The S&P favourable variances in 2013 relate principally to policyholder tax deductions and better than assumed expense and lapse experience of £0.8m and £1.6m respectively.

The Movestic experience variances include significant but reducing lapse experience variances. The 2012 full year result included a £6.0m persistency loss. This has reduced to a loss of £1.5m for the six months to 30 June 2013. The improvement is primarily due to recent strengthening of lapse assumptions. Despite the previous assumption strengthening, persistency losses have continued into 2013. In recognition of the level of continuing adverse experience, lapse assumptions have been further strengthened as at 30 June 2013, the impact of which is included in the operating assumption changes.

Operating assumption changes

The S&P 2012 full year result reflected a loss of £3.7m following a change in lapse assumptions. Policies are expected to run-off at a slower rate than previously assumed and for a book carrying guarantees this has a negative impact as more policies are anticipated to rank for guarantee payments. This was partially offset by a profit resulting from a reduction in future expenses assumptions. No further operating assumption change profit has emerged from the S&P book in the first half of 2013.

Investigation of CWA lapse experience highlighted that the level of assumption out-performance is higher than previously expected and as such CWA lapse assumptions have been weakened at the 30 June 2013 resulting in a profit of £1.8m.

During 2012 the Movestic long-term lapse assumptions were strengthened, with a total adverse impact of £7.9m. This was more than offset by positive assumption changes relating to broker and fund manager rebates totalling some £13m. Lapse assumptions have been further strengthened as at 30 June 2013 such that they now broadly align to current levels of experience. This resulted in a £2.4m loss. Changes to expense assumptions added a further £0.6m loss. Continuing positive changes relating to broker and fund manager rebates have had a £1m positive compensating effect.

Uncovered business and other group activities

The result includes Chesnara parent company costs relating to corporate governance and business development, not attributable to the covered business. The 2013 expense is reflective of the steady state cost base, whereas the 2012 full year comparison included a £2.5m one-off increase in a provision to cover future contractual property costs associated with the Group Head Office.

The Movestic result is impacted by:

i) Risk and Health results: This business is less long-term in nature and hence is not modelled as covered business. Profit of £0.8m is £0.5m higher than the prior year equivalent.

ii) Profit from the Modernac associate, which at £0.4m for the six months to 30 June 2013 has increased marginally from a profit of £0.2m for the six months to 30 June 2012.

iii) Valuation adjustments for the Movestic financial reinsurance arrangements which had a £0.2m adverse impact on the results for the six months to 30 June 2013 compared with having no impact on the EEV figures during the first half of 2012. 

European embedded value £337.4m 31 December 2012: £311.1m 

Net of tax profit

The EEV profit arising during the period is analysed in more detail within the preceding section.

Effect of modelling adjustments

Modelling adjustments during the six months ended 30 June 2013 have reduced when compared with those included in the six months ended 31 December 2012.

Modelling adjustments this period of £0.8m relate entirely to the Movestic business and have arisen due to further small refinements that have been made to the model since the year end that are outside of our operating results. These adjustments followed a thorough external review of our model by an external consultancy.

The modelling adjustments that were reported during the second half of 2012 were more material, contributing to an increase in EEV of £3.6m, comprising:

Movestic

As a result of a review of the model during 2012 the following adjustments were reflected in the EEV at 31 December 2012:

i) Levels of commission claw-back within the future cash flow projections were overstated by £7.9m; and

ii) Several enhancements to policy fee cash flow estimates and data input routines have been identified with a total net adverse impact of £1.1m.

UK

The CA and CWA EEV models previously assumed a single average rate of investment return for all durations as opposed to the use of a full yield curve. This approximation was reported in the EEV assumptions section of the Supplementary Information within the 2011 Report and Accounts. As at 31 December 2012 the models were enhanced to recognise differing rates of return across the different durations of the yield curve, resulting in a net of tax increase of £12.6m.

Foreign exchange reserve movements

The £2.9m foreign exchange reserve movement during 2013 has arisen as a result of a strengthening of the Swedish Krona against Sterling by 2.74% since the end of 2012.

EEV - Value in force (VIF) and adjusted shareholder net worth (SNW)

(£m)

Analysis of VIF at 30 June 2013 - £226.3m

HIGHLIGHTS

- There is a good balance in EEV across the core business segments, with the UK businesses representing the majority (51%) of the total EEV. The value in-force component is dominated by the Swedish business which represents 60% of the total Group VIF.

- There is a significant level of product diversification within the VIF. When adjusted to recognise the impact of the S&P cost of guarantees which are predominantly pension contract related, 63% of the total product level value in-force relates to pension contracts, 18% to protection business and 13% to endowments.

The tables below set out the value of in-force business by major product line at each period end. Analysis of the composition of the VIF by business and major product category provides a useful insight into the commercial dynamics underpinning the value of Chesnara.

financial MANAGEMENT

Objectives

The Group's financial management framework is designed to provide security for all stakeholders, while meeting the expectations of policyholders and shareholders. Accordingly it:

i) safeguards policyholders' interests by meeting regulatory requirements established by the regulators of the insurance markets in which the Group's regulated companies operate, while not retaining unnecessary excess capital;

ii) seeks to meet the dividend expectations of shareholders and to optimise the gearing ratio to ensure an efficient capital base;

iii) ensures there is sufficient liquidity to meet obligations to policyholders, debt financiers and creditors as they fall due; and

iv) maintains the Group as a going concern so that it continues to provide returns and to meet obligations to shareholders.

Capital structure and cash flows

The Group's UK operations are ordinarily financed through retained earnings and through the current emergence of surplus in the UK life businesses.

Movestic is financed by a combination of external financial reinsurance arrangements and capital contributions from Chesnara.

With respect to acquisitions the Group seeks to finance these through a suitable mix of debt and equity, within the constraints imposed by the operation of regulatory rules over the level of debt finance which may be borne by Insurance Groups without breaching solvency requirements.

The acquisition of S&P in December 2010 for £63.5m was accomplished by way of debt: equity financing broadly in a ratio of 2:1. This introduced a modest level of gearing to the structure of Group financing.

Other factors which may place a demand on capital resources in the future include the costs of unavoidable large scale systems developments such as those which may be involved with changing regulatory requirements. To the extent that ongoing administration of the UK life businesses is performed within the terms of its third-party outsourcing agreements, the Group is sheltered, to a degree, from these development costs as they are likely to be on a shared basis.

The Group's longer-term cash flow cycle continues to be characterised by the strong inflow to shareholders' funds of transfers from the long-term insurance funds of CA, which is supported by the emergence of surplus within those funds.

These flows are used:

i) to repay our debt obligations;

ii) to support dividend distributions to shareholders; and

iii) to support the medium-term requirements of Movestic to meet regulatory solvency capital requirements as it expands.

Methods

In order to meet our obligations we employ and undertake a number of methods. These are centred on:

i) regulatory solvency capital resource and capital requirements analysis, where the relevant Boards set minimum targets for solvency capital resources;

ii) longer-term projections of key financial variables, including the regulatory solvency calculations set out in (i); and

iii) the setting of policies and investment manager guidelines for the investment of policyholder and shareholder funds.

Regulatory solvency capital resources and requirements

The operation of the UK, Swedish and EU regulatory regimes with respect to solvency capital requirements at the individual regulated company and Group level together with details of minimum target solvency ratios are set out in the IFRS financial statements ('Capital Management'). Targets are established at a level which aims to balance policyholder and shareholder interests. A higher target affords a greater degree of protection to policyholders, but constrains the level of cash generated and transferable by the UK businesses, which are in run-off, and absorbed by Movestic which is in a development phase. In respect of the UK businesses statutory regulations require:

i) a Pillar 1 calculation, which compares regulatory capital resource requirements, based on the characteristics of the in-force life business, with an associated measure of capital as prescribed by regulation; and

ii) a Pillar 2 calculation which compares a risk-based assessment of solvency capital with an associated measure of capital based on a realistic assessment of insurance liabilities; and

iii) the amount of required regulatory solvency capital is then determined by the method which gives rise to the lower excess of regulatory capital over requirements.

These calculations are monitored continuously.

Longer-term projections

On a six monthly basis, longer-term projections are prepared on a Group basis embracing:

i) Segmental earnings and surplus arising in the long-term insurance funds;

ii) Chesnara company cash flows;

iii) Regulatory solvency and capital resources and requirements on a regulated individual entity basis and on a consolidated Group basis; and

iv) European embedded value.

The projections are prepared for a base case and for various sensitivities; the base case follows the latest assumptions approved by the respective boards, regarding:

i) the calculation of actuarial liabilities for longer-term insurance contracts; and

ii) cash flows within the embedded value calculation.

The sensitivities which are prepared include the impact of movements in:

i) equity, property and bond markets;

ii) variations in anticipated new business volumes in the Swedish business; and

iii) adverse movements in the Sterling: Swedish Krona exchange rate.

In addition:

- Financial condition reports are prepared on an annual basis which includes assessments of the ability of the business to withstand key adverse events, including increased rates of policy lapse, expense overruns and unfavourable market conditions.

- Reverse stress testing techniques are employed which assess events and circumstances which would cause the combined CA and S&P business to become unviable. In this context, unviable is defined as the point at which the market loses confidence in the firm being able to carry out its normal business activities.

Investment management

An element of meeting policyholders' expectations and thereby, promoting customer retention is the pursuit of good relative investment performance in the policyholder funds.

The CA funds are primarily managed by Schroder Investment Management Limited while the CWA funds continue to be managed by Irish Life Investment Managers Limited and the S&P funds continue to be managed by JPMorgan Asset Management (UK) Ltd.

We meet formally with fund managers on a quarterly basis to assess past performance and future strategy. Investment guidelines for investment fund managers are established for each fund having regard to the nature of the fund and to contractual obligations to policyholders. For the with-profits funds these are also in accordance with the published Principles and Practices of Financial Management.

Movestic funds are managed by a carefully selected range of fund managers who have strong performance records in the relevant sector. Performance is monitored very closely and regular meetings are held with fund managers. Should under performance continue then an alternative manager is sourced and appointed to manage the relevant assets. Where a new market niche or specific opportunity is identified new funds may also be added.

The CA Board continues to have a conservative approach to the investment of shareholders' funds in the UK life businesses, which underpins our strong solvency position. For the UK businesses, where the greater part of shareholders' funds subsist, this approach targets the investment of 100% of available funds in cash and fixed interest securities. In the light of recent volatility in financial markets, particular attention is given to the mix and spread of these investments to ensure that we are not unduly exposed to particular sectors and that our counterparty limits are strictly adhered to.

OUTCOMES

Key outcomes from our financial management process, in terms of meeting our objectives are set out below:

Solvency and regulatory capital

For the whole of the periods presented below the Pillar 1 calculation for the UK business gave rise to the lower measure of excess capital. The statutory solvency position of the individual businesses may accordingly be summarised as:

i) During the financial year ended 31 December 2011, the business of S&P was transferred to CA under part VII of the FSMA. The amounts reported as S&P as at 30 June 2012 represent residual S&P shareholder funds which were retained to cover the minimum EU regulatory capital resource requirements for regulated entities. The S&P companies were de-authorised during 2012 thereby removing the need for them to maintain regulatory capital resources.

ii) Excess capital is determined by the minimum regulatory capital resource targets set by the respective boards, except for the Group solvency ratio for which no target is set above the regulatory minimum of 100%. Reliance is placed instead on the efficacy of targets set at the subsidiary level.

iii) The Movestic Board has set a minimum target of 150% of the regulatory capital requirement. Swedish solvency regulation requires that a certain proportion of assets, to be fully admissible, is to be held in the form of cash. The operation of this requirement may, from time to time, act as the operative constraint in determining the level of additional funding requirements, thereby causing Movestic's solvency ratio to rise above what it would otherwise have been, had the form of assets matching capital resources not been a constraint.

The information provided in respect of CA and the Group illustrates:

- robust protection for policyholders; and

- a favourable position from which Chesnara, which relies on dividend distributions from CA, continues to service its loan commitments and to pursue an attractive dividend policy.

The information in respect of Movestic also illustrates robust policyholder protection and provides the context in which Chesnara makes further capital contributions as the business expands.

Returns to shareholders

The Board's primary aim is to continue to provide an attractive dividend flow to shareholders within the context of the emergence of surplus in the UK businesses.

Returns to shareholders are underpinned by the emergence of surpluses in, and transfer of surpluses from, long-term insurance funds to shareholder funds and by the return on shareholder net assets representing shareholder net equity.

These realisations are utilised in the first instance for the repayment and servicing of debt. The surpluses arise from the realisation of in-force value of UK businesses, which are in run-off. The return on shareholder net assets is determined by the Group's investment policy. Shareholder funds bear central corporate governance costs which cannot be fairly attributed to the long-term insurance funds and which arise largely in connection with Chesnara's obligations as a listed company.

Returns to shareholders can be assessed by reference to many measures including the actual share price, the yields on the shares and the comparison of total market capital to embedded value.

Throughout 2012 and up to 19 August 2013 there has been a general gradual increase in the share price. During 2013 (up to 19 August) the share price has increased by 35%.

Throughout the same periods dividend yields have remained strong and significantly in excess FTSE average returns.

The combined impact of the recent share price growth and the continuing attractive yield means shareholders will have achieved good total shareholder return.

Returns to policyholders

Key aspects of policyholder fund performance in respect of the UK Business and in respect of the Swedish Business are set out in the Chief Executive's Review.

Liquidity

The current profile and mix of investment asset holdings between fixed-interest securities and cash deposits is such that realisations to meet obligations to third parties and to support dividend distributions can be made in an orderly and efficient way.

Going concern

The Group's cash flow position, together with the return on financial assets in the parent company, supports the ability to trade in the short term. Accordingly, the underlying solvency position of the UK life business and their ongoing ability to generate surpluses which support cash transfers to shareholders' funds is critical to the ongoing ability of the Group to continue trading and to meet its obligations as they fall due.

The information set out in 'Solvency and Regulatory Capital' above indicates a strong solvency position as at 30 June 2013 as measured at both the individual regulated life company levels in both the UK and Sweden and at the Group level. In addition, in respect of the UK business, the financial condition report and reverse stress testing assessments indicate that it is able to withstand the impact of adverse scenarios, including the effect of significant investment market falls, while the business's outsourcing arrangements protect it from significant expense overruns.

Notwithstanding that the Group is well capitalised, the current financial and economic environment continues to present specific threats to its short-term cash flow position and it is appropriate to assess other relevant factors. In the first instance, the Group does not rely on the renewal or extension of bank facilities to continue trading - indeed, as indicated, its day to day operations are cash generative. The Group does, however, rely on cash flow from the maturity or sale of fixed interest securities which match certain obligations to policyholders: in the current economic environment there remains a continuing risk of bond default, particularly in respect of financial institutions. In order to manage this risk we ensure that our bond portfolio is actively monitored and well diversified. Other significant counterparty default risk relates to our principal reassurers. We monitor their financial position and are satisfied that any associated credit default risk is low. It is noteworthy that we have negligible exposure to Euro-denominated sovereign debt.

Our expectation is that, notwithstanding the risks set out above, the Group will continue to generate surplus in its UK long-term businesses sufficient to meet its debt obligations as they fall due, to continue to pursue an attractive dividend policy and to meet the short-term financing requirements of Movestic.

RISK MANAGEMENT

Risk management processes:

Overlaying all the day-to-day and development activity we undertake is a focused risk management culture and regime.

In both the UK and Swedish businesses we maintain processes for identifying, evaluating and managing the significant risks faced by the Group, which are regularly reviewed by the Group Audit & Risk Committee. Our risk processes have regard to the significance of risks, the likelihood of their occurrence and take account of existing controls and the cost of mitigating them. The processes are designed to manage rather than eliminate risk and, as such, provide reasonable, but not absolute, assurance against loss.

At the subsidiary level in the UK businesses we maintain, in accordance with the regulatory requirements of the PRA and FCA, a risk and responsibility regime. Accordingly, the identification, assessment and control of risk are firmly embedded within the organisation and the procedures for the monitoring and updating of risk are robust. As part of this we established a Risk Committee in CA, which comprises solely of Non-executive Directors. This committee receives quarterly updates of the key risk registers, as maintained by the senior management, for review and challenge. The committee reports directly to the CA Board which also reviews reports from the compliance and internal audit functions. The Risk Committee reports are also reviewed by the Chesnara Audit & Risk Committee on a quarterly basis. The key risk registers have been designed to complement the production of Individual Capital Assessments, which we are required to submit to the PRA on request and maintain on an ongoing basis. We categorise all risks against the following relevant categories - insurance, market, credit, liquidity, operational and group - and identify potential exposures and the necessary capital requirements accordingly.

In the Swedish business, at the Movestic subsidiary level, there is full compliance with the regulatory requirement in that its Board and Managing Director have responsibility for ensuring that the management of the organisation is characterised by sound internal control, which is responsive to internal and external risks and changes in them. The Board has responsibility for ensuring that there is an internal control risk function, which is charged with (i) ensuring that there is information which provides a comprehensive and objective representation of the risks within the organisation and (ii) proposing changes in processes and documentation regarding risk management. These obligations are evidenced by regular compliance, internal audit, general risk and financial risk reports to the Movestic Board. The latter is supplemented by quarterly returns to the Swedish regulator, Finansinspektionen, which set out estimated capital requirements in respect of insurance, market, credit, liquidity, currency and operational risks.

Risk management processes are enhanced by stress and scenario testing, which evaluates the impact on the Group of certain adverse events occurring separately or in combination. There is a strong correlation between these adverse events and the risks identified in 'principal risks and uncertainties' below. The outcome of this testing provides context against which the Group can assess whether any changes to its risk management processes are required.

Group and subsidiary auditors regularly report to management on identified control weaknesses together with suggested improvements.

In accordance with the need to comply with the requirements of Solvency II on an EU-wide basis, we are currently reviewing and upgrading our risk management processes, so that Group-wide they will be enhanced in a uniform and consistent manner, embracing:

- articulation of risk appetite statements, following from documented strategic objectives;

- formulation and monitoring of associated risk metrics; - risk identification and assessment;

- calculation of risk-based capital; and

- the embedding of risk management processes so that they are at the forefront of, and underpin, strategic and operating decisions.

These developments have continued during the first half of 2013 and are planned to be completed during 2014.

Principal risks and uncertainties

Risks and uncertainties are assessed by reference to the extent to which they threaten, or potentially threaten, the ability of the Group to meet its core strategic objectives. These currently centre on the intention of the Group to maintain an attractive dividend policy.

The specific principal risks and uncertainties subsisting within the Group are determined by the fact that:

i) the Group's core operations centre on the run-off of closed life and pensions businesses in the UK;

ii) notwithstanding this, the Group has a material segment, which comprises an open life and pensions business operating in a foreign jurisdiction; and

iii) these businesses are subject to local regulation, which significantly influences the amount of capital which they are required to retain and which may otherwise constrain the conduct of business.

The following identifies the principal risks and uncertainties, together with a description of their actual or potential impact and of the way in which the Group seeks to control the specific insurance and financial risks it faces.

focus on solvency ii

Solvency II is a fundamental review of the capital adequacy regime for the European insurance industry.

Solvency II is a fundamental review of the capital adequacy regime for the European insurance industry. It aims to establish a revised set of EU-wide capital requirements and risk management standards that will replace the current solvency requirements. Solvency II's primary objective is to strengthen policyholder protection by aligning capital requirements more closely with the risk profile of the company. The regime has a three pillar structure, with each pillar governing a different aspect of the Solvency II requirements and approach. As well as requiring firms to disclose their capital and risk frameworks, the Directive also asks firms to demonstrate how and where the requirements are embedded in their wider activities. The European Insurance and Occupational Pensions Authority (EIOPA), an adviser to the European Commission on Solvency II, launched a public consultation on Guidelines related to the preparation for Solvency II on March 27th 2013. The Guidelines provide support to National Competent Authorities (NCA's) and insurers and reinsurers in preparing for Solvency II. The Guidelines cover the areas that EIOPA considers fundamental to ensure effective preparation for Solvency II:-

- system of governance, including risk management;

- forward looking assessment of the undertaking's own risk (based on the Own Risk and Solvency Assessment (ORSA) principles);

- submission of information to National Competent Authorities (NCA's); and

- pre-application of internal models.

It will be up to NCAs to determine how to comply with EIOPA's Guidelines by incorporating them into their regulatory or supervisory framework in an appropriate manner. The public consultation ended on 19 June 2013 and EIOPA plans to publish the final Guidelines in the autumn of 2013. This should allow NCAs to put in place certain important aspects of the preparation for Solvency II starting on 1 January 2014.

The current anticipated implementation date is 1 January 2016 although this has yet to be formalised and is already being viewed in some quarters as ambitious given the significant work still required to finaliserequirements, the legal framework and achieve support across the EU.

IFRS FINANCIAL STATEMENTS

Directors' Responsibility Statement

We confirm that to the best of our knowledge:

- the condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting';

- the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

- the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

By order of the Board

Peter Mason Graham Kettleborough

Chairman Chief Executive Officer

29 August 2013 29 August 2013

Independent Auditor's Review Report to the Members of Chesnara plc in respect of the Half Year Financial Report

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2013 which comprises the condensed consolidated statement of comprehensive income, the condensed consolidated balance sheet, the condensed consolidated statement of changes in equity, the condensed consolidated statement of cash flows and related notes 1 to 8. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed. 

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting," as adopted by the European Union. 

Our responsibility

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

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. 

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2013 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Deloitte LLP

Chartered Accountants and Statutory Auditor

Manchester

United Kingdom

29 August 2013

Condensed Consolidated Statement of Comprehensive Income (unaudited)