Chesnara Regulatory News (CSN)

27 Oct 2009 14:26

Chesnara plcTrading Update27 October 2009

This announcement is made prior to the Interim Management Statement for the period from 1 January 2009 to 18 November 2009, which will be issued on 19 November 2009. It highlights key factors, which will have a significant impact on Chesnara plc's ("Chesnara") results for the nine months ended 30 September 2009 and on the financial position of the Chesnara as at that date, being:

i. determination of the acquisition balance sheet of Moderna Forsakringar Liv

AB ("Moderna"); and

ii. the continuing significant recovery in investment markets.

The impact of these two factors is explained below separately on both the European Embedded Value (EEV) * and IFRS bases of accounting.

EEV

1. Moderna Acquisition Balance Sheet

On 23 July 2009, Chesnara announced that it had completed the acquisition of Moderna for a total consideration of SEK 250m ( 20m). Chesnara had previously announced, on 17 April 2009, that this represented an effective 63% discount to the directors' estimate of Moderna's embedded value of SEK 670m as at 31 December 2008. In the event, at the acquisition date (23 July 2009), the embedded value of Moderna is estimated to have risen to between SEK 900m and SEK 950m (between 72.8m and 76.8m). The excess of the embedded value at acquisition over the purchase consideration is therefore estimated to be between 52.8m and 56.8m. This will be reflected in the Chesnara EEV results for the nine months ended 30 September 2009 as an exceptional profit. The acquisition was therefore made at a discount of between 72.5% and 74% to Moderna's embedded value at the acquisition date.

The embedded value of Moderna between 31 December 2008 and 23 July 2009 was significantly impacted by:

i. the recovery in global investment markets in the second and third quarters

of 2009, underpinned by a favourable change in the investment mix of the

underlying managed funds from fixed-interest securities to equities; and

ii. the favourable effect of resetting long-term policy maintenance expense

assumptions to a more realistic basis; offset by

iii. an increase in the risk discount rate, used to value the cash flows

arising from in-force investment contracts, from 5.2% to 6.04%.

2. Recovery in Investment Markets

Global investment markets have continued to recover since 30 June 2009, the date to which Chesnara's interim financial statements, issued on 27 August 2009, were drawn up. This has had a significant favourable impact on the embedded value of both Moderna and of the existing UK life business. In this regard, attention is drawn to:

i. the economic sensitivities set out in Part 1 of the Circular dated 3 July

2009, sent to shareholders in connection with the acquisition of Moderna;

and

ii. note 7 to the supplementary (EEV) information included in the interim

financial statements for the six months ended 30 June 2009,

where sensitivities to movements in equity and property values on the embedded value are set out. While these record the effect of a 10% fall in equity and property values, increases of a similar order of magnitude, SEK 40m ( 3.2m) and 3.9m respectively, arise on equivalent market movements in the opposite direction.

IFRS

1. Moderna Acquisition Balance Sheet

In accordance with the requirements of IFRS 3 `Business Combinations', the assets and liabilities of Moderna have been reviewed, in order to establish their fair value at the acquisition date.

As a result of this review, the directors currently estimate that, at the acquisition date, the fair value of net assets acquired is SEK 534.7m ( 43.2m). After allowing for the purchase consideration of SEK 250m ( 20m), the resulting estimated excess of SEK 284.7m ( 23.2m) of fair value of net assets acquired, will be recognised as income in the Group IFRS financial statements for the nine months ended 30 September 2009 and for the year ending 31 December 2009.

Adjustments to re-state the carrying value of assets and liabilities acquired to fair value include the recognition of an intangible asset, being the acquired value of in-force (AVIF) investment contracts, which is recognised at its fair value, currently estimated to be SEK 726.8m ( 58.7m). This has been determined by applying a discount rate of 12% to the estimated net cash flows arising from investment contracts, being the rate which is considered to represent a fair return on an acquired asset of this type.

Until the net cash flows underlying AVIF are realised over the lifetime of the related policies, the consequential accretion to Group retained earnings arising from recognition of this intangible asset is not distributable.

2. Recovery in Investment Markets

The recovery in investment markets has a favourable impact on the IFRS result, insofar as, for both the UK and Swedish businesses, fees charged to the underlying unit-linked funds vary with the size of funds under management. However, under IFRS reporting, the order of magnitude of accretion to profits is considerably less than that recognised for EEV reporting purposes.

* EEV supplementary information is prepared in accordance with the European Embedded Value (`EEV') principles issued in May 2004 by the European CFO Forum and supplemented by Additional Guidance on EEV disclosures, issued by the same body in October 2005.

EnquiriesGraham Kettleborough

Chief Executive, Chesnara plc 07799 407519

Notes to editors:

Chesnara plc, which listed on the London Stock Exchange in May 2004, is the owner of Countrywide Assured plc ("CA") and Moderna Forsakringar Liv AB ("Moderna"). CA is a life assurance subsidiary that is substantially closed to new business. In June 2005 Chesnara acquired a further closed life insurance company - City of Westminster Assurance ("CWA") - for 47.8m. With effect from 30 June 2006, CWA's policies and assets were transferred into CA plc.

Moderna was acquired on 23 July 2009 for 20m. The company continues to attract new business and grow the strong position it has achieved in the Swedish

unit-linked market since its launch in 2002.