Last checked at 5 Oct 2005 06:00
Chesnara plc - Interim Results for six months ended 30 June 2005Strong emerging surplus and solvency position support dividend increaseCity of Westminster acquisition offers significant benefits to shareholdersFor immediate release5th October 2005Chesnara, the closed life business, today reported interim results for thefirst half of 2005. Chesnara is committed to offering shareholders anattractive, long term income stream arising from the profits from its lifeassurance businesses. * Profit (on IFRS basis) on ordinary activities before taxation for the six months to 30 June 2005 of ‚£4.2m, 3.81p per share (2004 half year loss before tax: ‚£(5.6)m, (5.18)p per share) * Purchase of City of Westminster Assurance for ‚£47.8m offers significant merger synergies and increases stability and longevity of income stream * Exceptional Achieved Profit result underlines attraction of acquisition strategy * Prudent increase of provision for mortgage endowment misselling by ‚£3.9m (‚£2.7m net of tax) * Persistency continues to improve * Embedded Value (pre interim dividend payment) now ‚£180.9m (2004: ‚£144.7 m), with strong NAV backing of ‚£52.6m * Combined capital resource cover ratio remains strong at 186% (CA 2004:183%) * 4.9p interim dividend per share declared (4.75p): increased by 3.2% * Board optimistic about future dividend flows Graham Kettleborough, Chief Executive, said:" This has been an important and encouraging first half. It reflects thesuccess of Chesnara's business model which focuses on managing life funds,which are substantially closed to new business, through outsourcedadministration services provided on a cost per policy basis."The acquisition of City of Westminster enables us to begin delivery of thesynergies that can be realised using this model and we think that there arefurther value enhancing opportunities in the market which we will continue toinvestigate. The acquisition has increased both the predictability andlongevity of returns to shareholders."We have taken a realistic view on reserving. The combination of aggressivemarketing by claims handing firms and mailings of new style letters topolicyholders means that we have decided to increase provisions for endowmentpolicy misselling. While increasingly misselling complaints will become timebarred, we will continue to review reserves as necessary." Very much as expected, we have seen the strong emergence of surplus which inthe future will be enhanced by contributions from City of Westminster. This,together with the strength of our solvency position, means that we are ableonce again to deliver our promise to shareholders of a reliable and progressivedividend stream, by increasing the interim dividend to 4.9 pence."EnquiriesGraham KettleboroughChief Executive, Chesnara plc 07799 407519Michael HenmanCubitt Consulting 0207 367 5106Notes to editors:Chesnara plc, which was listed on the London Stock Exchange in May 2004, wasformed to become the new holding company of the life assurance activitiesformerly owned by Countrywide plc. Its primary subsidiary - Countrywide Assuredplc - is substantially closed to new business and has outsourced its backoffice functions to Liberata Financial Services. In June 2005, Chesnaraconfirmed its strategic intentions when it acquired City of WestminsterAssurance for ‚£47.8m. CHESNARA plc Interim Financial Statements For the Six Months Ended 30 June 2005 and Explanation of Transition to International Financial Reporting Standards 1 - Interim Financial Statements for the six months ended 30 June 2005Financial Highlights 6 months Year ended ended 30 June 31 December 2005 2004 2004 IFRS basis Operating profit/(loss) 4.3 (7.2) 2.8 Financing costs (0.1) (0.3) (0.3) Profit on sale of - 1.9 1.9discontinued operation ------- ------- ------- Profit/(loss) before tax ‚£4.2m ‚£(5.6)m ‚£4.4m ======= ======= ======= Basic earnings/(loss) per share 3.81p (5.18)p 6.10p Dividend per share 4.90p 4.75p 11.85p Shareholders' net equity ‚£98.1m ‚£73.9m ‚£79.4m ======= ======= ======= Achieved profit basis Operating profit/(loss) before 2.9 (13.5) (5.8)tax and exceptional items Exceptional items Profit on acquisition and sale 18.5 1.9 1.9of subsidiary companies ------- ------- ------- Operating profit before tax 21.4 (11.6) (3.9) Investment variances and economic assumption changes 0.8 (0.1) 0.9 ------- ------- ------- Achieved profit before tax ‚£22.2m ‚£(11.7)m ‚£(3.0)m ======= ======= ======= Value in-force 123.2 87.9 84.6 Other net assets 57.7 56.8 64.6 ------- ------- ------- Embedded value ‚£180.9m ‚£144.7m ‚£149.2m ======= ======= ======= Life annual premium income (AP) ‚£55.8m ‚£64.7m ‚£123.3m Life single premium income (SP) ‚£33.4m ‚£22.9m ‚£78.9m Life annualised premium income (AP + 1/10 SP) ‚£59.1m ‚£67.0m ‚£131.2m Under the Achieved Profit basis of reporting, the exceptional profit arisingduring the six months ended 30 June 2005 relates to the acquisition of CWA LifeHoldings plc and represents the excess of the embedded value of that companyover the total purchase price. The exceptional profit arising during the sixmonths ended 30 June 2004 and the year ended 31 December 2004 relates to thesale of Key Retirement Solutions Limited, being the excess of the net proceedsreceived over its carrying value.Chairman's StatementI am pleased to present the second interim statements of Chesnara plc('Chesnara'), the company originally formed to hold the demerged life assuranceoperations of Countrywide plc. The company was listed on the London StockExchange on 25 May 2004.BackgroundChesnara's original and primary subsidiary, Countrywide Assured plc ('CA'),manages a portfolio of some 190,000 life assurance and personal pensionpolicies whilst its recent acquisition, City of Westminster Assurance CompanyLimited ('CWA'), a subsidiary of CWA Life Holdings plc ('CWALH'), manages afurther 84,000 policies. Whilst CA continues to sell and market GuaranteedIncome and Growth Bonds, CWA is closed to new business other than by way oftop-ups to existing contracts. As substantially closed books, it is expectedthat the embedded value of these businesses will decline over time as thenumber of policies in force reduces and as the surplus emerging in thebusinesses is distributed by way of dividends. As the portfolio runs off, theregulatory capital supporting them may also be reduced and returned toshareholders.Business ReviewSince the demerger Chesnara has pursued a policy of delivering enhanced valueto shareholders. I am pleased to report two significant transactions thatdeliver on that policy during the first half of 2005. Firstly, in February, weentered into a contract with Liberata Financial Services Limited, whichoutsourced CA's back office operations. This arrangement removes some potentialfuture fixed cost issues associated with a reducing book of business and, as itis based on a per policy charge, it will mean a greater alignment ofadministration expenses with policy generated income. Later, in June, wedelivered on our stated strategy of value-enhancing acquisitions, when weacquired CWALH for ‚£47.8m, including ‚£0.3m transaction costs, from Irish Lifeand Permanent plc. This acquisition offers the prospect of significantfinancial synergies once the businesses are merged, and although CWALH'scontribution to earnings is minor in the context of these results, we believethat it will, as it is a more mature run-off business, provide a reasonablypredictable dividend flow and improve the quality and longevity of shareholderreturns.Chesnara has, for the first time, adopted International Financial ReportingStandards ('IFRS') as the basis for presenting the primary statement ofearnings, financial position and cash flows. It will continue to publishsupplementary financial information, based on the Achieved Profit method ofreporting. In Part 2 of this document we have set out the impact of thetransition to IFRS on the results and financial position of the Group aspreviously reported under UK GAAP, whilst a short summary is presented on page 8.On the IFRS basis, Chesnara has posted a pre-tax profit of ‚£4.2m for the halfyear ended 30 June 2005 (30 June 2004, pre-tax loss of ‚£(5.6)m). This is afterincreasing the provision for mortgage endowment misselling redress by ‚£3.9m (‚£2.7m net of tax). For the year ended 31 December 2004 we decided, based on experience up to the date of reporting, 21 March 2005, which included early experience of the 'new-style' endowment reprojection letters, that the provision that existed at that time did not require adjustment. However, since then the industry has witnessed the proliferation of complaint handling firms who have engaged in widespread advertising of their services. Although the increasing incidence of time-barring and the welcome recovery in the equity markets has mitigated the effect of the higher than expected number of complaints we feel it necessary to increase the provision as stated above.Despite the adverse impact of the increase in this provision on earnings, thestrong emergence of surplus has continued and this allows the Board torecommend an interim dividend of 4.9p (2004: 4.75p). This represents anincrease of 3.2% and equates to a total interim dividend of ‚£5.1m.On the alternative Achieved Profit basis of reporting, the operating profitbefore tax of ‚£22.2m (six months ended 30 June 2004, loss of ‚£(11.7)m),includes an exceptional profit of ‚£18.5m arising on the acquisition of CWALH,which effectively represents the excess of the embedded value acquired over thetotal purchase consideration. The operating profit before tax and exceptionalitems for the six months ended 30 June 2005 was ‚£2.9m on this basis (six monthsended 30 June 2004, loss of ‚£(13.5)m). This turnaround is largely due to alower addition to the provision for mortgage endowment misselling redress andto the absence of any material adjustment to our persistency assumptions. CA'sprotection book of business is demonstrating convergence to our longer-termassumptions. The endowment book is demonstrating less convergence, at least inpart due to the higher number of complaints and subsequent policy encashments.As endowment mailing volumes, which to some extent drive complaints, willreduce significantly in the second half, we do not propose to make anyadjustment to our persistency assumptions at this time.The Group embedded value has, before the proposed dividend appropriation of ‚£5.1m, increased from ‚£149.2m at 31 December 2004 to ‚£180.9m at 30 June 2005.This net increase is largely due to the acquisition of CWALH's embedded valueof some ‚£60m at 30 June 2005, net of debt financing of ‚£21m which was used topart fund the acquisition.Both CA's and CWA's capital requirement (the ratio of available capitalresource to capital resource requirements) remain at a premium to the targetlevel of 150% set by the Board. CA's ratio of 185% is broadly comparable withthe year-end figure of 190% whilst CWA' s ratio of 192% also demonstrates ahealthy margin over the target level. CA has invested significant effort inupdating its Individual Capital Assessment (`ICA'), under which its capitalrequirements are assessed with guidance from the FSA. Whilst we are yet toreceive formal feedback from the FSA we do not expect there to be anyadditional capital requirement. CWA have also prepared an ICA whichdemonstrates that further capital support is unlikely to be required.OutlookWhilst there is some inevitable uncertainty regarding endowment misselling andpersistency, the Board look to the future with optimism. We believe wehave a strong grip on these issues. With outsourcing mitigating potentialfuture expense issues, rising investment markets providing a positive underpinand the acquisition of CWALH providing a strong surplus flow and positivefinancial synergies, we believe that we are well placed to fulfil our statedobjective of delivering a reliable and progressive dividend flow.To further this objective we will continue to research the market for closedlife books and look for further consolidation opportunities.The Board wishes to extend its thanks to all employees for their contributionto the notable achievements in this half-year and also to welcome our newcolleagues from CWA.Christopher SporborgChairman5 October 2005Chief Executive Officer's StatementBackgroundChesnara plc ('Chesnara'), which was listed on the London Stock Exchange on 25May 2004, was formed to become the new holding company of the life assuranceactivities formerly owned by Countrywide plc ('Countrywide'). It was consideredthat as the activities of the life business were fundamentally different innature from the rest of the members of the Countrywide group, a separatelisting would be appropriate for the life business. The listing enabledshareholders to better assess the risk and rewards associated with the lifebusiness and its cash flows and allows management to create additional valuefor shareholders though greater focus as an independent business.Chesnara's principal subsidiary at the time of the demerger of the lifebusiness from Countrywide - Countrywide Assured plc ('CA') - had beenestablished in 1988 as the life assurance division of Countrywide, sellingmortgage-related life assurance products through Countrywide's financialservices division. Following its substantial closure to new business in August2003, CA continues to administer an existing portfolio of some 190,000policies, including those acquired as a result of the purchase of Premium Lifein 1995. The portfolio, which primarily consists of endowment and protectionpolicies, reflects CA's history of providing mortgage-related policies to anestate agency-based financial services sales force.CA continues to sell and market Guaranteed Income and Growth Bonds throughIndependent Financial Advisers and directly to investors, and in addition itsells a small amount of life protection business to existing customers.Business ReviewSince the demerger, Chesnara has pursued a policy of delivering enhanced valueto shareholders through focusing its activities on the efficient run off of itslife businesses which are substantially closed to new business. Significantsteps which have been taken to achieve this include: (1) the sale of KeyRetirement Solutions Limited, an Independent Financial Adviser, which was awholly-owned subsidiary of Chesnara and which was engaged in the marketing ofproperty-related equity release products and the sale of associated financialservices; (2) the completion by CA of an Insurance Administration ServicesAgreement with Liberata Financial Services Limited ('Liberata'). Thisagreement, which is described below, allows us more properly to align the costbase of the CA life business with the size of its policy portfolio as it runsoff. In turn this supports and makes more certain the emergence of surpluswithin the long-term insurance funds which can be transferred for onwarddistribution to shareholders by way of dividend.Having established its operating model, Chesnara has been able to focus oncorporate governance activities and on the pursuit of its strategy of acquiringother life businesses in run off. We believe that this strategy affordsopportunities for further operational and administrative efficiencies, togetherwith other financial benefits. These include, significantly, the potential forthe effective merging of life and pensions funds, under Part VII of theFinancial Services and Markets Act 2000 ('FSMA 2000'), which we believe,besides reducing the reporting and regulatory burden, raises the prospect offinancial synergies, including the more efficient use of regulatory capital.We believe that the acquisition of suitable propositions will enhance both thelongevity and certainty of the dividend stream to shareholders and the prospectof a return of capital, provided there is no clearly superior investmentalternative.Acquisition of CWA Life Holdings plcOn 2 June 2005, Chesnara completed the acquisition of CWA Life Holdings plc('CWALH'), formerly Irish Life (UK) Holdings plc, from Irish Life and Permanentplc for a total purchase consideration of ‚£47.8m of which some ‚£0.3m related tocosts associated with the transaction. CWALH's life business subsidiary is Cityof Westminster Assurance Company Limited ('CWA'). This was Chesnara's firstacquisition since its listing in May 2004 and delivers on its stated strategyof the consolidation of value enhancing closed life businesses. The funding forthe purchase, which was settled in cash, was made by the raising of furtherequity of ‚£22m from shareholders by way of a placing and an open offer, and bythe provision of a bank loan of ‚£21m, with the balance being sourced frominternal retained funds. The Board believes that the bank loan, which isrepayable in five equal annual amounts on the anniversary of the draw downdate, introduces an element of gearing to the balance sheet which isproportionate to both the size of the acquisition and to the existing capitalbase of the Company.CWALH is a suitable and attractive acquisition for shareholders, policyholdersand management. Being approximately 40% of the size of the existing Chesnaraoperations in terms of embedded value it represents both a sizeable andmanageable acquisition. It has a strong capital position, no significantregulatory issues and has no with profits exposure. In common with CA, CWA hasoutsourced its investment management and the majority of its back officefunctions. As its business has been in run off since 1995 and has outsourcedits administration since 1999, its future surplus flows can be predicted with areasonable degree of certainty. This, together with the planned transfer of theCWA business into CA, which will enable financial synergies to be realised,will, the Directors believe, enhance the short, medium and long-term cash flowof the enlarged group. The contribution from CWALH, which is minor in thecontext of these results as they include only one month of post-acquisitiontrading activity, will, in future, provide the capacity to support therepayment of the bank loan and to enhance reported earnings and dividend flowto shareholders.Outsourcing Arrangements and VATAs stated in our Report and Accounts for 2004 we successfully completed anagreement with Liberata to outsource our back office functions with effect fromFebruary 2005. The agreement, which runs for 10 years, provides CA with adefined level of cost per policy during the term and mitigates the risks andsignificant cost inefficiencies that arise from a diminishing policy base. Theoperational handover has gone well and the transition project, which willmigrate the business to Liberata's systems, is progressing under the jointcontrol of CA and Liberata.CWA's back office is also outsourced on a defined per policy cost, albeit to adifferent supplier - Computer Sciences Corporation. This agreement is currentlydue to expire in January 2009.Following a decision delivered in the European Court of Justice in early 2005in the case of Staatssecretaris von Financien v Arthur Andersen and Co,Accountants, there was uncertainty whether charges made under the variousoutsourcing arrangements, which subsist within the Group, would continue to beexempt from VAT. This has significance for the Group's life businesses as theirsupplies are almost wholly VAT exempt, which means that any VAT levied onsupplies of services to the life businesses represents a permanent additionalcost burden. In July 2005, HM Revenue and Customs issued a ConsultationDocument entitled "Changes to the VAT Exemption for Insurance-related Services"and, notwithstanding the strong industry lobbying against the proposed changes,the Directors are of the opinion that it is now prudent to make allowance forfuture additional VAT costs in valuing insurance contract liabilities.The terms of CA's agreement with Liberata referred to above are such that theeffect of any additional cost burden arising from these changes will be shared,while under the terms of policyholder contracts CA is able to recoveradditional costs from policyholders in the majority of cases. CWA is unlikelyto be able to recover the additional costs arising from these changes under itspolicy terms. The impact of the changes is that CA's reported IFRS earnings arereduced by ‚£1.5m (‚£1.1m net of tax) while the value of policies in forceincluded within the overall embedded value reduces by ‚£0.2m (pre and post tax).CA had already anticipated these costs for Prudential Reporting to theFinancial Services Authority at 31 December 2004, but had reversed the relatedprovision for UK GAAP reporting at that time. CWA has, during the six monthsended 30 June 2005, for both FSA Prudential Reporting and for reported IFRSearnings, established a liability of ‚£0.8m (‚£0.6m net of tax), together with aconcomitant reduction in the value of polices in force within its embeddedvalue of ‚£2.5m (‚£1.7m net of tax) by way of changes to the underlying expenseassumptions. These changes were, however, fully anticipated in connection withthe acquisition of CWA and were recognised in establishing the fair value ofassets and liabilities in the acquisition balance sheet as at 2 June 2005.Mortgage Endowment Misselling Redress ProvisionCA and CWA are required to write to endowment policyholders at least every twoyears to appraise them of the expected maturity value of their policy. Thesemailings are governed by the rules and guidance issued by the FSA and ABI inMay 2004, which include a requirement to give clear notification topolicyholders of an individual 'cut-off' date by which they must complain (ifthey are minded to do so). If the policyholder does not complain by the'cut-off' date then the company has the right to refuse to consider thecomplaint. After a short delay, in which the relevant system changes were made,CA began mailing the new style letters in September 2004. Early indicationswere that the new letters were having little effect on customer complaint ratesand therefore no adjustment to the mortgage endowment complaints redressprovision was considered necessary at the time that we issued the 2004 Reportand Accounts on 21 March 2005, based on experience to that date. However, sincethen the industry has witnessed increased media coverage and ever-presentadvertising driven by the proliferation of endowment complaint handling firms.Whilst the value of the service provided by these largely unregulated firms canbe debated, it is clear that their activities have given rise to greater thanexpected levels of complaints. Although complaints emanating from these firmscan be identified it is impossible to know how many other complaints areinfluenced by the advertising or are simply a response to the new styleletters.As a result of the higher than expected levels of complaints received the Boardnow consider that an increase of ‚£3.9m (‚£2.7m net of tax) in the provision isnecessary. This takes into account the increased levels of complaints received,the positive contribution from the increase in equity markets during the firsthalf of 2005 and the increasing number of cases that are expected to becometime-barred under the existing rules. The provision is calculated on a bestestimate basis taking into account recent experience. Therefore, as experienceis subject to external factors, there is an element of uncertainty. This willhowever be alleviated as more of the population becomes time-barred, with themajority of cases being settled in the next two years.Whereas CA has a rolling programme of mailing, CWA adopted a bulk mailingprocedure where mailings are spread over a few months every two years. CWAmailed their endowment policyholder base in the first half of 2005 and, todate, it appears that the provision, which was strengthened to reflect our viewof the fair value of assets and liabilities on acquisition, is provingadequate. It is significant that the number of endowment policies in-force inCWA is proportionately much lower than that in CA and that, due to the natureof the mailing profile, the population becomes time-barred, where appropriate,comparatively earlier.PersistencyAs regards CA persistency, experience over the first six months has differedbetween our two major product lines. On protection business there has beenconvergence of actual experience to our underlying persistency assumptions andwe do not see the need to make any alteration to these. On endowment businessthe expected convergence is less clear, at least partly due to the higher thanexpected number of endowment misselling related complaints we have received,and to the subsequent encashment of related policies. As mailing volumes, whichat least in part drive complaint activity, will be significantly lower in thesecond half, we do not propose to make any significant adjustment at this time.IFRS ReportingTRANSITION TO IFRSAs explained in the Notes to these interim financial statements, the Group hasadopted International Financial Reporting Standards (`IFRS') for the firsttime, as the basis for presenting the primary statements of earnings, financialposition and cash flows. It will continue to publish supplementary financialinformation, based on the Achieved Profit method of reporting. Part 2 of thisdocument sets out more fully the impact of the transition to IFRS on theresults and financial position of the Group as previously reported under UKGAAP. The impact of the introduction of IFRS on previously reported periods maybe summarised as follows: 6 months ended Year ended or as at or as at 30 June 2004 31 December 2004 UK GAAP IFRS UK GAAP IFRS ‚£000 ‚£000 ‚£000 ‚£000 Shareholder net equity 71,014 73,920 73,952 79,442 ------- ------- ------- ------- (Loss)/profit before taxation (4,887) (5,635) 4,551 4,397 Taxation 1,189 1,252 813 759 ------- ------- ------- ------- (Loss)/profit after taxation (3,698) (4,383) 5,364 5,156 ======= ======= ======= =======Basic (loss)/earnings per Share (4.37)p (5.18)p 6.34p 6.10p ======= ======= ======= =======The main enduring influence of IFRS on reported earnings and on the financialposition of the Group, arises from the requirement to classify the Group'slong-term contracts into insurance or investment contracts (as defined underIFRS). The primary consequence of this is that insurance contracts continue tobe valued using identical methods as under UK GAAP, subject to liabilityadequacy testing, while acquisition costs and fees received for servicesprovided on investment contracts, previously charged or credited to incomeunder UK GAAP up front, are now deferred over the life of the contract,together with a concomitant release of actuarially based provisions which it isno longer necessary to carry. The net impact of this treatment, compared withUK GAAP, is to reduce shareholder equity while future period reported earningswill be higher than would otherwise be reported under UK GAAP, as the deferredcosts and income are released as charges or credits to earnings.Shareholder net equity has also been impacted by the effect of the addback ofthe interim dividend of ‚£4,017,000 in respect of the six months ended 30 June2004 and of the final dividend of ‚£6,124,000 in respect of the year ended 31December 2004, both of which are not recognised as liabilities at those datesunder IFRS. These dividends have also been added back for the purposes ofreporting embedded value at those period ends and the statements of AchievedProfit and Embedded Value in respect of prior periods, presented in theseinterim financial statements, have been restated accordingly.The impact of these restatements under IFRS are not considered significant inthe overall context of the earnings and financial position of the Group. As themain activities of the Group are centred on long-term businesses in run off,the earnings profile of the Group will continue to be dominated by theunderlying emergence of surplus from those businesses. While the application ofIFRS compared with UK GAAP leads to a relatively minor reallocation of profitrecognition between periods, the prospects for the disposition of the surplusemerging by way of transfer to shareholder funds and onward distribution by wayof dividend and the capacity to repay and service borrowings are determinedprincipally by the underlying regulatory solvency position of the lifebusinesses within the Group (see Solvency and Regulatory Capital sectionbelow). The adoption of IFRS changes neither the nature nor the measurement ofthose regulatory constraints, nor does it have a significant influence on thefuture capacity to return capital to shareholders.CWALH ACQUISITION AND IFRSThe fair values of the assets and liabilities of CWALH, at the acquisitiondate, 2 June 2005, have been established in accordance with IFRS. Inparticular, intangible assets related to the acquired in-force value attributedto both insurance and investment contracts have been recognised. As surplusemerges from the underlying businesses in run off, and is recognised in income,so these intangible assets (whose initial carrying value has been establishedby reference to the difference between the total purchase consideration for theacquisition of CWALH, determined as a result of a competitive tenderingprocess, and the fair value of all other assets and liabilities acquired) willbe amortised against income on a time profile which, it is intended, willbroadly match the profile of the underlying emergence of surplus. There is theprospect that future reported IFRS earnings attributable to CWALH will reflectthe effective unwinding of the implicit discount rate used to measure theintangible assets and the emergence of surplus at a level which can beestablished by reference to the value in-force component of CWA's embeddedvalue.IFRS RESULTThe Group has posted a pre-tax profit under IFRS of ‚£4.2m for the six monthsended 30 June 2005 as against a pre-tax loss of ‚£5.6m at the correspondinginterim position in 2004 and a pre-tax profit of ‚£4.4m at the full year end2004 position. The continuing strong underlying emergence of surplus fromlong-term business, and significantly reduced charges in respect of adjustmentsto the mortgage endowment misselling redress provision, compared with the priorperiod, are the principal factors which have given rise to this improvement inearnings. The result also reflects a charge of ‚£2.3m in respect of theamortisation of Deferred Acquisition Costs ('DAC') on insurance business (sixmonths ended 30 June 2004 ‚£6.0m; year ended 31 December 2004 ‚£11.0m). Theseamounts which had been recognised under UK GAAP continue to be recognised underIFRS. It is expected that the DAC relating to insurance business will be almostfully amortised by 31 December 2005 so that reported earnings after that datewill benefit from the lower incidence of amortisation charges from this source.Achieved Profit ResultSummary information on the Achieved Profit basis is presented as a supplementto these financial statements to provide alternative information to thatpresented under IFRS. The Achieved Profit method recognises profits as they areearned over the life of an insurance policy and assists in identifying thevalue being generated by the life businesses. The result determined under thismethod represents the movement in the life businesses' embedded value. As theGroup's life assurance operations are now substantially closed to new business,the principal underlying components of the achieved result are the expectedreturn from the business in force (being the yield at the risk discount rate onthe related policy cash flows as they fall into surplus) together with (1)variances of actual experience from that assumed for each component of thepolicy in force cash flows and (2) the impact of resetting assumptions for eachcomponent of the prospective cash flows.The Group has, under this basis, posted a pre-tax profit of ‚£22.2m for the sixmonths ended 30 June 2005 (six months ended 30 June 2004 pre-tax loss of ‚£(11.7)m; year ended 31 December 2004 pre-tax loss of ‚£(3.0)m). The principalfactors underlying this result, which is more fully analysed in thesupplemental information, are: 1. In respect of the core underlying CA result an expected return of ‚£4.4m has been offset by adverse mortgage endowment misselling experience of ‚£3.9m pre-tax (‚£2.7m net of tax). 2. The economic assumptions underlying the in-force value of CA business were reset at 30 June 2005, including a reduction in the risk discount rate from 9% to 8.3%. These adjustments gave rise to a net reduction of pre-tax in-force value of ‚£1.6m (‚£0.8m net of tax). The reduction in the risk discount rate was influenced mostly by a reduction in the underlying longer-term risk-free rate of return rather than by a changed view of the risk factors subsisting within the CA life business. 3. An exceptional credit of ‚£18.5m pre-tax (‚£12.6m net of tax) has been reflected, representing the difference between the total purchase consideration for the acquisition of CWALH and its embedded value at the acquisition date. This effectively reflects the fact that the purchase price for the acquisition of CWALH was broadly at a discount of 21% to its embedded value, and the amount represents the enhancement to shareholder value in Achieved Profit terms as a result of the acquisition. The amount which has been reflected as an exceptional credit has been measured after restating CWALH's embedded value at the acquisition date for: i. revised economic assumptions, which, except for the risk discount rate established at 7.7%, are now fully aligned with those of CA; ii. amended expense assumptions to reflect anticipated higher outsourcer costs, due to an increased VAT burden as described above; iii.an increase in the mortgage endowment misselling redress provision as described above. The CWA risk discount rate of 7.7% is lower then that of CA, reflecting currentlower perceived risk in its policy portfolio, arising in part from its greatermaturity as a business in run off.The post acquisition contribution of CWALH to the Achieved Profit result isotherwise minor, representing only one month's activity.There are a number of potential synergies which may arise from the acquisitionof CWALH and from the proposed transfer of CWA long-term business funds to CA,which have not been reflected in the overall Group embedded value assumptions.Embedded ValueThe movement on embedded value comprises: 6 months Year ended ended 30 June 1 December 2005 2004 2004 ‚£000 ‚£000 ‚£000 (restated) (restated) Embedded value at beginning of period 149,187 152,745 152,745 Net achieved profit/(loss) for the 16,415 (8,020) 469period Issue of new equity Share capital 1,001 - - Share premium 20,458 - - Dividends paid in period (6,124) (10) (4,027) ------- ------- ------- Embedded value at end of period 180,937 144,715 149,187 ======= ======= =======The balance sheet prepared on an achieved profit basis is summarised asfollows: 30 June 31 December 2005 2004 2004 ‚£000 ‚£000 ‚£000 (restated) restated) Value in-force 123,252 87,901 84,594 Other net assets 57,685 56,814 64,593 ------- ------- ------- 180,937 144,715 149,187 ======= ======= ======= Represented by: Share capital 41,501 40,500 40,500 Share premium 20,458 - - Capital redemption reserve 50 50 50 Retained earnings 118,928 104,165 108,637 ------- ------- ------- Embedded value 180,937 144,715 149,187 ======= ======= =======The embedded value represents the value of the Group's net assets attributableto shareholders, together with an estimate of the net present value of profitsattributable to shareholders from the policies in force. The capital structureset out above has been restated from that reported in previous periods toreflect the adoption of the reverse acquisition method of accounting asdescribed more fully in Note 2 to these statements. This gave rise to an amountpreviously reported as a demerger reserve of ‚£36,272,000 at 30 June 2004 and 31December 2004 being included in share capital and involved no net change instated embedded value at those dates.The amounts presented above in respect of the six months ended 30 June 2004 andthe year ended 31 December 2004 have also been restated from amounts previouslyreported, for the addback, at those respective period ends, of dividendsproposed but not yet paid at the period end. These adjustments have been madeto align the treatment of dividends proposed but not paid at the balance sheetdate, under Achieved Profit reporting with IFRS, and for the purposes ofreporting Embedded Value. Similarly, the interim dividend of ‚£5.1m proposed asat 30 June 2005 has not been reflected as a movement on embedded value for thesix months ended 30 June 2005 or as a reduction in embedded value as at thatdate.The tables below set out the components of the in-force value by major productline at each period end: 30 June 31 December 2005 2004 2004 Number of policies 000 000 000 CA Endowment 72 84 78 Protection 88 113 99 Other 30 31 31 ------- ------- ------- Total 190 228 208 ------- ------- ------- CWA Endowment 20 - - Protection 24 - - Annuities 4 - - Pensions 36 - - ------- ------- ------- Total 84 - * - * ------- ------- ------- CA and CWA combined 274 228 208 ======= ======= =======* Not applicable as not part of the Group at these dates. 30 June 31 December 2005 2004 2004 Value in-force ‚£m ‚£m ‚£m CA Endowment 45.8 50.1 49.3 Protection 40.8 57.3 45.0 Other 3.2 4.7 3.3 ------- ------- ------- Total 89.8 112.1 97.6 ------- ------- ------- CWA Endowment 15.1 - - Protection 20.7 - - Annuities 3.1 - - Pensions 27.9 - - ------- ------- ------- Total 66.8 - * - * ------- ------- ------- CA and CWA combined 156.6 112.1 97.6 Valuation adjustments 2.8 (7.3) 3.0 Cost of capital (6.0) (4.0) (4.4) ------- ------- ------- Total in-force value 153.4 100.8 96.2(pre-tax) Taxation (30.2) (12.9) (11.6) ------- ------- ------- Total in-force value 123.2 87.9 84.6(post-tax) ======= ======= =======* Not applicable as not part of the Group at these dates.Solvency and regulatory capitalRegulatory capital resources and requirementsThe following summarises the capital resources and requirements of the lifebusinesses for regulatory purposes: 30 June 31 December 2005 2004 2004 ‚£m ‚£m ‚£m CA Available capital resources (CR) 53.9 52.0 57.9 Capital resources requirement (CRR) 29.1 29.3 30.5 Target capital requirement cover 42.5 43.7 44.4 Excess of CR over target requirement 11.4 8.3 13.5 Ratio of available CR to CRR 185% 177% 190% ------- ------- ------- CWA Available capital resources (CR) 16.5 - * - * Total capital resources requirement (CRR) 8.6 - * - * Target capital requirement cover 13.6 - * - * Excess of CR over target requirement 2.9 - * - * Ratio of available CR to CRR 192% - * - * ------- ------- -------* Not applicable as not part of the Group at these dates.Available capital resource amounts are stated after appropriating final orinterim dividends, as the case may be, which are treated as payable to theparent company, but which had not yet, at each period end, been approved by therespective CA or CWA Board.CA's Board, as a matter of policy, will continue to target capital resourcecover at 150%. The CA solvency position has benefited from the reduction of ‚£3mto ‚£6m in the Reassurer Default Reserve (held for regulatory solvency purposesonly) against the possible default of Guardian Assurance plc ('GA'). Thisfollowed a review of publicly available information regarding the financialposition of GA.The CWA target capital requirement cover is expressed as a ‚£5m excess over theregulatory CRR, as a consequence of a long-standing agreement with the FSA. Ifour internal target CR to CRR ratio of 150% had been applied, the excess ofcapital resources would be ‚£3.6m.It can be seen from this information that Chesnara plc, which relies ondividend distributions from its life businesses, CA and CWA, is currently in afavourable position to service its loan commitments and to continue to pursue a progressive dividend policy.Individual Capital AssessmentsCA has invested significant effort in updating its Individual CapitalAssessment (`ICA'), which was submitted to the FSA. Further discussion hastaken place with the FSA and whilst we are yet to receive formal feedback fromthem we are not expecting there to be any additional capital requirement as aresult of their guidance. CWA have prepared an ICA which demonstrates that, asa well-capitalised predominantly unit-linked company, further capital supportshould not be required.Investment FundsThe Board continue to maintain a conservative approach to the investment ofshareholder funds, which underpins our strong solvency position. In the pastthis has resulted in an approach which targeted the investment of 60% of fundsin cash, 30% in fixed interest securities with the balance of 10% invested inequities. However, following the acquisition of CWA, whose embedded value ismore exposed to equity markets than CA's, a review was undertaken of itsincoming surplus and outgoing dividend cash flows. In view of the potentialeffect on solvency of equity volatility, the Board have reviewed the allocationof shareholder funds and decided that it is inappropriate to maintain theequity content. Therefore a revised benchmark of 70% cash and 30% fixedinterest securities has been adopted.On policyholder investment funds, and in particular the CA Managed Fund, whichrepresents a significant proportion of these funds, the fund managers producedgood performance during the half year. The fund benefited from improving equitymarkets and grew at 6.13% during the half year and was ahead of the ABI LifeBalanced Managed Fund average of 5.83%. Apart from the impact on policyholders'policy values, this performance reduces the overall cost of mortgage endowmentmisselling redress payable and has led to an increase in the value in-force asthe expected future charges based on fund value have been increased.DevelopmentsIn the second half of the year Chesnara will continue to investigate furtherconsolidation opportunities, work with Liberata to ensure the timely andefficient migration to their systems, initiate the project to enable thetransfer of the CWA long-term business into CA and continue with thedevelopment of IFRS reporting. We will also commence the processes to enablereporting on the European Embedded Value (`EEV') methodology for the first halfof 2006.ConsolidationHaving completed its first acquisition, the Board believe that furthervalue-enhancing opportunities are possible in the small to medium sector of themarket and they will continue to investigate suitable targets.Part of the rationale for the acquisition of CWA was the potential foroperating and financial synergies, including efficiency in regulatory reportingand in the use of capital which is required to support regulatory capitalrequirements. The Board believe that it is important to establish a uniformoperating model for its acquired life businesses in run off and to that end hasauthorised the effective combination of the businesses by way of a transfer ofthe CWA long-term business funds into those of CA under FSMA 2000. We willbegin this process in the second half of 2005 with a target date of mid-2006,completion being dependent on the approval of the FSA and the High Court.IFRSThe next phase of the transition to IFRS will be undertaken during the secondhalf of 2005. This will focus on the additional analysis and disclosures whichwill be included in the annual financial statements for the year ending 31December 2005.European Embedded ValueWe note the significant industry-wide development, in accordance withprinciples introduced in May 2004, to account for and present the results andfinancial position of life businesses on the EEV basis. It is our intention toadopt the EEV basis, in lieu of the Achieved Profit basis, when reporting theinterim results for 2006. This will allow the changes to reporting to be madein conjunction with the effects of the expected transfer referred to above.The change to EEV reporting will impact our method of reporting in a number ofareas. Among the more significant are: i. reformulation of the Risk Discount Rate, where the risk margin will be more transparently and objectively established and ii. recognition of the future stream of shareholder expenses. We do not currently expect these changes, taken together with a number of otherlesser adjustments, to have a significant impact on our reported embeddedvalue.OutlookThe results in the first six months have been adversely affected by the need tomake further provision in respect of redress for endowment misselling. Whilstthe increase is based on recent experience it takes account of the lowermailing volumes over the next year and the increasing effect of time-barring.Prospects for the equity markets, which have recovered well in the firsthalf-year, look positive but, based on discussion with our Investment Managers,lower returns are expected in the short and medium term.The underlying emergence of surplus from realisation of the value of thein-force business should continue strongly, albeit at a lower level as thepolicy numbers decrease. Future surpluses will, however, be enhanced by thereasonably predictable future contribution from CWA.DividendAfter slightly exceeding our full year 2004 target dividend payment we havesignalled that we would aim to provide a reliable and progressive dividendpayment. Despite the negative influence of an additional endowment missellingprovision, the healthy emergence of surplus from the underlying product base,together with a strong solvency position, enables the Board to recommend aninterim dividend of 4.90p which represents an increase of 3.2% over the 2004interim payment.Graham KettleboroughChief Executive Officer5 October 2005Consolidated interim income statement for the six months ended30 June 2005 (unaudited) 6 months 6 months ended Year ended 31 December 2004 ended 30 30 June 2004 June 2005 Continuing Discontnd Total Continuing Discontnd Total operations operation operations operation ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 Insurance 54,900 64,331 - 64,331 122,835 - 122,835premiumrevenue Insurance (12,838) (15,479) -(15,479) (30,055) - (30,055)premiumceded to reinsurers ------- ------- ------- ------ ------- ------ ------ Net 42,062 48,852 - 48,852 92,780 - 92,780insurancepremium revenue Fee and commission income Insurance contracts 23,959 28,849 - 28,849 54,359 - 54,359 Investment contract 1,299 633 - 633 1,471 - 1,471 Investment income 61,529 12,214 9 12,223 57,000 9 57,009 ------- ------- ------- ------ ------- ------ ------- Total revenue (net 128,849 90,548 9 90,557 205,610 9 205,619reinsurance payable Other operating 512 1,083 2,373 3,456 1,659 2,373 4,032income ------- ------- ------- ------ ------- ------ ------- Net income 129,361 91,631 2,382 94,013 207,269 2,382 209,651 ------- ------- ------- ------ ------- ------ ------- Policyholder (108,662) (95,836) -(95,836) (195,474) - (195,474)claims and benefits incurred Reinsurers' 17,504 14,250 - 14,250 31,152 - 31,152share of claimsand benefits incurred ------- ------- ------- ------ ------- ----- ------- Net policyholder (91,158) (81,586) -(81,586) (164,322) - (164,322)claims and benefits incurred ------- ------- ------- ------ ------- ------- ------- Change in (23,451) (5,115) - (5,115) (17,200) - (17,200)investment contractliabilities Reinsurers' share 1,201 639 - 639 1,951 - 1,951of investment contract liabilities ------- ------- ------- ------ ------- ------ ------- Net change (22,250) (4,476) - (4,476) (15,249) - (15,249)in investment contract liabilities ------- ------- ------- ------ ------- ------ ------- Fees, commission (3,124) (7,023) - (7,023) (12,135) - (12,135)and other acquisition costs Administrative (7,741) (5,542) (2,268)(7,810) (12,180) (2,268) (14,448)expenses Other operating expenses Charge for (460) (230) - (230) (383) - (383)amortisation of intangible assets Other (330) (130) (5) (135) (324) (5) (329) ------- ------- ------- ------ ------- ------- ------- Total expenses (125,063) (98,987) (2,273)(101,260)(204,593) (2,273) (206,866) ------- ------- ------- ------ ------- ------- ------- Operating profit 4,298 (7,356) 109 (7,247) 2,676 109 2,785 Financing costs (115) (336) - (336) (336) - (336) Profit on sale of - - 1,948 1,948 - 1,948 1,948discontinued operation ------- ------- ------- ------ ------- ------- ------- Profit/(loss) before 4,183 (7,692) 2,057 (5,635) 2,341 2,057 4,397tax Income tax expense (871) 1,256 (4) 1,252 763 (4) 759 ------- -------- ------ ------ ------- ------- ------- Profit/(loss) for 3,312 (6,436) 2,053 (4,383) 3,103 2,053 5,156theperiod ======= ======= ====== ====== ======= ======= ======= Basic 3.81p (7.60)p 2.42p (5.18)p 3.68p 2.42p 6.10pearnings/(loss)per share (Note 4) Diluted earnings 3.81p (7.60)p 2.42p (5.18)p 3.67p 2.42p 6.09pper share (Note 4) ======= ======= ====== ====== ======= ======= ======= Dividend per share Interim 4.90p 4.75p 4.75p Final ======= ======= 7.10p ------- Total 11.85p =======The Group considers that it has no product or distribution based segmentation and,as it only has significant business activity within the UK, it has nogeographic segmentation. Accordingly, no segmented reporting is presented.Consolidated interim balance sheet at 30 June 2005 (unaudited) 30 June 31 December 2005 2004 2004 Note ‚£000 ‚£000 ‚£000 Assets Intangible assets Deferred acquisition 15,466 13,245 8,137costs Acquired value of in -force business Insurance contracts 21,081 1,971 1,818 Investment contracts 12,398 - - Property and equipment 299 492 403 Investment properties 24,305 3,491 3,092 Financial assets Equity securities and 866,193 387,791 421,132holdings in collective investment schemes at fair value through income Debt securities at fair 520,307 319,438 351,772value through income Loans and receivables 23,246 13,985 15,013including insurance receivables Derivative financial 1,991 - -instruments ------- ------- ------- Total financial assets 1,411,737 721,214 787,917 ------- ------- ------- Reinsurers' share of 175,353 153,993 158,762insurance contract prov isions Amounts deposited with 23,120 21,254 22,888reinsurers Income taxes 105 - 103 Cash and cash 227,200 55,305 39,257equivalents ------- ------- ------- Total assets 1,911,064 970,965 1,022,377 ------- ------- ------- Liabilities Insurance contract 983,132 582,425 601,805provisions Financial liabilities Investment contracts 732,280 276,607 306,587at fair value through income Borrowings 8 21,000 - - Derivative financial 1,570 372 199instruments ------- ------- ------- Total financial liabilities 754,850 276,979 306,786 ------- ------- ------- Provisions 642 728 926 Deferred tax liabilities 8,420 2,771 1,748 Reinsurance payables 2,904 2,331 3,333 Payables related to direct 26,272 16,745 14,351insurance and investment contracts Deferred income 21,379 8,381 8,038 Income taxes 2,845 499 1,198 Other payables 12,531 6,186 4,750 ------- ------- ------- Total liabilities 1,812,975 897,045 942,935 ------- ------- ------- Net assets 98,089 73,920 79,442 ======= ======= ======= Shareholders' equity Share capital 7 41,501 40,500 40,500 Share premium 20,458 - - Other reserves 50 50 50 Retained earnings 36,080 33,370 38,892 ------- ------- ------- Total shareholders' 98,089 73,920 79,442equity ======= ======= =======Consolidated interim statement of cash flows for the six months ended30 June 2005 (unaudited) 6 months Year ended ended 30 June 31 December 2005 2004 2004 Note ‚£000 ‚£000 ‚£000 Cash generated from 9 29,164 29,551 18,777operations Income tax paid (1,585) (171) (1,392) ------- ------- ------- Net cash from operating 27,579 29,380 17,385activities ======= ======= ======= Cash flows from investing activities Acquisition of subsidiary, 124,496 - -net of cash acquired Disposal of subsidiary, - 2,342 2,343net of cash disposed of Purchases of property (2) (107) (144)and equipment ------- ------- ------- Net cash from 124,494 2,235 2,199investing activities ======= ======= ======= Cash flows from financing activities Proceeds from the 23,533 50 50issue of share capital Redemption of - (50) (50)redeemable preference share Proceeds from 21,000 - -borrowings Payment of (2,539) - -transaction costs Dividends paid (6,124) (10) (4,027) ------- ------- ------- Net cash from 35,870 (10) (4,027)financing activities ======= ======= ======= Net increase in cash 187,943 31,605 15,557and cash equivalents Cash and cash equivalents 39,257 23,700 23,700at beginning of period ------- -------- ------- Cash and cash equivalents 227,200 55,305 39,257at end of period ======= ======= =======Consolidated interim statement of changes in equity for the six months ended 30 June 2005 (unaudited)Six months ended 30 June 2005 Share Share Capital Retained Total capital premium redemption earnings reserve ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 Equity shareholders' 40,500 - 50 38,892 79,442funds at 1 January 2005 Profit for the period - - - 3,312 3,312representing total recognised income and expenses Dividends - - - (6,124) (6,124) Issue of ordinary shares 84 1,449 - - 1,533pursuant to exercise of option Issue of ordinary shares 917 21,083 - - 22,000pursuant to placing and open offer Expenses incurred in - (2,074) - - (2,074)connection with issue of ordinary shares pursuant to placing and open offer ------- ------- ------- ------- ------- Equity shareholders' 41,501 20,458 50 36,080 98,089funds at 30 June 2005 ======= ======= ======= ======= =======Six months ended 30 June 2004 Share Capital Retained Total capital redemption earnings reserve ‚£000 ‚£000 ‚£000 ‚£000 Equity shareholders' 40,500 - 37,477 77,977funds at 1 January 2004 (Loss) for the period - - (4,383) (4,383)representing total recognised income and expenses Dividends - - (10) (10) Issue of redeemable 50 - - 50preference share on reorganisation Redemption of (50) - - (50)preference share Transfer from retained - 50 (50) -earnings to redeem preference share Grant of share option - - 336 336 ------- ------- ------- ------- Equity shareholders' 40,500 50 33,370 73,920funds at 30 June 2004 ======= ======= ======= =======Year ended 31 December 2004 Share Capital Retained Total capital redemption earnings reserve ‚£000 ‚£000 ‚£000 ‚£000 Equity shareholders' 40,500 - 37,477 77,977funds at 1 January 2004 Profit for the period - - 5,156 5,156representing total recognised income and expenses Dividends - - (4,027) (4,027) Issue of redeemable 50 - - 50preference share on reorganisation Redemption of preference (50) - - (50)share Transfer from retained - 50 (50) -earnings to redeem preference share Grant of share option - - 336 336 ------- ------- ------- ------- Equity shareholders' 40,500 50 38,892 79,442funds at December 2004 ======= ======= ======= =======Notes to the consolidated interim financial statements (unaudited)1 Basis of preparationThe consolidated interim financial statements of the Company for the six monthsended 30 June 2005 comprise the interim financial statements of the Company andits subsidiaries (together referred to as `the Group').EU law (IAS Regulation EC 1606 /2002) requires that the next annualconsolidated financial statements of the Company, for the year ending 31December 2005, be prepared in accordance with International Financial ReportingStandards ('IFRSs') adopted for use in the EU (`EU-adopted IFRSs').The interim financial statements have been prepared on the basis of therecognition and measurement requirements of IFRSs in issue that either areendorsed by the EU and effective (or available for early adoption) at 31December 2005 or are expected to be endorsed and effective (or available forearly adoption) at 31 December 2005, the Group's first annual reporting date atwhich it is required to use IFRSs. Based on these adopted and unadopted IFRSsthe Directors have made assumptions about the accounting policies expected tobe applied when the first IFRS annual financial statements are prepared for theyear ending 31 December 2005.In particular the Directors have assumed that the proposed amendments to IAS39Financial Instruments: Recognition and Measurement (The Fair Value Option)issued by the International Accounting Standards Board will be adopted by theEU in sufficient time that they will be available for use in the annual IFRSfinancial statements for the year ending 31 December 2005.In addition the adopted IFRSs that will be effective (or available for earlyadoption) in the annual financial statements for the year ending 31 December2005 are still subject to additional interpretations and therefore cannot bedetermined with certainty. Accordingly the accounting policies for that annualperiod will be determined finally only when the annual financial statements areprepared for the year ending 31 December 2005.The significant accounting policies applied in the preparation of these interimconsolidated financial statements are set out in Notes 2 and 3 following. Theaccounting policies have been applied consistently to all periods presented inthese consolidated interim financial statements and have also been applied inpreparing an opening IFRS balance sheet at 1 January 2004 for the purposes ofthe transition to IFRS as required by IFRS 1 First-time Adoption ofInternational Financial Reporting Standards.The comparative figures for the financial year ended 31 December 2004 are notthe company's statutory accounts for that financial year. Those accounts, whichwere prepared under UK GAAP, have been reported on by the company's auditorsand delivered to the registrar of companies. The report of the auditors wasunqualified and did not contain statements under section 237 (2) or (3) of theCompanies Act 1985.2 Life business demerger and acquisition by Chesnara plc - reverse acquisitionaccountingOn 24 May 2004, Chesnara plc acquired the whole of the issued ordinary sharecapital of Countrywide Assured Life Holdings Limited ('CALH') from Countrywideplc ('Countrywide'), which had, itself, acquired the whole of the issuedordinary share capital of CALH on 22 May 2004 from Countrywide Assured Groupplc (`CAG'). These arrangements were effected to secure the demerger from CAGof CALH, which, together with its subsidiary companies, comprised the LifeBusiness of CAG.On the acquisition of CALH, Chesnara plc issued, as fully paid, 2.5p ordinaryshares to the shareholders of Countrywide ('the Countrywide shareholders') asrecorded on the shareholders register on 21 May 2004, pro rata to their holdingin Countrywide, such that they received one ordinary share in Chesnara plc forevery two ordinary shares held in Countrywide. On 25 May 2004, the existingordinary shares of 2.5p in Chesnara plc were consolidated into ordinary sharesof 5p each on the basis of one new share for every two old shares, so that, ineffect, the Countrywide shareholders received one ordinary 5p share in Chesnaraplc for every four ordinary shares held in Countrywide.In substance the transactions described above represent a continuation of thebusiness of CALH. Chesnara plc, a company with net assets of ‚£2 prior to itsacquisition of CALH, was used as a vehicle effectively to secure a listing forthe business of CALH on the London Stock Exchange, and, prior to itsacquisition of CALH, such net assets did not comprise an integrated set ofactivities and assets which were capable of generating revenue or of providinga return to investors. Chesnara plc, at the date of its acquisition of CALH,did not, therefore, comprise a business as defined in IFRS 3 BusinessCombinations. However the consolidated financial statements of Chesnara plchave been prepared based on the reverse acquisition method as set out in IFRS3, as the Directors consider that this is the fairest way of presenting thefinancial position, results of operations and cash flows of the combinedentities. Accordingly CALH is deemed to be the effective acquirer of Chesnaraplc and the consolidated financial statements have been prepared as acontinuation of the consolidated financial statements of CALH and itssubsidiaries. The consolidated income statement and cash flows for the sixmonths ended 30 June 2004 and for the year ended 31 December 2004 represent theconsolidated financial statements of CALH and the results of Chesnara plc areincluded in the consolidated financial statements from the demerger date as setout above.The fair value of the identifiable net assets and of the equity instruments ofChesnara plc before its deemed acquisition by CALH are negligible and thedeemed consideration, based on the fair value of the equity instruments deemedto have been issued by CALH to the shareholders of Chesnara plc, is alsonegligible and is taken as ‚£nil. Accordingly, the application of the purchasemethod of accounting for the deemed acquisition of Chesnara plc by CALH doesnot give rise to any goodwill or negative goodwill in the consolidatedfinancial statements.3 Accounting policies a. Basis of consolidation SubsidiariesThe consolidated financial statements incorporate the assets, liabilities andthe results of the Company and of its subsidiary undertakings. Subsidiaryundertakings are those entities in which the Group directly or indirectly hasthe power to govern the financial and operating policies in order to gainbenefits from its activities. The financial statements of subsidiaries areincluded in the consolidated financial statements from the date that controlcommences until the date that control ceases.(b) Business combinationsThe Group uses the purchase method of accounting to account for the acquisitionof subsidiaries. The cost of an acquisition is measured as the fair value ofthe assets given, equity instruments issued and liabilities incurred or assumedat the date of exchange, plus costs directly attributable to the acquisition.Identifiable assets acquired and liabilities and contingent liabilities assumedin a business combination are measured initially at their fair values at theacquisition date.(c) Product classificationThe Group's products are classified as either insurance or investment contractsfor accounting purposes. Insurance contracts are contracts, which transfersignificant insurance risk. Contracts under which the transfer of insurancerisk to the company from the policyholder is not significant are classified asinvestment contracts. Where contracts contain both insurance and investmentcomponents and the investment components can be measured reliably, thecontracts are unbundled and the components are separately accounted for asinsurance contracts and investment contracts respectively.(d) Insurance contracts i. Premiums Premiums are accounted for on a receivable basis, or in the case of unit-linkedinsurance contracts when the liability is recognised, and exclude any taxes orduties based on premiums. Outward reinsurance premiums are accounted for on apayable basis.(ii) Claims and benefitsClaims are accounted for in the accounting period in which they are due ornotified. Surrenders are accounted for in the accounting period in which theyare paid. Claims include policyholder bonuses allocated in anticipation of abonus declaration. Reinsurance recoveries are accounted for in the same periodas the related claim.(iii) Acquisition costsAcquisition costs comprise all direct and indirect costs arising from theconclusion of insurance contracts. An explicit deferred acquisition cost assetis established in the balance sheet to the extent that acquisition costs exceedinitial fees deducted. Deferred acquisition costs are amortised at a rate basedon the pattern of anticipated margins in respect of the related policies.Deferral of costs is limited to the extent that there are available futuremargins.(iv) Measurement of insurance contract provisionsUnder current IFRS requirements, insurance contract provisions are measuredusing accounting policies having regard to the principles laid down in CouncilDirective 2002/83/ECUnit-linked provisions are measured by reference to the value of the underlyingnet asset value of the Group's unitised investment funds, determined on a bidvalue, at the balance sheet date. Deferred tax on unrealised capital gains isalso reflected in the measurement of unit-linked provisions.Insurance contract provisions are determined following an annual actuarialinvestigation of the long-term fund in accordance with regulatory requirements.The provisions are calculated on the basis of current information and using theappropriate valuation method. The Group's accounting policies for insurancecontracts meet the minimum specified requirements for liability adequacytesting under IFRS 4, as they consider current estimates of all contractualcash flows.Long-term business provisions can never be definitive as to their timing northe amount of claims and are therefore subject to subsequent reassessment on aregular basis.Insurance contract provisions are tested for adequacy by discounting currentestimates of all contractual cash flows and comparing this amount to thecarrying value of the provision and any related assets. Where a shortfall isidentified, an additional provision is made and the Group recognises thedeficiency in income for the year.(e) Investment contracts i. Amounts collected Amounts collected on investment contracts, which primarily involve the transferof financial risk such as long-term savings contracts, are accounted for usingdeposit accounting, under which the amounts collected, less any initial feesdeducted, are credited directly to the balance sheet as an adjustment to theliability to the investor.ii. Amounts deposited with reinsurers Amounts deposited with reinsurers under finance reinsurance arrangementsrelating to investment contracts, which primarily involve the transfer offinancial risk, are entered directly to the balance sheet as an amount due fromthe reinsurer. These assets are measured at fair value through income.iii. Benefits For investment contracts, benefits paid are not included in the incomestatement but are instead deducted from investment contract liabilities in theaccounting period in which they are paid.iv. Acquisition costs Acquisition costs relating to investment contracts comprise directlyattributable incremental acquisition costs, which vary with and are related tosecuring new contracts, and are recognised as an asset to the extent that theyrepresent the contractual right to benefit from the provision of investmentmanagement services. The asset is presented as a deferred acquisition costasset and is amortised over the expected term of the contract, as the feesrelating to the provision of the services are recognised. All other costs arerecognised as expenses when incurred. v. Liabilities All investment contract liabilities are designated on initial recognition asheld at fair value through income. The financial liability in respect ofunit-linked contracts is measured by reference to the value of the underlyingnet asset value of the Group's unitised investment funds, determined on a bidvalue, at the balance sheet date. Deferred tax on unrealised capital gains isalso reflected in the measurement of unit-linked provisions.The fair value of other investment contracts is measured by discounting currentestimates of all contractual cash flows that are expected to arise undercontracts.(f) Contracts with discretionary participation featuresA discretionary participation feature is a contractual right held by apolicyholder to receive, as a supplement to guaranteed minimum payments,additional payments that are likely to be a significant portion of the totalcontractual payments. All such contracts are wholly reinsured with GuardianAssurance plc, a subsidiary of Aegon NV, and the amount or timing of theadditional payments is contractually at the discretion of the reinsurer and arecontractually based on:(i) the performance of a specified pool of contracts or a specified type ofcontract,(ii) realised and/or unrealised investment returns on a specified pool ofassets held by the reinsurer, or(iii) the profit or loss of the reinsurer.All contracts with discretionary participation features, whether classified asinvestment or insurance contracts, are accounted for as insurance contracts.(g)ReinsuranceThe cost of reinsurance related to long-term insurance contracts is accountedfor over the life of the underlying insurance policies using assumptionsconsistent with those used to account for the underlying policies. Amountsrecoverable under reinsurance contracts are assessed for impairment at eachbalance sheet date.Reinsurers' share of insurance contracts provisions include balances due fromreinsurance companies for ceded insurance liabilities.Amounts recoverable from reinsurers are estimated in a manner consistent withthe outstanding claims provision or settled claims associated with thereinsured policy. Such assets are deemed impaired if there is objectiveevidence, as a result of an event that occurred after its initial recognitionthat the Group may not recover all amounts due and that the event has areliably measurable impact on the amounts that the Group will receive from thereinsurer.(h) Fee and commission incomeFees charged for services related to the management of investment contracts arerecognised as revenue as the services are provided. Initial fees which exceedthe level of recurring fees and relate to the future provision of services, aredeferred and amortised over the anticipated period in which services will beprovided.On both insurance and investment contracts, annual management charges andcontract administration charges are recognised on an accruals basis. Surrendercharges are recognised when the surrender benefits are paid.Commissions received or receivable which do not require the Group to renderfurther services are recognised as revenue by the Group on the effectivecommencement or renewal dates of the related contract. However, when it isprobable that the Group will be required to render further services during thelife of the contract, the commission, or part thereof, is deferred andrecognised as revenue over the period in which services are rendered. i. Investment income Investment income comprises income from financial assets and investmentproperties, including dividends, interest and rent and gains and losses onfinancial assets (realised and unrealised).Dividends are accrued on an ex-dividend basis. Interest and rent are accountedfor on an accruals basis.(j) Expenses i. Operating lease payments Leases where a significant proportion of the risks and rewards of ownership isretained by the lessor are classified as operating leases. Payments made underoperating leases are recognised in the income statement on a straight-linebasis over the term of the lease. Lease incentives received are recognised inthe income statement as an integral part of the total lease expense.ii. Financing costs Financing costs comprise interest payable on borrowings calculated using theeffective interest rate method.(k) Income taxesIncome tax on the profit or loss for the year comprises current and deferredtax and is recognised in the income statement. i. Current tax Current tax is the expected tax payable on the taxable income for the year,using tax rates enacted or substantively enacted at the balance sheet date, andany adjustment to tax payable in respect of previous years.ii. Deferred tax Deferred tax is provided using the balance sheet liability method, providingfor temporary differences between the carrying amounts of assets andliabilities for financial reporting purposes and the amounts used for taxationpurposes. The amount of deferred tax provided is based on the expected mannerof realisation or settlement of the carrying amount of assets and liabilities,using tax rates enacted or substantively enacted at the balance sheet date.A deferred tax asset is recognised only to the extent that it is probable thatfuture taxable profits will be available against which the asset can beutilised. Deferred tax assets are reduced to the extent that it is no longerprobable that the related tax benefit will be realised.(l) Acquired value of in-force businessAcquired in-force insurance and investment contracts are measured at fair valueat the time of acquisition.The difference between the fair value of insurance contracts and the liabilitymeasured in accordance with the accounting polices for the contracts isrecorded as acquired present value of in-force business ('Acquired PVIF').Acquired PVIF is carried gross of tax and is amortised against income on a timeprofile which, it is intended, will broadly match the profile of the underlyingemergence of surplus. It is tested for impairment annually.Acquired PVIF in respect of in-force investment contracts is stated at costless accumulated amortisation and impairment losses. The initial cost is deemedto be the fair value of the contractual customer relationships acquired. Theacquired present value of the in-force investment contracts is carried gross oftax and is amortised against income on a time profile which, it is intended,will broadly match the profile of the underlying emergence of profit from thecontracts. It is tested for impairment annually.(m) Property and equipmentItems of property and equipment are stated at cost less accumulateddepreciation and impairment losses (see accounting policy (q)).Depreciation is charged to the income statement on a straight-line basis overthe estimated useful lives of the property and equipment as follows: * Computers: 5 years * Fixtures and fittings: 5 years * Office equipment: 5 years * Motor vehicles: 4 years (n) Investment propertyInvestment properties are properties which are held either to earn rentalincome or for capital appreciation or for both. Investment properties arestated at fair value. An external, independent valuation company, having anappropriate recognised professional qualification and recent experience in thelocation and category of property being valued, values the portfolio everytwelve months.The fair values are based on market values, being the estimated amount forwhich a property could be exchanged on the date of valuation between a willingbuyer and a willing seller in an arm's length transaction after propermarketing wherein the parties had each acted knowledgeably, prudently andwithout compulsion.Any gain or loss arising from a change in fair value is recognised in theincome statement. Rental income from investment property is accounted for asdescribed in accounting policy (i).(o) Financial assetsDebt and equity securities and holdings in collective investment schemes areall classified as fair value through income, with all gains and lossesrecognised through the income statement. The fair values of quoted financialassets are based on current bid prices.The Group currently has no unquoted financial assets.Loans and other receivables are stated at cost less impairment losses. p. Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call withbanks and other short-term highly liquid investments. q. Impairment The carrying amounts of the Group's assets which are not carried at fair valueare reviewed at each balance sheet date to determine whether there is anyindication of impairment. If any such indication exists, the assets'recoverable amount is estimated. An impairment loss is recognised whenever thecarrying amount of an asset exceeds its recoverable amount. Impairment lossesare recognised in the income statement.Impairment losses are reversed through the income statement if there is achange in the estimates used to determine the recoverable amount. Such lossesare reversed only to the extent that the assets' carrying amount does notexceed the carrying amount that would have been determined, net of depreciationor amortisation where applicable, if no impairment loss had been recognised. r. Provisions Provisions are recognised when the Group has a present, legal or constructiveobligation as a result of past events such that it is probable that an outflowof economic benefits will be required to settle the obligation and a reliableestimate of the amount of the obligation can be made. The Group recognisesprovisions for onerous contracts when the expected benefits to be derived froma contract are less than the unavoidable costs of meeting the obligations underthe contract. s. Borrowings Borrowings are recognised initially at fair value, net of transaction costs,and subsequently stated at amortised cost. The difference between the proceedsand the redemption value is recognised in the income statement over theborrowing period on an effective interest rate basis. t. Employee benefits i. Pension obligations Group companies operate defined contribution pension schemes, which are fundedthrough payments to insurance companies, to which Group companies pay fixedcontributions. There are no legal or constructive obligations on Groupcompanies to pay further contributions if the fund does not hold sufficientassets to pay employee benefits relating to service in current and priorperiods. Accordingly, Group companies have no further payment obligations oncethe contributions have been paid.Contributions to defined contribution pension schemes are recognised asemployee benefit expense when they are due.ii. Bonus plans The Group recognises a liability and an expense for bonuses based on a formulathat takes into consideration the profit attributable to the Company'sshareholders after certain adjustments. The Group recognises a liability wherecontractually obliged. u. Share capital Shares are classified as equity when there is no obligation to transfer cash orother assets. Incremental costs directly attributable to the issue of equityinstruments are shown in equity as a deduction from the proceeds, net of tax.Incremental costs directly attributable to the issue of equity instruments, asconsideration for the acquisition of a business, are included in the cost ofacquisition. v. Dividends Dividend distributions to the Company's shareholders are recognised asliabilities in the period in which the dividends are paid, and, for the finaldividend, when approved by the Company's shareholders at the annual generalmeeting.4 Earnings/(loss) per shareEarnings/(loss) per share is based on the following: 6 months ended Year ended 30 June 31 December 2005 2004 2004 Profit/(loss) for the period 3,312 (4,383) 5,156(‚£000) ------- ------- ------- Weighted average number 86,842,651 84,564,168 84,564,168of ordinary shares ------- ------- ------- Basic earnings/(loss) per share 3.81p (5.18)p 6.10p ------- ------- ------- Diluted earnings/(loss) per 3.81p (5.18)p 6.09pshare ======= ======= =======The basic and diluted loss per share in respect of the six months ended 30 June2004 and the year ended 31 December 2004 is stated after taking account ofprofit after tax arising on the sale of a discontinued operation.The weighted average number of shares in respect of the six months ended 30June 2004 and the year ended 31 December 2004, is the number of ordinaryshares, entitled to dividend, in issue at each of those respective dates.Except for the cancellation of 2 ordinary shares on 22 June 2004, the effect ofwhich is not considered to be material, this corresponds to the number ofordinary shares issued by Chesnara plc on 25 May 2004 in accordance with thescheme of demerger described in Note 2 above. This number of shares has beenapplied uniformly to the results after tax for both the six months ended 30June 2004 and the year ended 31 December 2004, as this is considered to be themost meaningful way to present earnings and loss per share for these periods,having regard to the basis on which the results have been presented as set outin Note 2 above.The weighted average number of shares in respect of the six months ended 30June 2005 is based on 84,564,168 shares in issue at the beginning of the periodand on the issues of shares during the period as described in Note 7.The diluted weighted average number of shares is 86,914,457, being theequivalent number of shares that would be issued, for no consideration, had theexercise of the share option described in Note 7 been exercised prior to itsactual exercise date of 10 February 2005. There were no further share optionsoutstanding during the six months ended 30 June 2005.5 DividendA final dividend in respect of the year ended 31 December 2004 of ‚£6.1m paid on29 April 2005 was based on 86,255,452 shares in issue at a rate of 7.1p pershare.The interim dividend in respect of the six months ended 30 June 2005 of ‚£5.1mis based on 104,588,785 shares in issue at a rate of 4.9p per share and will bepaid on 14 November 2005 to shareholders registered at close of business on 14October 2005, the dividend record date. The ex-dividend date is 12 October2005.6 Business combinations On 2 June 2005, Chesnara plc acquired the whole of the issued ordinary sharecapital of CWA Life Holdings plc (`CWALH'), formerly Irish Life (UK) Holdingsplc, from Irish Life and Permanent plc, of which City of Westminster AssuranceCompany Limited (`CWA') was a wholly-owned subsidiary. CWA is the principaloperating subsidiary of CWALH and is a UK based business concentrating on theoperation of a life assurance book which is substantially closed to newbusiness. The acquired business contributed revenues of ‚£23,074,000 and netprofit of ‚£410,000 to the Chesnara plc Group for the period from 2 June 2005 to30 June 2005. If the acquisition had occurred on 1 January 2005, Chesnara plcGroup's revenue would have been ‚£175,506,000 and net profit would have been ‚£5,085,000 for the six months ended 30 June 2005 (this information isunaudited).Details of net assets acquired and goodwill are as follows:Purchase consideration: ‚£000 Cash paid 47,500 Direct costs relating to the acquisition 278 Total purchase consideration 47,778 Fair value of net assets acquired 47,778 Goodwill -No goodwill arises on the acquisition of CWALH. This is because the principaloperating subsidiary of CWALH, CWA, is closed to new business and because theexcess of the total purchase consideration paid over the fair value of theidentifiable tangible net assets of the CWALH Group at the acquisition date hasbeen established as the fair value of the intangible assets at the acquisitiondate, being the purchased value attributed to acquired in-force investment andinsurance contracts.The assets and liabilities arising from the acquisition are as follows: Fair Acquiree's value carrying amount ‚£000 ‚£000 Intangible assets Deferred acquisition costs 9,858 9,858 Acquired value of in-force business Insurance contracts 19,619 - Investment contracts 12,502 - Investment properties 20,986 20,986 Financial assets Equity securities at fair value 419,948 419,948through income Debt securities at fair value 160,605 160,605through income Loans and receivables 16,101 16,101including insurance receivables Derivative financial instruments 678 678 Deferred tax assets - 3,024 Reinsurers' share of 8,241 8,241insurance contract provisions Cash and cash equivalents 172,275 172,275 Insurance contract provisions (344,138) (344,138) Financial liabilities Investment contracts at fair (409,865) (409,865)value through income Derivative financial instruments (1,614) (1,614) Deferred tax liabilities (7,136) - Payables related to direct insurance (10,027) (10,027)and investment contracts Deferred income (13,859) (13,859) Income taxes (1,206) (1,206) Other payables (5,190) (5,190) ------- ------- Net assets 47,778 25,817 ======= =======7 Share capitalGroup 30 June 31 December 2005 2004 2004 Number of Share Number of Share Number of Share shares capital shares capital shares capital ‚£000 ‚£000 ‚£000 Share 104,588,785 41,501 84,564,168 40,500 84,564,168 40,500capital ====== ======= ======= ======= ======= =======Under the reverse acquisition basis of accounting referred to in Note 2, at thedate of acquisition of Chesnara plc (the legal parent) the amount of issuedshare capital in the consolidated balance sheet represents the amount of issuedshare capital of Countrywide Assured Life Holdings Limited (the legalsubsidiary) immediately before the acquisition and the deemed cost ofacquisition, which as explained in Note 2 is taken as ‚£nil. The number andvalue of shares representing the equity structure, reflects the equitystructure of Chesnara plc as set out below.CompanyThe share capital of Chesnara plc comprises:Authorised 30 June 31 December 2005 2004 2004 ‚£ ‚£ ‚£ Ordinary shares of 5p each 10,050,000 10,050,000 10,050,000 ======= ======= ======== Issued Ordinary shares of 5p each 5,229,439 4,228,208 4,228,208 ======= ======= =======The following sets out changes in the authorised and issued share capital ofChesnara plc during the six months ended 30 June 2005.Ordinary shares of 5p each Authorised Issued Number ‚£ Number ‚£ Balance at 1 January 201,000,000 10,050,000 84,564,168 4,228,2082005 Issue and allotment on - - 1,691,284 84,56410 February 2005 pursuant to exercise of share option Issue and allocation - - 18,333,333 916,666on 2 June 2005 pursuant to placing and open offer ------- ------- ------- ------- Balance at 30 June 201,000,000 10,050,000 104,588,785 5,229,4392005 ======= ======= ======= =======Pursuant to an agreement dated 18 March 2004 between Chesnara plc and NumisSecurities Limited (`Numis'), Numis received, on the admission of Chesnara plcto the Official List of the UK Listing Authority, an option to subscribe forChesnara plc shares equivalent in number to 2% of the issued share capital ofChesnara plc at the date of admission.On 10 February 2005, pursuant to a notice of exercise of such option by Numis,the Board approved the issue and allotment of 1,691,284 new ordinary shares of5p each to rank pari passu with the existing ordinary shares of 5p each. Theconsideration received from Numis in respect of the allotment of shares was ‚£1,533,318, of which ‚£84,564 was credited to the called up share capital accountand ‚£1,448,754 was credited to share premium account. On 16 February 2005 thenewly issued shares were admitted to trading on the London Stock Exchange.On 2 June 2005, pursuant to a placing and open offer, the Board approved theissue and allotment of 18,333,333 new ordinary shares of 5p each to rank paripassu with the existing ordinary shares of 5p each. The arrangements, whichwere underwritten by Numis Securities Limited, involved the placing of9,707,788 ordinary shares at a subscription price of 120p per share and an openoffer of 8,625,545 ordinary shares on the basis of 1 new share for every 10existing ordinary shares, also at a subscription price of 120p share. Theproceeds from the consequential subscription for new ordinary shares were ‚£22,000,000, of which ‚£916,667 was credited to the called up share capitalaccount and of which ‚£21,083,333 was credited to the share premium account.Expenses of ‚£2,074,000 which were incurred in connection with thesearrangements were charged to the share premium account. The gross proceeds of ‚£22,000,000 were used to part finance the acquisition of CWA Life Holdings plc,as referred to the Note 6.8 Borrowings 30 June 31 December 2005 2004 2004 ‚£000 ‚£000 ‚£000 Bank loan 21,000 - - ======= ======= =======The bank loan which was drawn down on 2 June 2005 under a facility madeavailable on 4 May 2005 is unsecured and is repayable in five equal annualamounts on the anniversary of the draw down date. Accordingly the currentportion as at 30 June 2005, being that payable within one year is ‚£4,200,000and the non-current portion is ‚£16,800,000. The outstanding principal on theloan bears interest at a rate based on the London Inter-bank Offer Rate and ispayable in arrears over a period which varies between one and six months at theoption of the borrower.9 Cash generated from operations 6 months ended Year ended 30 June 31 December 2005 2004 2004 ‚£000 ‚£000 ‚£000 Profit for the year 3,312 (4,383) 5,156 Adjustments for: Depreciation 105 179 302 Amortisation of deferred 2,529 6,127 11,235acquisition costs Amortisation of acquired 460 230 383in-force value Tax expense/(recovery) 871 (1,252) (759) Change in fair value of (227) (488) (89)investment properties Fair value (gains)/losses (27,309) 1,098 (31,086)on financial assets Loss on sale of property 1 - 4and equipment Profit on sale of subsidiary - (1,948) (1,948) Interest expense 115 - - Equity settled share based - 336 336payment expense Changes in operating assets and liabilities (excluding the effect of acquisitions) Decrease in financial assets 1,320 40,545 6,326 Increase in reinsurers' share (8,350) (331) (5,100)of insurance contract provisions Increase in amounts deposited (232) (1,104) (2,738)with reinsurers Increase in insurance contract 26,176 2,015 21,395provisions Increase/(decrease) in investment 15,828 (9,369) 20,611contract liabilities Increase/(decrease) in provisions 2,318 (738) (540) Increase/(decrease) in reinsurance (429) 1,246 2,248payables Increase/(decrease) in payables 11,921 1,651 (743)related to direct insurance and investment contracts Increase/(decrease) in other 755 (4,263) (6,216)payables -------- -------- ------- Cash generated from operations 29,164 29,551 18,778 ======= ======== ======= In the cash flow statement proceeds from the sale of property and equipment comprise: Net book amount (1) - (4) Loss on sale (1) - (4) ------- ------- ------- Proceeds from sale - - - ------- ------- ------- 10 Statutory accountsThe financial information presented in these consolidated interim financialstatements is unaudited and does not constitute statutory accounts. Thecomparative figures for the financial year ended 31 December 2004 are not thecompany's statutory accounts for that period. Those accounts, which wereprepared under UK GAAP, were reported on by the company's auditors and weredelivered to the Registrar of Companies, the report of auditors containedtherein being unqualified and not containing a statement under section 237 (2)or (3) of the Companies Act 1985.11 Approval of interim reportThis interim report was approved by the Board of Directors on 4 October 2005. Acopy of the report is being sent to all shareholders on 12 October 2005 andwill be available to the public at the company's registered office, HarbourHouse, Portway, Preston PR2 2PR, UK and at www.chesnara.co.uk.Supplementary information on the Achieved Profit basis* Life assurance profit analysis on the Achieved Profit basis a. Basis of presentation Supplementary information is presented in these supplementary notes whichpresents summary data relating to the results and financial position of theGroup on the Achieved Profit basis, the objective of which is to providealternative information to that presented in accordance with InternationalFinancial Reporting Standards (IFRSs). The information includes the result ofthe Group's Life Assurance long-term business on a basis determined inaccordance with the ABI Guidance "Supplementary reporting for long-termassurance business" (the "Achieved Profit method") issued in December 2001.References to `Notes' in this supplementary information are to the notes to theinterim financial statements prepared in accordance with IFRS.The unaudited interim supplementary information prepared on the Achieved Profitbasis and unaudited comparative figures for the year ended 31 December 2004 arethe results and financial position of the Chesnara plc Group as deemedappropriate under the reverse acquisition method of accounting as described inNote 2. In accordance with that method, the consolidated results and financialposition of Chesnara plc are based on the consolidated results and financialposition of Countrywide Assured Life Holdings Limited.Dividends declared after the balance sheet date are not recognised at thebalance sheet date, because they do not represent a present obligation. Thistreatment, which accords with IFRS, represents a change from previousaccounting treatment on the Achieved Profit basis and amounts previouslyreported as net assets and embedded value as at 30 June 2004 and 31 December2004 are, accordingly, restated. Except for these adjustments, there are noother adjustments required, for reporting on the Achieved Profit basis, as aresult of the Group's transition to IFRS as the basis of preparation of itsprimary financial statements.As described in Note 6 the Group acquired CWA Life Holdings plc on the 2 June2005, the principal operating subsidiary of which is City of WestminsterAssurance Company Limited (`CWA'), which is engaged in long-term assurancebusiness. The achieved profit result set out below includes the achieved profitarising within CWA from the date of acquisition to 30 June 2005. The excess ofthe embedded value of CWA (on the Achieved Profit basis) over the totalpurchase consideration, has been treated as an exceptional credit to theachieved profit result of the Group for the six months ended 30 June 2005 asset out below.The unaudited comparative figures for the six months ended 30 June 2004 havebeen presented to provide consistent treatment and disclosure between periods.6 Achieved profit result 6 months ended Year ended 30 June 31 December 2005 2004 2004 ‚£000 ‚£000 ‚£000 New business contribution 170 331 664 Existing business contribution Expected return 4,423 5,364 10,708 Experience variances Persistency 2,576 1,759 2,854 Complaints and pensions (4,846) (16,796) (17,556)review redress Mortality / morbidity (781) (871) (1,030) Other 1,036 2,486 3,541 Operating assumption charges Persistency - (6,005) (9,105) Expenses and expense (209) (190) 3,110deductions Other - - (220) Expected return on 542 430 1,152unencumbered capital ------- ------- ------- Operating profit before tax 2,911 (13,492) (5,882)and exceptional items Exceptional items Profit on acquisition and sale 18,446 1,948 1,948of subsidiary companies ------- ------- ------- Operating profit before tax 21,357 (11,544) (3,934) Investment variances 2,294 295 1,774 Economic assumption changes Investment return (4,711) (445) (2,146) Risk discount rate 3,229 - 1,320 -------- ------- ------- Achieved profit before taxation 22,169 (11,694) (2,986) Taxation (5,754) 3,674 3,455 ------- ------- ------- Achieved profit after taxation 16,415 (8,020) 469 ======= ======= =======The exceptional profit arising during the six months ended 30 June 2005 relatesto the acquisition of CWA Life Holdings plc and represents the excess of theembedded value of that company over the total purchase price. The exceptionalprofit arising during the six months ended 30 June 2004 and the year ended 31December 2004 relates to the sale of Key Retirement Solutions Limited, beingthe excess of the net proceeds received over its carrying value. c. Methodology The Achieved Profit methodology recognises as an element of "Shareholder Funds"the discounted value of the expected future statutory surpluses arising fromthe insurance and investment contracts in force at the period end. These futuresurpluses are calculated by projecting future cash flows using realisticassumptions for each component of cash flow. Demographic actuarial assumptionsadopted for the determination of discounted value are generally reviewedannually, although more frequent reviews are carried out if there is evidenceof material changes. Future economic and investment assumptions are based onperiod end conditions. d. Key assumptions The table below shows the key economic and investment assumptions used in thecalculation of the value of the in-force business, being that subsisting withinCountrywide Assured plc (`CA') and City of Westminster Assurance CompanyLimited (`CWA'). 6 months ended Year ended 30 June 31 December 2005 2004 2004 % % % Risk discount rate CA 8.30 9.25 9.00 CWA 7.70 n/a n/a Future expenses inflation CA 3.30 3.85 3.10 CWA 2.60 n/a n/a Future expense charge inflation rate CA 3.30 3.85 3.10 CWA 2.60 n/a n/a Future RPI 2.60 2.85 2.50 Unit-linked funds Income (pre-tax) 3.23 3.43 3.30 Capital Growth (pre-tax) 3.09 3.79 3.52 ------- ------- ------- Unit-linked funds (total) 6.32 7.22 6.82 ------- ------- ------- Investment returns (pre-tax) Government fixed interest 4.20 5.10 4.70 Other fixed interest 4.40 5.50 5.20 Equity 6.80 7.70 7.30 Property 6.80 7.70 7.30The risk discount rate is used to discount projected future cash flows from thebusiness in-force to present value and is set within the context of assumptionsfor future investment returns.The principal economic assumptions have been determined by reference tounderlying medium term government fixed interest yields at the respectivevaluation dates. Other fixed interest yield assumptions reflect the yield curvefor different asset outstanding terms and credit and liquidity riskadjustments. The equity return assumes, over the longer term, a risk premiumover 5 - 15 year government fixed interest yields.Future persistency experience assumptions are determined, in the main, byreference to the life businesses' own emerging experience of individualproducts, but with some allowance recognised for external industry experienceand trends. Explicit allowance for anticipated short-term adverse persistencyrisk has been reflected by the inclusion, for CA business only, within the coreannualised product line lapse assumption rates, of temporary decrement rates,being 8% pa for Endowment business and 3.5% pa for Protection business, withthe additional decrement rates assumed operable from 31 December 2004 fortemporary periods of twelve months (Endowment business) and six months(Protection business).Mortality and morbidity decrement assumptions are determined by reference toemerging underlying experience, published industry data and reassurer rates.Due regard is paid in setting the experience assumptions to policyholderreasonable expectations as mortality and morbidity costs are met by chargesagainst unit accounts.The renewal expense assumptions reflect the charges under the InsuranceAdministration Services Agreement with Liberata Financial Services Limited forCA and the charges under the Insurance and Pensions Services Agreement with CSCServices Limited for CWA, together with the residual governance expensesattributable to the life businesses.During 2003, the CA life business substantially closed to new business and theallowance for future expenses in the calculation of the embedded value at 30June 2004, 31 December 2004 and 30 June 2005 has been based on management'sview of total company expenses chargeable to the long-term business. Inaddition, the Board has decided, on the grounds of prudence, that, in view ofthe uncertain outlook for expenses over the longer term, cash flows arising inCA beyond a 13.5-year time horizon should be excluded from the value ofpolicies in-force.CWA has been substantially closed to new business for a longer period of timethan CA and the predictability of its future expenses is accordingly morecertain.Allowance has been made, in both the CA and CWA renewal expense assumptions,for additional VAT costs which may arise on third-party insuranceadministration arrangements. This follows the issue by HM Revenue and Customsof a consultation document in July 2005 entitled "Changes to the VAT Exemptionfor Insurance-related Services".The provisions established to cover redress on endowment complaints, in boththe CA and CWA businesses is based on recent experience of complaints cases,assuming the life businesses continue to deal with complaints in accordancewith the regulator's procedural requirements, including the application oftime-barring.The portion of a reassurer default reserve held within CA that relates tounit-linked business is assumed to be released within six months. However, theportion of this reserve that relates to with-profits business is assumed to bereleased over the expected lifetime of that business.Expenses inflation and indexation of capital gains assumptions are set withinthe context of rates of price inflation implicit within the yields of 5 - 15year index-linked gilt edged securities.Future fund management expenses are based on current fees charged to the lifebusinesses.Tax has been provided at the rates applicable to investment income and expensesrelief provided under relevant life company tax legislation, which is assumedto continue unaltered. A projection of future tax charges, based on anassumption of continuation of current tax rules, is made and is discounted atthe risk discount rate to produce a deferred tax charge at the period end. Thenet result is grossed up by the deferred tax charge movement and current tax toderive the gross results.2 Value of policies in force and embedded value 6 months ended Year ended 30 June 31 December 2005 2004 2004 ‚£000 ‚£000 ‚£000 (restated) (restated) Value of policies in-force At beginning of period, 84,594 98,521 98,521net of tax Purchased in-force value 44,368 - - arising on the acquisition of CWA Life Holdings plc, net of tax Gross decrease in the value (7,797) (14,859) (19,452)of policies in force Taxation 2,087 4,239 5,525 ------- ------- ------- At end of period, net of tax 123,252 87,901 84,594 Other net assets at end 57,685 56,814 64,593of period ------- ------- ------- Embedded value at 180,937 144,715 149,187end of period ======= ======= =======The amounts presented as net assets at end of period and as embedded value atend of period, as at 30 June 2004 and 31 December 2004, have been restated fromamounts previously reported for the effect of the addback, at those respectiveperiod ends, of dividends proposed but not yet paid at the period end. Theseadjustments were made to align the treatment of dividends proposed but not paidat the period end under Achieved Profit reporting with IFRS, and for thepurposes of reporting Embedded Value.The following summarises the effect of the adjustments which have been made. 30 June 2004 31 December 2004 As As As As previously restated previously restated reported reported ‚£000 ‚£000 ‚£000 ‚£000 Net assets 52,797 56,814 58,469 64,593 ======= ======= ======= ======= Embedded value 140,698 144,715 143,063 149,187 ======= ======= ======= =======3 Reconciliation of shareholder equity on the IFRS basis to embedded value 30 June 31 December 2005 2004 2004 ‚£000 ‚£000 ‚£000 Shareholders' equity 98,089 73,920 79,442on the IFRS basis Adjustments: Deferred acquisition costs Insurance contracts (2,817) (10,134) (5,120) Investment contracts (11,989) (2,402) (2,324) Deferred income 20,302 7,228 6,910 Adjustment to provisions (14,474) (3,524) (4,038)on investment contracts Adjustments to provisions (1,447) (348) 62on insurance contracts Revaluation of financial - 200 359assets/adjustment to contract liabilities Acquired in-force value (23,228) (1,758) (1,622) Deferred tax (751) 2,632 1,638 ------- ------- ------- Sub total 63,685 65,814 75,307 Reinsurer default reserve (6,000) (9,000) (9,000) Reserve for additional costs - - (1,714) ------- ------- ------- Sub total 57,685 56,814 64,593 Value of in-force book 123,252 87,901 84,594 ------- ------- ------- Embedded value 180,937 144,715 149,187 ======= ======= =======The reinsurer default reserve and the reserve for additional costs relate toreserves which are established for FSA prudential reporting. Neither of thesereserves are recognised for reporting in accordance with IFRSs or forestablishing embedded value, either at 30 June 2004 or 31 December 2004, as thecase may be, as the events to which they relate were, in the opinion of theDirectors, considered to be remote or uncertain. However, the reserves arecharged to the shareholder net assets component of embedded value, but arereleased within the value-in-force calculations, This method is used so thatthe cost of capital of maintaining the relevant reserves is recognised withinthe overall embedded value calculation.The reassurer default reserve relates to the reserve which is maintainedagainst the effect of possible default by a major reinsurer, Guardian Assuranceplc, which is a subsidiary of Aegon NV.The adjustment for the reserve for additional costs related to VAT which maybecome assessable on charges made under an Insurance Administration ServicesAgreement with Liberata Financial Services Limited. Following a decisiondelivered in the European Court of Justice in early 2005 in the case ofStaatssecretaris von Financien v Arthur Andersen and Co, Accountants, there wasuncertainty whether charges made under such arrangements would be exempt fromVAT. However following the issue of a Consultation Document entitled "Changesto the VAT Exemption for Insurance-related Services" by HM Revenue and Customsin July 2005, subsequent to that decision, the Directors are of the opinionthat it is appropriate to establish reserves for additional VAT costs as at 30June 2005 for reporting in accordance with IFRS and for establishing embeddedvalue as at that date. Accordingly, the IFRS treatment accords with thetreatment in measuring embedded value and the adjustment in the reconciliationset out above is no longer required as at 30 June 2005.Independent review report to Chesnara plcIntroductionWe have been engaged by the Company to review the financial information set outon pages 3 to 35 and we have read the other information contained in theinterim report and considered whether it contains any apparent misstatements ormaterial inconsistencies with the financial information.This report is made solely to the Company in accordance with the terms of ourengagement to assist the Company in meeting the requirements of the ListingRules of the Financial Services Authority. Our review has been undertaken sothat we might state to the Company those matters we are required to state to itin this 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 reached.Directors' responsibilitiesThe interim report, including the financial information contained therein, isthe responsibility of and has been approved by the Directors. The Directors areresponsible for preparing the interim report in accordance with the ListingRules which require that the accounting policies and presentation applied tothe interim figures should be consistent with those applied in preparing thepreceding annual financial statements except where any changes, and the reasonsfor them, are disclosed.As disclosed in Note 1 to the financial information, the next annual financialstatement of the group will be prepared in accordance with IFRSs adopted foruse in the European Union.The accounting policies that have been adopted in preparing the financialinformation are consistent with those that the Directors currently intend touse in the next financial statements. There is, however, a possibility that theDirectors may determine that some changes to these policies are necessary whenpreparing the full annual financial statement for the first time in accordancewith those IFRSs adopted for use by the European Union. This is because, asdisclosed in Note 1, the Directors have anticipated that certain standards,which have yet to be formally adopted for use in the EU, will be so adopted intime to be applicable to the next annual financial statements.Review work performedWe conducted our review in accordance with guidance contained in Bulletin 1999/4 `Review of interim financial information' issued by the Auditing PracticesBoard for use in the United Kingdom. A review consists principally of makingenquiries of Group management and applying analytical procedures to thefinancial information and underlying financial data and, based thereon,assessing whether the accounting policies and presentations have beenconsistently applied unless otherwise disclosed. A review is substantially lessin scope that an audit performed in accordance with Auditing Standards andtherefore provides a lower level of assurance than an audit. Accordingly, we donot express an audit opinion on the financial information.Review conclusionOn the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2005.KPMG Audit PlcChartered AccountantsManchester5 October 2005Part 2 - Explanation of transition to International Financial ReportingStandardsA IntroductionAs stated in Note 1 of Part 1 of this document these are the Group's firstconsolidated interim financial statements for part of the period which will becovered by the first annual consolidated financial statements to be prepared inaccordance with International Financial Reporting Standards ('IFRSs'). TheGroup's transition date for IFRS reporting purposes is 1 January 2004.The accounting policies set out in Notes 2 and 3 of Part 1 of this documenthave been consistently applied in preparing the consolidated interim financialstatements for the six months ended and as at 30 June 2005 and the comparativeinformation for the six months ended and as at 30 June 2004 and for the yearended and as at 31 December 2004. They have also been applied in thepreparation of an opening balance sheet prepared in accordance with IFRS at 1January 2004, the transition date. In preparing this comparative information inaccordance with IFRSs the Group has adjusted amounts previously reported infinancial statements prepared in accordance with UK GAAP. An explanation of howthe transition from UK GAAP to IFRSs has affected the Group's financialposition and financial performance is set out in the following tables and inthe notes that accompany the tables.This information is prepared on the basis of the recognition and measurementrequirements of IFRSs in issue that either are endorsed by the EU and effective(or available for early adoption) at 31 December 2005 or are expected to beendorsed and effective (or available for early adoption) at 31 December 2005,the Group's first annual reporting date at which it is required to use IFRSs.Based on these adopted and unadopted IFRSs the Directors have made assumptionsabout the accounting policies expected to be applied when the first IFRS annualfinancial statements are prepared for the year ending 31 December 2005.In particular the Directors have assumed that the proposed amendments to IAS39Financial Instruments: Recognition and Measurement (The Fair Value Option)issued by the International Accounting Standards Board will be adopted by theEU in sufficient time that they will be available for use in the annual IFRSfinancial statements for the year ending 31 December 2005.B Transitional arrangements on first time adoption of IFRSCompanies are required to apply their IFRS accounting policies retrospectivelyto determine IFRS opening balance sheets and comparative figures. However, IFRS1 First-Time Adoption of International Financial Reporting Standards provides anumber of exemptions to this general principle. The Group has not takenadvantage of the exemptions to retrospective application set out in IFRS 1 andhas applied all relevant standards retrospectively, with the followingexception:The Group has elected to apply IFRS 1, Paragraph 25A, which permits financialassets and liabilities to be designated as fair value through income at thedate of transition to IFRS, whereas IAS39 Financial Instruments : Recognitionand Measurement would require this designation only to be made on initialrecognition.The Group has also elected not to apply the exemptions from presentingcomparative information in accordance with IFRS 4 Insurance Contracts, IFRS 5Non-current Assets Held For Sale And Discontinued Operations, IAS32 FinancialInstruments: Disclosure and Presentation and IAS39 Financial Instruments:Recognition and Measurement.Transition of the balance sheet as at 1 January 2004 Investment contracts UK GAAP Reclassification Release Deferred and deposit of acquisition accounting reserves costs ( a ) ( b ) ( c ) ( d ) ‚£000 ‚£000 ‚£000 ‚£000 Assets Intangible assets Deferred 16,135 3,237acquisition costs Acquiredvalue of in-force business Insurance 2,201 contracts Investment - contracts Property and 904 equipment Investment 3,003 properties Financial assets Equity 414,036 securities and holdings in collective investment schemes at fairvalue through income Debt securities 328,911 at fair value through income Loans and 24,559 receivables including insurance receivables Derivative financial - instruments Deferred tax - assets Reinsurers 174,187 (19,469) share ofinsurance contract provisions Amounts deposited - 19,469 404 (732)with reinsurer Income taxes - Cash and cash 23,700 equivalents ------- ------- ------- ------- Total assets 987,636 - 404 2,505 ------- ------- ------- ------- Liabilities Insurance 875,374 (290,359) contract provisions Financial liabilities Investment - 290,359 (3,830) contracts atfair value through income Derivative 167 financialinvestments Provisions 1,466 Deferred tax 4,926 1,270 752liabilities Reinsurance 1,085 payables Payables related 15,094 to direct insurance and investment contracts Deferred income - Income taxes 117 Other payables 10,668 ------- ------- ------- ------- Total 908,897 - (2,560) 752liabilities ------- ------- ------- -------- Net assets 78,739 - 2,964 1,753 ======= ======= ======= ======= Shareholders' equity Share capital 4,228 Share premium - Other reserves 36,272 Retained 38,239 - 2,964 1,753earnings ------- ------- ------- ------- Total 78,739 - 2,964 1,753shareholders' equity ======= ======= ======= =======Transition of the balance sheet as at 1 January 2004 (Continued) Deferred Revaluation Application IFRS income of financial of reverse assets/ acquisition adjustment accounting to contract liabilities ( e ) ( f ) ( i ) ‚£000 ‚£000 ‚£000 ‚£000 Assets Intangible assets Deferred 19,372acquisition costs Acquiredvalue of in-force business Insurance 2,201contracts Investment -contracts Property and 904equipment Investment 3,003properties Financial -assets Equity (3,993) 410,043securities and holdings in collective investment schemes at fairvalue through income Debt securities (171) 328,740at fair value through income Loans and 24,559receivables including insurance receivables Derivative financial -instruments Deferred tax -assets Reinsurers (1,056) 153,662share ofinsurance contract provisions Amounts 1,200 (191) 20,150deposited with reinsurer Income taxes - Cash and cash 23,700equivalents ------- ------- ------- ------- Total assets 1,200 (5,411) - 986,334 ------- -------- ------- ------- Liabilities Insurance (4,605) 580,410contract provisions Financial liabilities Investment (553) 285,976contracts atfair value through income Derivative 167financialinvestments Provisions 1,466 Deferred tax (2,272) (76) 4,600liabilities Reinsurance 1,085payables Payables related 15,094to direct insurance and investment contracts Deferred income 8,774 8,774 Income taxes 117 Other payables 10,668 ------- ------- ------- ------- Total 6,502 (5,234) - 908,357liabilities ------- ------- ------- ------- Net assets (5,302) (177) - 77,977 ======= ======= ======= ======= Shareholders' equity Share capital 36,272 40,500 Share premium - Other reserves (36,272) - Retained (5,302) (177) 37,477earnings ------- ------- ------- ------- Total (5,302) (177) - 77,977shareholders' equity ======= ======= ======= =======Transition of the balance sheet as at 30 June 2004 Investment Contracts Reclass- ification and Release Deferred deposit of acquis- UK accounting reserves ition GAAP costs Note ( a ) ( b ) ( c ) ( d ) ‚£000 ‚£000 ‚£000 ‚£000 Assets Intangible assets Deferred 10,139 3,106 acquisition costs Acquired value of in- force business Insurance 1,971 contracts Investment - contracts Property and 492 equipment Investment 3,491 properties Financial assets Equity 391,698 securities and holdings in collective investment schemes at fair value through income Debt 319,638 securities at fair value through income Loans and 13,985 receivables including insurance receivables Derivative - financial instruments Deferred tax - assets Reinsurers 175,571 (20,549) share of insurance contract provisions Amounts - 20,549 444 (704) deposited with einsurer Income taxes Cash and cash 55,305 equivalents ------- ------- ------- ------- Total assets 972,290 - 444 2,402 ------- ------- ------- ------- Liabilities Insurance 867,238 (280,237) contract provisions Financial - liabilities Investment - 280,237 (3,082) contracts at fair value through income Derivative 372 financial investments Provisions 728 Deferred tax 3,160 1,118 721 liabilities Reinsurance 2,331 payables Payables 16,745 related to direct insurance and investment contracts Deferred - income Income taxes 499 Other payables 10,203 ------- ------- ------- ------- Total 901,276 - (1,964) 721 liabilities ------- ------- ------- ------- Net assets 71,014 - 2,408 1,681 ====== ====== ====== ====== Shareholders' equity Share capital 4,228 Other reserves 36,322 Retained 30,464 2,408 1,681 earnings ------- ------- ------- ------- Total 71,014 - 2,408 1,681 shareholders' equity ====== ====== ====== ====== Transition of the balance sheet as at 30 June 2004 (Continued) Revalu- Post- Applic- ation of balance ation of financial sheet reverse assets/ event- acquis- Deferred adjust- divid- ition Income ment to ends account- liabilities ing IFRS ( e ) ( f ) ( h ) ( i ) ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 Assets Intangible assets Deferred 13,245acquisition costs Acquired value of in- force business Insurance 1,971contracts Investment -contracts Property and 492equipment Investment 3,491properties Financial assets Equity (3,907) 387,791securities and holdings in collective investment schemes at fair value through income Debt (200) 319,438securities at fair value through income Loans and 13,985receivables including insurance receivables Derivative -financial instruments Deferred tax -assets Reinsurers (1,029) 153,993share of insurance contract provisions Amounts 1,153 (188) 21,254deposited with einsurer Income taxes - Cash and cash 55,305equivalents ------- ------- ------- ------- ------- Total assets 1,153 (5,324) - - 970,965 ------- ------- ------- ------- ------- Liabilities Insurance (4,576) 582,425contract provisions Financial -liabilities Investment (548) 276,607contracts at fair value through income Derivative 372financial investments Provisions 728 Deferred tax (2,168) (60) 2,771liabilities Reinsurance 2,331payables Payables 16,745related to direct insurance and investment contracts Deferred 8,381 8,381income Income taxes 499 Other payables (4,017) 6,186 ------- ------- ------- ------- ------- Total 6,213 (5,184) (4,017) - 897,045liabilities ------- ------- ------- ------- ------- Net assets (5,060) (140) 4,017 - 73,920 ====== ====== ====== ====== ====== Shareholders' equity Share capital 36,272 40,500 Other reserves (36,272) 50 Retained (5,060) (140) 4,017 33,370earnings ------- ------- ------- ------- ------- Total (5,060) (140) 4,017 - 73,920shareholders' equity ====== ====== ====== ====== ======Transition of the balance sheet as at 31 December 2004 Investment Contracts Reclass- ification and Release Deferred deposit of acquis- UK accounting reserves ition GAAP costs Note ( a ) ( b ) ( c ) ( d ) ‚£000 ‚£000 ‚£000 ‚£000 Assets Intangible assets Deferred 5,122 3,015 acquisition costs Acquired value of in- force business Insurance 1,818 contracts Investment - contracts Property and 403 equipment Investment 3,092 properties Financial - assets Equity 425,295 securities and holdings in collective investment schemes at fair value through income Debt securities 352,131 at fair value through income Loans and 15,013 receivables including insurance receivables Derivative - financial instruments Deferred tax - assets Reinsurers 182,037 (22,194) share of insurance contract provisions Amounts - 22,194 456 (692) deposited with einsurer Income taxes 103 Cash and cash 39,257 equivalents ------- ------- ------- ------- Total assets 1,024,271 - 456 2,323 ------- ------- ------- ------- Liabilities Insurance 917,416 (310,752) contract provisions Financial liabilities Investment - 310,752 (3,582) contracts at fair value through income Derivative 199 financial investments Provisions 926 Deferred tax 2,022 1,211 696 liabilities Reinsurance 3,333 payables Payables 14,351 related to direct insurance and investment contracts Deferred income - Income taxes 1,198 Other payables 10,874 ------- ------- ------- ------- Total 950,319 - (2,371) 696 liabilities ------- ------- ------- ------- Net assets 73,952 - 2,827 1,627 ======= ======= ======= ======= Shareholders' equity Share capital 4,228 Other reserves 36,322 Retained 33,402 2,827 1,627 earnings ------- ------- ------- ------- Total 73,952 - 2,827 1,627 shareholders' equity ======= ======= ======= ======= Transition of the balance sheet as at 31 December 2004 (Continued) Revalu- Post- Applic- ation of balance ation of Financial sheet reverse assets/ event- acquis- Deferred adjust- divid- ition income ment to ends account- contract ing IFRS liabilities ( e ) ( f ) ( h ) ( i ) ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 Assets Intangible assets Deferred 8,137acquisition costs Acquired value of in- force business Insurance 1,818contracts Investment -contracts Property and 403equipment Investment 3,092properties Financial -assets Equity (4,163) 421,132securities and holdings in collective investment schemes at fair value through income Debt securities (359) 351,772at fair value through income Loans and 15,013receivables including insurance receivables Derivative -financial instruments Deferred tax -assets Reinsurers (1,081) 158,762share of insurance contract provisions Amounts 1,128 (198) 22,888deposited with reinsurer Income taxes 103 Cash and cash 39,257equivalents ------- ------- ------- ------- ------- Total assets 1,128 (5,801) - - 1,022,377 ------- ------- ------- ------- ------- Liabilities Insurance (4,859) 601,805contract provisions Financial -liabilities Investment (583) 306,587contracts at fair value through income Derivative 199financial investments Provisions 926 Deferred tax (2,073) (108) 1,748liabilities Reinsurance 3,333payables Payables 14,351related to direct insurance and investment contracts Deferred income 8,038 8,038 Income taxes 1,198 Other payables (6,124) 4,750 ------- ------- ------- ------- ------- Total 5,965 (5,550) (6,124) - 942,935liabilities ------- ------- ------- ------- ------- Net assets (4,837) (251) 6,124 - 79,442 ======= ======= ======= ======= ======= Shareholders' equity Share capital 36,272 40,500 Other reserves (36,272) 50 Retained (4,837) (251) 6,124 38,892earnings ------- ------- ------- ------- ------- Total (4,837) (251) 6,124 - 79,442shareholders' equity ======= ======= ======= ======= =======Reconciliation of the income statement for the six months ended 30 June 2004 Investment Contracts UK GAAP Reclassification Release Deferred and deposit of acquisition accounting reserves costs Note ( a ) ( b ) ( c ) ( d ) ‚£000 ‚£000 ‚£000 ‚£000 Insurance premium 87,631 (23,300) revenue Insurance premium (15,761) 282 ceded to reinsurers ------- Net insurance 71,870 premium revenue Fee and commission income Insurance contracts 29,136 (287) Investment contracts - 287 Investment income 12,166 ------- Total revenue (net 113,172 of reinsurance payable) Other operating 3,456 income ------- Net income 116,628 ------- Policyholder claims (123,469) 27,662 and benefits incurred Reinsurers share of 15,101 (878) claims and benefits incurred ------- Net policyholder (108,368) claims and benefits incurred -------- Change in investment - (4,362) (748) contract liabilities Reinsurers share of - 596 40 investment contract liabilities ------- Net change in - investment contract liabilities ------- Fees, commission and (6,920) (103) other acquisition costs Administrative (7,810) expenses Other operating expenses Charge for (230) amortisation of intangible assets Other (135) ------- Total expenses (123,463) ------- Operating profit (6,835) Financing costs - Profit on sale of 1,948 discontinued operation ------- Profit before tax (4,887) Income tax expense 1,189 152 31 -------- ------- ------- ------- Profit for the (3,698) - (556) (72) period ======= ======= ======= ======= Reconciliation of the income statement for the six months ended 30 June 2004 (Continued) Deferred Revaluation Share-based IFRS income of payment financial assets/ adjustment to contract liabilities ( e ) ( f ) ( g ) ‚£000 ‚£000 ‚£000 ‚£000 Insurance premium 64,331revenue Insurance premium (15,479)ceded to reinsurers ------- Net insurance 48,852premium revenue Fee and commission income Insurance contracts 28,849 Investment contracts 346 633 Investment income 57 12,223 ------- Total revenue (net 90,557of reinsurance payable) Other operating 3,456income ------- Net income 94,013 -------- Policyholder claims (29) (95,836)and benefits incurred Reinsurers share of 27 14,250claims and benefits incurred -------- Net policyholder (81,586)claims and benefits incurred ------- Change in investment (5) (5,115)contract liabilities Reinsurers share of 3 639investment contract liabilities ------- Net change in (4,476)investment contract liabilities ------- Fees, commission and (7,023)other acquisition costs Administrative (7,810)expenses Other operating expenses Charge for (230)amortisation of intangible assets Other (135) ------- Total expenses (101,260) ------- Operating profit (7,247) Financing costs (336) (336) Profit on sale of 1,948discontinued operation ------- Profit before tax (5,635) Income tax expense (104) (16) 1,252 ------- ------- ------- ------- Profit for the 242 37 (336) (4,383)period ======= ======= ======= =======Reconciliation of the income statement for the year ended 31 December 2004 Investment Contracts UK GAAP Reclassification Release Deferred and deposit of acquisition accounting reserves costs Note ( a ) ( b ) ( c ) ( d ) ‚£000 ‚£000 ‚£000 ‚£000 Insurance premium 202,230 (79,395) revenue Insurance premium (31,193) 1,138 ceded to reinsurers Net insurance 171,037 premium revenue Fee and commission income: Insurance contracts 55,167 (808) Investment contracts - 808 Investment income 57,368 ------- Total revenue (net 283,572 of reinsurance payable) Other operating 4,032 income ------- Net income 287,604 ------- Policyholder claims (292,105) 96,377 and benefits incurred. Reinsurers share of 34,220 (3,043) claims and benefits incurred ------- Net policyholder (257,885) claims and benefits incurred ------- Change in investment - (16,982) (248) contract liabilities Reinsurers share of - 1,905 53 investment contract liabilities ------- Net change in - investment contract liabilities ------- Fees, commission and (11,956) (179) other acquisition costs Administrative (14,448) expenses Other operating expenses Charge for (383) amortisation of intangible assets Other (329) ------- Total expenses (285,001) ------- Operating profit 2,603 Financing costs - Profit on sale of 1,948 discontinued operation ------- Profit before tax 4,551 Income tax expense 813 59 54 ------- ------- ------- ------- Profit for the 5,364 - (136) (125)period ======= ======= ======= ======= Reconciliation of the income statement for the year ended 31 December 2004 (Continued) Deferred Revaluation Share-based IFRS income of payment financial assets/ adjustment to contract liabilities ( e ) ( f ) ( g ) ‚£000 ‚£000 ‚£000 ‚£000 Insurance premium 122,835revenue Insurance premium (30,055)ceded to reinsurers Net insurance 92,780premium revenue Fee and commission income: Insurance contracts 54,359 Investment contracts 662 1,471 Investment income (359) 57,009 ------- Total revenue (net 205,619of reinsurance payable) Other operating 4,032income ------- Net income 209,651 ------- Policyholder claims 254 (195,474)and benefits incurred. Reinsurers share of (25) 31,152claims and benefits incurred ------- Net policyholder (164,322)claims and benefits incurred ------- Change in investment 30 (17,200)contract liabilities Reinsurers share of (7) 1,951investment contract liabilities ------- Net change in (15,249)investment contract liabilities ------- Fees, commission and (12,135)other acquisition costs Administrative (14,448)expenses Other operating expenses Charge for (383)amortisation of intangible assets Other (329) ------- Total expenses (206,866) ------- Operating profit 2,785 Financing costs (336) (336) Profit on sale of 1,948discontinued operation ------- Profit before tax 4,397 Income tax expense (199) 32 759 ------- ------- ------- ------- Profit for the 464 (75) (336) 5,156period ======= ======= ======= =======Notes to the transition to IFRS a. Reclassification of UK GAAP reported amounts to IFRS format The UK GAAP balance sheet and income statement which were previously reportedand presented in accordance with the modified statutory solvency basis, havebeen presented in a format which is consistent with IFRS. Other than changeshighlighted in the transition matrices, no changes have been made to theamounts previously reported under UK GAAP. b. Accounting for investment contracts: reclassification and deposit accounting Under UK GAAP all of the long-term contracts of the Group were accounted forand disclosed as insurance contracts. IFRS 4 Insurance Contracts requires allsuch contracts to be classified for accounting purposes as either insurancecontracts or as investment contracts, depending on whether significantinsurance risk is transferred to the Group under the contract. Assets andliabilities relating to investment and insurance contracts are disclosedseparately in the balance sheet.Investment contract liabilities fall to be accounted for in accordance withIAS39 Financial Instruments: Measurement and Recognition. In accordance withIFRS amounts receivable from policyholders under investment contracts are nolonger credited to premium revenue in the income statement but are treated asamounts received on deposit and are credited directly to investment contractliabilities. Likewise amounts payable to policyholders under investmentcontracts are no longer charged to claims expense in the income statement butare deducted from investment contract liabilities. Group companies are party tovarious reinsurance contracts which provide for certain of these amountsreceivable and payable under investment contracts to be borne by the reinsurer.Amounts previously treated under UK GAAP as charges to the income statement,being outward reinsurance premiums ceded to reinsurers, or as credits to theincome statement, being reinsurers' share of claims payable, are similarly nolonger accounted for as charges or credits to the income statement, but aretreated as direct movements in amounts deposited with reinsurers in the balancesheet. None of these adjustments has any net impact on profit before tax,profit after tax or on shareholders' equity.IFRS 4 requires the existing UK GAAP method of accounting for insurancecontracts to continue subject to liability adequacy tests and to the fairvaluation of derivatives embedded in insurance contracts under IAS39. c. Accounting for investment contracts: release of reserves As stated in Note (b) investment contract liabilities fall to be accounted forin accordance with IAS39. A consequence of this is that certain reserves heldin respect of investment contracts under UK GAAP are released under IFRS. Thishas the effect of increasing shareholder equity. As also stated in Note 1 tothese consolidated interim financial statements the Directors have assumed thatthe proposed amendment to IAS39 Financial Instruments: Measurement andRecognition (The Fair Value Option) issued by the International AccountingStandards Board will be adopted by the EU in sufficient time that it will beavailable for use in the annual IFRS financial statements for the year ending31 December 2005. In accordance with the anticipated amended version of IAS39the Directors have decided that investment contract liabilities should bemeasured at fair value. d. Deferred acquisition costs Under IAS18 Revenue the deferral of acquisition costs attributable toinvestment contracts varies from the treatment under UK GAAP both as to theamount of costs deferred and as to the amortisation period. Under UK GAAP allacquisition costs, which are directly attributable to investment contracts aredeferred and are then subsequently amortised against income over the period inwhich they are deemed to be recovered from further receipts from policyholders(classified as regular annual premium revenue under UK GAAP). This method leadsto a relatively short amortisation period, being some four years on average.Under IAS18 Revenue only directly attributable incremental costs are deferred.Further, they are subsequently amortised over the lives of the contracts, whichare typically considerably longer than four years. As all of the relevant costshad, under UK GAAP, been fully amortised at 1 January 2004, the date oftransition from UK GAAP, this adjustment has led to an increase in shareholderequity at that date, with subsequent increased charges to the income statementcompared with UK GAAP, in connection with the amortisation of such costs. e. Deferred income Under UK GAAP front end fees received from policyholders in respect of servicesto be provided on investment contracts in future periods are recognised asincome in the period in which they are received, while under IAS18 Revenue suchrevenue is recognised in the accounting periods in which services are renderedwhich has been determined as the life of the contracts. Accordingly an explicitdeferred income liability is recognised in respect of front end fees whichrelate to services to be provided in future periods. This deferral of incomehas led to a reduction in shareholders' equity at 1 January 2004, the date oftransition to IFRS, with subsequent additional amounts credited to the incomestatement in subsequent periods compared with UK GAAP. f. Revaluation of financial assets / adjustment to contract liabilities Under UK GAAP at the IFRS transition date, 1 January 2004, listed investmentswere valued on the basis of the market convention applicable to where theinvestments were primarily traded, which was either last traded or mid- marketprice. Under IFRS listed investments, which are included in financial assets,are classified as fair value through income and IAS39 requires that the fairvalue for listed investments be determined at bid value. Insofar as thisrevaluation from last traded or middle market price to bid value relates toinvestments held within the unit-linked funds, which are thereby reduced invalue, there is an offset by way of a corresponding reduction in insurancecontract provisions and in investment contract liabilities carried at fairvalue through income. There is, however, a small reduction in net equity at 1January 2004 as a result of these adjustments, relating to surplus asset unitsheld within unit-linked funds, which are not matched by liability units, and tothe revaluation of investments held outside the unit-linked funds. g. Share based payment As stated in Note 7 to these consolidated interim financial statements NumisSecurities Limited (`Numis') received, on the admission of Chesnara plc to theofficial list of the UK Listing Authority on 25 May 2004, an option tosubscribe for ordinary shares in Chesnara plc. IFRS 2 Share Based Paymentrequires the difference between the total value of such shares at their optionprice and the fair value of the option at the date of grant to be charged as anexpense to the income statement. Accordingly, an amount representing thedifference was charged to financing costs in the income statement for the sixmonths ended 30 June 2004 and the year ended 31 December 2004, with acorresponding amount credited directly to retained earnings. This cost, whichis not cash-based, was not recognised in the corresponding income statementsprepared in accordance UK GAAP and the adjustment in accordance with IFRS hasno net effect on shareholder equity. h. Post balance sheet events - dividends Under IAS10 Events after the Balance Sheet Date dividends declared after thebalance sheet date are not recognised as a liability at the balance sheet date,because the proposed dividend does not represent a present obligation underIAS37 Provisions, Contingent Liabilities and Contingent Assets. Under UK GAAPproposed dividends had been recognised in the balance sheet as at 30 June 2004and 31 December 2004, and these amounts are reversed under IFRS. i. Reverse acquisition accounting On 24 May 2004, Chesnara plc (`Chesnara'), by way of the issue of its ordinaryshares to the shareholders of Countrywide plc, acquired the whole of the issuedordinary share capital of Countrywide Assured Life Holdings Limited (`CALH') aspart of the process of the demerger of CALH from Countrywide plc.Chesnara, a company with net assets of ‚£2 prior to its acquisition of CALH, waseffectively used as a vehicle to secure a listing for the business of CALH onthe London Stock Exchange. As such the net assets of Chesnara prior to theacquisition of CALH did not comprise an integrated set of activities and assetswhich were capable of generating revenue or of providing a return to investors.Chesnara, at the date of its acquisition of CALH therefore did not comprise abusiness as defined in IFRS 3 Business Combinations.However, the Directors consider that the fairest way of presenting thefinancial position and results of operations from the viewpoint of thecontinuing interest of the shareholders of Countrywide plc is to prepare theaccounts on the basis of the reverse acquisition method of accounting set outin IFRS 3, as the demerger and listing arrangements described above effectivelyrepresent a continuation of the business of CALH. This replicates the treatmentthat would have been accorded under IFRS, had Chesnara constituted a businessat the date of its acquisition of CALH.Under the reverse acquisition method of accounting CALH (the legal subsidiary)is treated as a parent company of Chesnara (the legal parent), so that theconsolidated financial statements are treated as a continuation of thefinancial statements of CALH. In particular the issued share capital in theconsolidated financial statements at the date of acquisition is taken as theissued share capital of CALH, the accounting parent.The adoption of the reverse acquisition method of accounting for the purposesof presenting IFRS financial statements comprises a difference from UK GAAP.The adjustment in the statements of transition of the balance sheets involvesthe elimination of the reserve arising on demerger, recognised under UK GAAP,together with the credit of a corresponding amount to issued share capital.This adjustment gives rise to no net change in shareholders' equity and givesrise to the issued share capital of the Chesnara plc Group corresponding withthe share capital of CALH at the acquisition date.ENDCHESNARA PLC
- Home
- Share Prices
- AQSE Share Prices
- Euronext
- Stock Screeners
- Share Chat
- FX
- News & RNS
- Events
- Media
- Trading Brokers
- Finance Tools
- Members
Latest Share Chat
Chesnara Regulatory News (CSN)
CSN Share
Price
CSN Share
News
CSN Share
Chat
CSN Share
Trades141
CSN
Live RNS
CSN Share
Charts
CSN Level 2
Console
CSN Live
Share Price
CSN Broker
Ratings
CSN Directors
Deals
CSN Financial
Diary
CSN
Fundamentals
CSN Short
Positions
CSN
Media
Chesnara Information
Share Price Information for Chesnara (CSN)
Share Price is delayed by 15 minutes
Get Live Data
Share Price:
250.00
Bid:
250.50
Ask:
252.00
Change:
0.00 (0.00%)
Spread:
1.50 (0.599%)
Open:
246.50
High:
0.00
Low:
0.00
Prev. Close:
250.00
Last checked at -
Watchlists are a member only feature
Login to your account
Don't have an account? Click here to register.Interim Results
Due to London Stock Exchange licensing terms, we stipulate that you must be a private investor. We apologise for the inconvenience.
To access our Live RNS you must confirm you are a private investor by using the button below.