CHESNARA PLC — AGM Information 2010

Nov 29, 2010

THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in any doubt as to the action you should take, you are recommended to seek your own financial advice immediately from your stockbroker, bank manager, solicitor, accountant or other independent financial adviser authorised under the Financial Services and Markets Act 2000 if you are resident in the United Kingdom or, if not, from another appropriately authorised independent financial adviser.

If you have sold or otherwise transferred all your Ordinary Shares in Chesnara plc, please send this document, together with the accompanying Form of Proxy, as soon as possible, to the purchaser or transferee, or to the stockbroker, bank or other agent through whom the sale or transfer was effected for delivery to the purchaser or transferee. If you have sold or otherwise transferred only part of your holding, you should retain these documents.

Hawkpoint Partners Limited, which is authorised and regulated in the United Kingdom by the Financial Services Authority, is acting as financial adviser and sponsor to Chesnara plc and no one else in connection with the Acquisition and, apart from the responsibilities and liabilities, if any, which may be imposed on Hawkpoint Partners Limited by FSMA and the regulatory regime established thereunder, Hawkpoint Partners Limited accepts no responsibility whatsoever for, and makes no representation or warranty, express or implied, in relation to, the contents of this document (including, but not limited to, its accuracy, fairness, sufficiency completeness or verification) and will not be responsible to anyone other than Chesnara plc for providing the protections afforded to clients of Hawkpoint Partners Limited or for giving advice in connection with the Acquisition, or any other matter referred to herein.

Chesnara plc

(Registered in England and Wales No. 4947166)

Proposed Acquisition of Save & Prosper Group Circular and Notice of General Meeting

Hawkpoint Partners Limited

Financial adviser and sponsor

Your attention is drawn to the letter from the Chairman of Chesnara plc which is set out on pages 3 to 8 of this document and recommends you to vote in favour of the resolution to be proposed at the General Meeting referred to below. You should read the whole text of this document.

Notice of a General Meeting of Chesnara plc, to be held at 11.00 a.m. on 16 December 2010 at the offices of Panmure Gordon (UK) Limited, Moorgate Hall, 155 Moorgate, London EC2M 6XB, is set out at the end of this document. The Form of Proxy for use at the meeting accompanies this document and, to be valid, should be completed and returned to the Company's registrars, Capita Registrars at PXS, 34 Beckenham Road, Beckenham, Kent BR3 4TU as soon as possible and, in any event, so as to arrive by no later than 11.00 a.m. on 14 December 2010. Completion and return of the Form of Proxy will not preclude Shareholders from attending and voting in person at the General Meeting, should they so wish.

This document includes forward-looking statements concerning the Enlarged Group. Forward-looking statements are based on current expectations and projections about future events. These forward-looking statements are subject to risks, uncertainties, and assumptions about the Enlarged Group. Subject to the Company's continuing obligations under the Listing Rules, the DTRs and the Prospectus Rules, the Enlarged Group undertakes no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

This document does not constitute or form part of an offer to sell, or the solicitation of an offer to buy, securities in the United States. None of the Placing Shares (as defined and referred to herein) have been or will be registered under the US Securities Act of 1933, as amended (the ''Securities Act'') or under the securities laws of any state or other jurisdiction of the United States and may not be offered, sold, resold or delivered, directly or indirectly, in or into the United States absent registration under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. No public offering of the Placing Shares is being made in the United States.

TABLE OF CONTENTS

		Page
	EXPECTED TIMETABLE OF PRINCIPAL EVENTS	2
PART I	Letter from the Chairman of Chesnara plc	3
PART II	Risk Factors	9
PART III	Financial Information on the Save & Prosper Group	24
PART IV	Pro Forma Financial Information on Chesnara plc	72
PART V	Principal Terms of the Acquisition Agreement	76
PART VI	Additional Information	79
PART VII	Definitions	86
	Notice of General Meeting	88

EXPECTED TIMETABLE OF PRINCIPAL EVENTS

Latest time and date for receipt of Forms of Proxy	11.00 a.m. on 14 December 2010
General Meeting	11.00 a.m. on 16 December 2010
Expected date for completion	20 December 2010

PART I

LETTER FROM THE CHAIRMAN OF CHESNARA PLC

Registered in England and Wales, Registration No. 04947166

Registered office: Harbour House, Portway, Preston, Lancashire PR2 2PR

29 November 2010

Dear Shareholder

Proposed Acquisition of the Save & Prosper Group

Notice of General Meeting

Introduction

The Board announced on 26 November 2010 that Chesnara had entered into the Acquisition Agreement to acquire Save & Prosper Insurance Limited and its wholly-owned subsidiary Save & Prosper Pensions Limited (together the ''Save & Prosper Group'') for £63.5 million in cash. The Acquisition will be financed from a mixture of cash resources primarily sourced from a placing undertaken on 26 November 2010 which raised £26.7 million (£25.4 million net of expenses) and new bank facilities of £40 million.

This Acquisition will be treated as a ''Class 1'' transaction for the purposes of Chapter 10 of the Listing Rules and as such requires prior approval of Shareholders. The purpose of this Circular is to provide you with details of the Acquisition and to explain why the Board believes that the Acquisition is in the best interests of the Company and its Shareholders and why the Board unanimously recommends that you vote in favour of the Resolution at the General Meeting to be held on 16 December 2010. The notice of General Meeting is set out at the end of this document.

Background to and reasons for the Acquisition

The Acquisition of the Save & Prosper Group is consistent with Chesnara's stated aim of participating in the consolidation of life and pensions businesses in the UK and Western Europe. The Acquisition is a logical transaction for Chesnara given the Company's financial strength and its core skills in the efficient management of life assurance companies and, in particular, closed books in the UK. This is further supported by the fact that the Save & Prosper Group operates a substantially equivalent operating model to Chesnara's existing UK business, including using one of the outsource providers currently used by the Group. Chesnara aims to provide shareholders with an attractive long-term dividend yield, supported by the emergence of surplus from its existing UK portfolios. By the nature of the Group's business the surplus arising from Chesnara's existing underlying UK life funds will diminish over time. The Acquisition is expected to enhance the future cash flows available for distribution to shareholders, achieved through the generation of cash surplus as the Save & Prosper Group's business runs down over the longer term. A number of planned potential management actions, including combining the UK life companies by means of transfer pursuant to the provisions of Part VII of FSMA, are expected to generate synergies within the Enlarged Group post transaction. The Acquisition of the Save & Prosper Group at a discount to embedded value (a term commonly used to refer to an economic valuation technique that is in widespread use in the insurance industry), should enhance future cash flows available for distribution to shareholders.

Information on the Save & Prosper Group

The Save & Prosper Group is a UK based provider of unit-linked, non-linked and with-profits pension and life assurance products with approximately 174,000 policies in force as at 30 June 2010. The Save & Prosper Group consists of Save & Prosper Insurance Limited and its wholly-owned subsidiary Save & Prosper Pensions Limited and was founded in 1936. The business is currently a subsidiary of JPMorgan Asset Management Marketing Limited. The Save & Prosper Group ceased writing new business in 1998 but existing policyholders are able to purchase increments or switch their existing investments to other products offered by, or available through, the Save & Prosper Group.

The Save & Prosper Group has two with-profits funds (combined approximately 48,000 policies as at 30 June 2010) which provide a guarantee of a minimum value payable at maturity or death, the possibility of bonus depending on the performance of the underlying investments of the fund and some smoothing of

fluctuations in the value of the underlying investments. The market and credit risk within these funds is primarily borne by policyholders. However, the Save & Prosper Group does have some potential market risk should the policyholder fund be unable to meet the cost of guarantees. The Save & Prosper Group with-profits books were established to enable participation in the with-profits market. However, the structure adopted by the Save & Prosper Group for its with-profits business was very different from that of most (if not all) other similar companies. The with-profits policies are administered in a similar manner to unit-linked contracts, with shareholder assets clearly distinguished from policyholder assets.

This distinction from traditional 90:10 with-profits funds led the Save & Prosper Group to request the FSA to grant a waiver from the requirements contained in the FSA Rules (IPRU (INS) 3.3R) thus facilitating the orderly and timely releases of surplus capital from its respective shareholder funds. On 29 July 2010, the FSA granted a five year waiver from this rule on the condition that the effect of any proposed capital extraction is considered by the with-profits actuary and an actuarial report is supplied to the FSA at least 21 days in advance of any planned extraction. This waiver would continue to be effective following the Acquisition and provides the framework for the extraction of excess capital, subject to FSA approval, as the books run-off.

The Save & Prosper Group's outsourced business model is complementary to Chesnara's outsourced model for its existing book. Three permanent staff are responsible for the oversight of the book, the administration role is outsourced to HCL (one of Chesnara's outsourcing partners) and the asset management function resides with JPMorgan Asset Management (UK) Limited. Following completion, Chesnara intends to continue to operate the Save & Prosper Group in substantially the same manner. The three permanent Save & Prosper Group staff will become employees of Chesnara, JPMorgan Asset Management (UK) Limited will continue to manage the assets (under a new Investment Management Agreement with the Save & Prosper Group on customary, market-standard terms for the provision of investment management services of this type), and HCL will continue in its role as administration outsourcer. Management intends to focus on realising potential synergies when they might be available, such as through combining the underlying UK life companies of the Enlarged Group by means of a transfer pursuant to the provisions of Part VII of FSMA, and other operational efficiencies.

The Directors have estimated an unaudited embedded value of the Save & Prosper Group as at 30 June 2010 of £184 million. Post 30 June 2010 excess capital of £91 million was extracted by the Seller. Chesnara will retain the Save & Prosper Group's residual embedded value of £93 million (estimated as at 30 June 2010, post capital extraction adjustments). After the extraction of capital, the acquired book remains well capitalised with regulatory capital at 243 per cent. of required levels as at 30 June 2010. Embedded value is a term commonly used to refer to an economic valuation technique that has been in widespread use in the insurance industry for some time. An embedded value is an estimate of the economic value of a company, excluding the value of any future new business that the company may be expected to write. The embedded value of the business is the aggregate of the shareholder net worth and the present value of future shareholder cash flows from in-force covered business (value of in-force business) less deductions for (i) the cost of guarantees within the business, and (ii) the cost of required capital. It is stated after allowance has been made for aggregate risks in the business. Shareholder net worth comprises those amounts in the long-term business, which are either regarded as required capital or which represent surplus assets within the business. The components of the Save & Prosper Group's unaudited estimated embedded value which has been prepared on a market consistent basis are as follows:

	30 June 2010
Directors' estimate of embedded value	unaudited
Free surplus Required capital	£ million 103.9 43.1
Adjusted shareholder net worth	147.0
Value of in-force business Cost of capital Cost of guarantees	60.3 (3.3) (20.0)
Embedded value Dividends paid to Seller post 30 June 2010	184.0 (91.0)
Estimated embedded value post dividends paid to Seller	93.0

Embedded value assumptions

The Directors have estimated the unaudited market-consistent embedded value of the Save & Prosper Group as at 30 June 2010 on projections of surplus which were derived from the actuarial systems of the Save & Prosper Group using a methodology which is consistent with that used by Chesnara and which are in accordance with assumptions established on the following bases:

(a) Discount rates

The discount rates applied to the cash flows at differing durations are a combination of the reference rate and a risk margin. The reference rate reflects the time value of money and is consistent with the investment return assumptions set out below, while the risk margin, which is established to cover any risks which are considered to be non-market and non-diversifiable, is set at 50 basis points.

(b) Economic assumptions

Investment returns
Duration*	%
5 year	2.47
10 year	3.42
15 year	3.81
20 year	3.90
25 year	3.90
Inflation
RPI	2.90

*A full yield curve is used and the rates quoted are presented as illustrative rates.

(c) Demographic assumptions

The Directors of Chesnara have reviewed information based on recent experience for mortality and persistency and have set appropriate best-estimate assumptions.

(d) Expense assumptions

Expense assumptions are based on internal expense analysis and are determined by reference to:

• (i) the outsourcing agreement in place with a third-party business process administrator;
• (ii) anticipated revisions to the terms of such agreement as it falls due for renewal;
• (iii) expected investment management expenses; and
• (iv) related corporate governance costs.

Where appropriate these expenses allow for VAT.

(e) Taxation

Projected tax has been determined assuming current tax legislation and rates and allows for changes in corporation tax as announced by the Chancellor in his budget speech of 22 June 2010, thereby reflecting a reduction from the current rate of 28 per cent. to 24 per cent. in steps of 1 per cent. p.a.

Sensitivities to alternative assumptions

The following table shows the sensitivity of the embedded value as estimated at 30 June 2010 to variations in the assumptions:

	Increase/ (decrease)
	in embedded value
	£ million
Economic
100 basis point increase in yield curve	11.4
100 basis point reduction in yield curve	(16.0)
10% decrease in equity and property values	(8.4)
Operating
10% decrease in maintenance expenses	3.0
10% decrease in lapse rates	(0.4)
5% decrease in mortality rates	(0.1)
Reduction in required capital to the statutory minimum	0.2

In the financial year ended 31 December 2009 the Save & Prosper Group generated total income of £200.6 million, reported profit on ordinary activities before tax of £53.2 million and had total assets of £1,463.4 million on an IFRS basis. In the financial year ended 31 December 2008, the Save & Prosper Group recognised a loss before tax of £58.9 million, primarily due to the value of the with-profits policyholders' fund being lower than the amount of the long-term business provision (the present value of projected payments to policyholders based on guaranteed minimum payments to policyholders). However, in 2009 this position reversed and the Save & Prosper Group reported a profit as noted above. In the six months to 30 June 2010 the Save & Prosper Group had total income of £23.0 million, reported a loss on ordinary activities before tax of £24.7 million and had total assets of £1,418.2 million. The accounting loss recognised as at 30 June 2010 under IFRS was primarily a result of a decrease in the discount rate used to calculate the actuarial liabilities due to management actions taken to de-risk the investment portfolio, including hedging the equity exposure and selling an element of its corporate bond portfolio, resulting in a higher weighting within the investment portfolio of lower yielding cash assets. The Directors believe that this accounting loss does not materially affect the expected cash generation of the Save & Prosper Group business, which remains the primary reason for completing the Acquisition. Further financial information relating to the Save & Prosper Group is included in Part III of this document.

Terms and financing of the Acquisition

As summarised in Part V of this document, the Acquisition will require the payment by Chesnara of £63.5 million. The Acquisition will be financed by a mixture of cash resources of Chesnara (enhanced by the Placing undertaken on 26 November 2010) and new bank facilities which have been arranged for the purposes of the Acquisition.

Completion of the Acquisition remains conditional upon approval of the Resolution. The Company will issue an announcement upon the satisfaction of this condition. As at the date hereof, the FSA has agreed to the change of control of the Save & Prosper Group, provided the Acquisition is completed prior to 23 August 2011. Completion is expected to take place on 20 December 2010. Further details of the Acquisition Agreement are set out in Part V of this document.

The Placing

On 26 November 2010, Chesnara launched the Placing, being a bookbuilt, non pre-emptive placing of 10,458,877 New Ordinary Shares and the sale of 2,897,183 Ordinary Shares, previously held as Treasury Shares, to institutional investors. The Placing completed on 26 November 2010 and raised gross proceeds of £26.7 million and £25.4 million net of expenses.

Further details of the Placing Agreement are set out in paragraph 5.1(b) of Part VI of this document.

The Loan Facility

On 17 November 2010, Chesnara agreed a new five year term facility for £40 million with The Royal Bank of Scotland plc. Further details of the terms of the Loan Facility are set out in paragraph 5.1(d) of Part VI of this document.

Effect of the Acquisition

The Directors believe that the Acquisition will enable the Group to enhance its embedded value per share following the completion of the Acquisition and the Placing. Embedded value per share is calculated by dividing the embedded value by the number of shares in issue. However this does not mean that the future embedded value per share of Chesnara will necessarily be lower, match or exceed its historical embedded value per share. The Directors believe that the transaction will be accretive to the cash flows of the Group and hence will enhance future cash flows available for distribution to shareholders.

Notwithstanding the Save & Prosper Group's reported loss for the six month period to 30 June 2010 which would have had a negative effect on the earnings of the Enlarged Group, the Directors believe that in the medium and long term Group earnings will be enhanced as a result of the Acquisition.

Had the Acquisition taken place at the date of Chesnara's last balance sheet, being 30 June 2010, the effect of the transaction on Chesnara's balance sheet would have been a decrease in cash equal to the difference between the purchase price of the Acquisition and the sum of net proceeds of the Placing and the post-balance sheet term facility of £40 million, and an increase in net assets equal to the fair value, net of post balance sheet capital extractions, of the Save & Prosper Group. Unaudited pro forma financial information (assuming that the Acquisition took place on 30 June 2010) has been included in Part IV of this document to illustrate the impact of the Acquisition on the consolidated net assets of Chesnara.

Current trading, trends and prospects

Since 30 June 2010, the Group has traded in line with expectations, with Group European embedded value increasing 9.2 per cent. to £278.5 million¹ at 30 September 2010 from £255.1 million at 30 June 2010. Trading results have been positively impacted by favourable experience in investment markets, driven primarily by the improved performance of leading equity market indices in the UK and Sweden. While rates on fixed interest investments have declined over the last quarter in the UK they have, by contrast, strengthened in Sweden. Given the different mixes of underlying investment and insurance contracts in the UK and Swedish businesses these contrasting movements have led to beneficial outcomes in both businesses.

Countrywide Assured plc, the principal operating subsidiary in the UK, has been in run-off for a number of years and its future surplus flows can be predicted with a reasonable degree of certainty. Expenses continue to be controlled and as equity markets have recovered, persistency remains within the Company's long-term assumptions, the level of surplus, and its embedded value, are in line with expected outcomes. Moderna, Chesnara's Swedish subsidiary, has also traded satisfactorily and continues to steadily recover market share in its targeted profitable business segments.

The Save & Prosper Group is similar to CA in that it has been in run off for a number of years and therefore its future surplus flows can be predicted with a reasonable degree of certainty. Whilst the Save & Prosper Group is more sensitive than CA to equity and fixed interest returns, it also benefits from positive equity market movements, has effective expense control mechanisms and persistency experience in line with assumptions. Outcomes regarding the level of surplus generation and the Save & Prosper Group's embedded value are therefore also expected to be in line with expectations.

Dividend policy

The Group is committed to offering its Shareholders an attractive and reliable income stream arising from the profits of its life assurance business. The Group has a progressive dividend policy which it aims to continue to pursue. In its interim results, which were announced on 26 August 2010, the Group

¹ Stated prior to payment of interim dividend of £5.9 million, paid on 12 October 2010

declared an interim dividend of 5.8p per share, an increase of 2.65 per cent. over the dividend of 5.65p declared for the comparable period in 2009.

Risk factors

Shareholders should consider fully the risk factors associated with the Enlarged Group. Your attention is drawn to the risk factors set out in Part II of this document.

General Meeting

A notice convening a General Meeting of the Company to be held at 11.00 a.m. on 16 December 2010 at the offices of Panmure Gordon (UK) Limited, Moorgate Hall, 155 Moorgate, London EC2M 6XB is set out at the end of this document. A Form of Proxy to be used in connection with the General Meeting is enclosed. The purpose of the General Meeting is to seek Shareholders' approval for the Acquisition.

As permitted by the Articles and resolution 13 passed at the Company's annual general meeting of 13 May 2010, the Board is calling the General Meeting on 14 days' notice. The Board believes this to be in the best commercial interests of the Company and of Shareholders as a whole.

Action to be taken

You will find enclosed a Form of Proxy for use at the General Meeting. Whether or not you intend to be present at that meeting, you are requested to complete the Form of Proxy (in accordance with the instructions printed thereon) and return it to the Company's registrars, Capita Registrars at PXS, 34 Beckenham Road, Beckenham, Kent BR3 4TU as soon as possible and, in any event, so as to arrive by 11.00 a.m. on 14 December 2010. Alternatively, you may submit your proxy vote electronically using the Share Portal Service at www.capitashareportal.com by the same deadline. Completion and return or submission of a Form of Proxy will not preclude you from attending that meeting and voting in person if you so wish.

Further information

Your attention is drawn to the further information contained in Parts II to VII of this document.

You are advised to read the whole of this document and not to rely solely on the information contained in this letter.

Recommendation

The Board of the Company, which has received financial advice from Hawkpoint, considers the Acquisition to be in the best interests of Shareholders as a whole. In providing its advice, Hawkpoint has placed reliance on the Board's commercial assessment of the Acquisition.

Accordingly, the Board of the Company unanimously recommends that Shareholders vote in favour of the resolution to be proposed at the General Meeting, as they intend to do in respect of their own beneficial holdings amounting (as at 26 November 2010, being the latest practicable date prior to the posting of this document) to an aggregate of 281,884 Ordinary Shares, representing approximately 0.25 per cent. of the Company's current issued share capital.

Yours faithfully,

Peter Mason Chairman

PART II

RISK FACTORS

The following risk factors, which the Directors believe include all known material risks, should be carefully considered by Shareholders when deciding whether to vote in favour of the Acquisition at the General Meeting. If any or a combination of the following risks actually occurs, the business, financial condition and prospects of the Group and/or of the Enlarged Group could be adversely affected. In such case, the market price of the Ordinary Shares could decline and you may lose all or part of your investment.

1. RISK FACTORS RELATING TO THE ACQUISITION

1.1 Failure to complete the Acquisition

Completion of the Acquisition remains conditional upon approval of the Resolution. If Shareholders do not approve the Acquisition at the General Meeting, the Acquisition will not complete. If the Acquisition does not complete, the Company would nonetheless be obliged to pay approximately £4.4 million of costs (primarily due diligence and advisory fees) incurred in connection with the Acquisition. Failure to complete the Acquisition may materially adversely affect the trading price of the Ordinary Shares.

As at the date hereof, the FSA has agreed to the change of control of the Save & Prosper Group, provided the Acquisition is completed prior to 23 August 2011.

1.2 Adverse change in the financial condition of the Save & Prosper Group prior to completion of the Acquisition

Pursuant to the terms of the Acquisition Agreement, the Company may only terminate the Acquisiton Agreement prior to completion in certain circumstances (details of which are set out in paragraph 6 of Part V). Completion is expected to occur on 20 December 2010. Until completion of the Acquisition, the Company will not own the Save & Prosper Group and it is possible that there could be an adverse event affecting the Save & Prosper Group which would not give rise to a right of the Company to terminate the Acquisition Agreement. In such an event, the value of the Save & Prosper Group may be less than the consideration paid by the Company and, accordingly, the net assets of the Enlarged Group could be reduced. This could have an adverse effect on the business, financial condition and operating results of the Enlarged Group.

1.3 Failure to realise benefits of the Acquisition

The Enlarged Group may not realise the expected benefits from the Acquisition or succeed in addressing any problems encountered in connection with the Acquisition. Such unforeseen costs could include integration costs and regulatory costs in the jurisdictions in which the Save & Prosper Group's business is written or in which the Save & Prosper Group's policyholders are located. Further, the investment performance of the Save & Prosper Group's funds or its historical handling of insurance risk may not be as sound as the Company had previously assessed. Any such issues would adversely affect the financial position of the Enlarged Group and ultimately the trading price of the Ordinary Shares.

2 RISKS RELATING TO THE ENLARGED GROUP

The Enlarged Group comprises the following principal operating segments:

UK Business

The UK Business comprises CALH and, following the Acquisition, the Save & Prosper Group. CALH and the Save & Prosper Group underwrite life risks such as those associated with death, disability and health and provide a portfolio of investment contracts for the savings and investment needs of customers through asset management. They are substantially closed to new business.

Swedish Business

The Swedish Business comprises Moderna which underwrites life, accident and health risks and which provides a portfolio of investment contracts. It is open to new business, securing distribution of its products principally through independent financial advisers.

In view of a high degree of commonality in the nature and scope of the activities of the UK and Swedish Businesses, these operating segments are exposed to similar classes of risk as set out below. Insofar as the nature of the scope and activities of the segments differ and are thereby exposed to different risks, these are identified in Sections 3, 4 and 5 following.

2.1 Insurance risk

The Enlarged Group's management of insurance risk is a critical aspect of its business. The primary insurance activity carried out by the Enlarged Group comprises the assumption of the risk of loss from persons that are directly subject to the risk. Such risks in general relate to life, accident, health and financial perils that may arise from an insurable event. As such, the Enlarged Group is exposed to the uncertainty surrounding the timing and severity of claims under the related contracts. The principal risk is that the frequency and severity of claims is adverse to that expected. The theory of probability is applied to the pricing and provisioning for a portfolio of insurance contracts. Insured events are, by their nature, random, and the actual number and size of events during any one year may vary from those estimated using established statistical techniques. The risk under assurance policies is partly naturally hedged by risks under annuity policies where the exposure is to the risk of longevity.

The Enlarged Group manages its insurance risk through adoption of underwriting strategies, the aim of which is to avoid the assumption of undue concentration of risk, and through adoption of reinsurance strategies, the aim of which is to reinforce the underwriting strategy by avoiding the retention of undue concentration of risk on any one life.

Nothwithstanding that similar techniques are employed in managing these risks, the disparate characteristics of the products and of the market and regulatory environments of the UK and Swedish Businesses are such that insurance risk is managed separately for the separate businesses. The following paragraphs set out the principal types of insurance contract of the UK and Swedish Businesses and the associated risks and risk mitigation.

UK Business

CALH

(a) Long-term insurance contracts without discretionary participation features

By far the most significant type of contract of CALH by value of sums assured are long-term contracts without discretionary participation features. Death is the predominant risk assured, and the most significant factors that could increase risk for CALH are epidemics (such as AIDS, SARS or a flu pandemic) or widespread changes in lifestyle, such as eating, smoking and exercise habits, resulting in earlier or more claims than expected.

Approximately two per cent. of total sums assured by the Group have fixed and guaranteed benefits and fixed future premiums, leaving no scope for the Group to mitigate its risk through changes in premiums. However, the remainder of the long-term contracts without discretionary participation features are either unit-linked or quasi-linked insurance contracts. Unit-linked contracts have reviewable charges and consist mainly of unit-linked endowments where the primary purpose is investment return, but the policyholder is also insured against death and certain illnesses and injury. The maturity or surrender value depends upon the investment performance of the underlying fund, so insurance risk arises only in respect of the excess of any guaranteed death benefit over the value of the unit-linked fund. For quasi-linked contracts, CALH has the right to alter monthly charges for mortality risk and to change the premium payable in light of changing circumstances. CALH aims to avoid undue concentration of risk on any one life through its underwriting and reinsurance strategies.

Insurance contracts where the benefits and also future premiums are fixed leave no scope for CALH to mitigate its insurance risk, and any changes to the original assumptions on which such contracts were priced could have an adverse effect on the profitability of CALH. Where CALH has the ability to mitigate its insurance risk through changing charges and premiums, failure to act in a timely manner to changing information could adversely affect the profitability of the Enlarged Group, and in the case of a major epidemic, it may be impossible to recoup the costs of the resulting claims.

(b) Long-term insurance contracts – with discretionary participation features

Just over one per cent. of total sums assured of CALH comprise with-profits business, meaning a guaranteed sum payable on death or at maturity plus a discretionary amount depending upon investment performance.

This business is wholly reinsured to Guardian, which is a subsidiary of Aegon N.V., a Dutch insurer. Therefore, the only significant risk for CALH associated with this business is the risk of default by Guardian. If Guardian were to default, CALH would become liable under the insurance contracts to the policyholders which would adversely affect the profitability of the Enlarged Group.

(c) Long-term insurance contracts – immediate annuities

Statutory mathematical reserves for immediate annuities represent (net of reinsurance) approximately 6.2 per cent. of the total statutory mathematical reserves. This type of annuity is purchased with a single premium at the outset and is paid to the policyholder for the remainder of their life. Profit on existing contracts arises when mortality is worse and investment experience is better than expected, or, to view it another way, the main risks associated with this product are longevity and investment risks. Failure to correctly price annuities at the outset or failure to generate sufficient investment return could both, over the longer term, adversely affect the solvency position of the Enlarged Group, the surplus available for distribution and thus the Enlarged Group's capacity to pay dividends.

Save & Prosper Group

The principal types of insurance contract of the Save & Prosper Group and the associated risks and risk mitigation are set out below:

(a) Long-term insurance contracts – with discretionary participation features

At retirement the with-profits deferred annuity contracts provide for guaranteed minimum pension funds and the with-profits endowments provide for guaranteed minimum lump sums. With-profits funds whole of life policies guarantee a minimum amount payable on death. The guaranteed pension funds or lump sums represent investment returns on contributions mainly at 5 per cent. per annum. A terminal bonus may be paid at maturity or retirement, and on death, depending on the investment performance of the with-profits policyholder assets when the policyholder receives the higher of the asset share and the minimum guaranteed amount. The asset share is based on the contributions invested plus an allocation of investment return less costs and expenses. In accordance with the Principles and Practices of Financial Management for its with-discretionary participation features business the Save & Prosper Group may make a deduction of up to 1.5 per cent. per annum from the asset shares of withprofits policyholders to meet the future cost of guarantees. The amount deducted remains part of the assets in the with-profits policyholder funds. The size of the deduction is reassessed at least annually. In the event of a policyholder choosing to transfer out, the amount payable is not guaranteed and is based on the asset share. For life endowment and whole of life policies mortality risk is material. This risk is mitigated to some extent by the use of reinsurance. The risk is to increases in mortality rates, which are most likely to be from epidemics (such as AIDS, SARS or a flu pandemic) or widespread changes in lifestyle, such as eating, smoking and exercise habits, resulting in earlier or more claims than expected. For deferred annuity contracts, the risk is to improving mortality. The risk is managed through the initial pricing, and technical provisions are assessed allowing for future mortality improvements based on industry available information on mortality experience.

(b) Long-term non-linked and unit-linked insurance contracts – without discretionary participation features

The Save & Prosper Group has written both non-linked and unit-linked contracts, which include death and morbidity benefits on a whole life, endowment and term assurance basis. For contracts where death is the insured risk, the most significant factors that could increase risk are epidemics (such as AIDS, SARS or a flu pandemic) or widespread changes in lifestyle such as eating, smoking and exercise habits, resulting in earlier or more claims than expected. Unit-linked insurance contracts are contracts where the primary purpose is to provide an investment return to policyholders. In addition, the policyholder is insured against death and

serious injury. Unit-linked contracts operate by investing the policyholders' premiums into pooled investment funds, the policyholders' share of the fund being represented by units. The benefit is payable on death, or maturity if earlier, the amount payable on death being subject to a guaranteed minimum amount. Therefore, the Save & Prosper Group is exposed to insurance risk insofar as the value of the unit-linked fund is lower than the guaranteed minimum death benefit. The maturity or surrender value depends on the investment performance of the underlying fund and on the level of charges levied by the Save & Prosper Group for policy administration fees, mortality and other charges. For contracts with fixed and guaranteed benefits and fixed future premiums, there are no mitigating terms and conditions that reduce the insurance risk accepted. This is the case for a small proportion (7.6 per cent. of total sums assured) of the life assurance business sold by the Save & Prosper Group. Reinsurance is used on the business described above to mitigate concentrations of insurance risk. The insurance risk is further managed through pricing, product design and, for non-linked contracts, appropriate investment strategy. For units held under unit-linked contracts all of the investment risk is borne by the policyholder.

(c) Long-term insurance contracts – immediate annuities

This type of annuity is purchased with a single premium at outset, and is paid to the policyholder whilst alive, either for the remainder of his/her lifetime or for a maximum term. Annuities may be level or escalate at a fixed rate. There are two types of immediate annuities: retirement and voluntary. Voluntary annuities are made at the discretion of the policyholder, and in many cases are for funding regular commitments such as school fees. Policyholders of personal pensions may have to purchase an immediate annuity on retirement. Other variations (joint life annuities) are to continue the annuity (at the same level or lower) to the surviving spouse or partner. Profit on existing contracts arises when mortality and investment experience are better than expected. All risks and rewards associated with this type of product accrue to shareholders. The main risk associated with this product is longevity, as annuities are paid whilst the life assured remains alive, and this risk is managed through the initial pricing of the annuity. The key risks are managed through appropriate pricing and product design. Reinsurance and underwriting are not used for this product. In respect of mortality risk (longevity), the pricing assumption is based on both historic in-house and industry available information on mortality experience for the population of policyholders, including allowances for future mortality improvements. In respect of investment risk, with this type of product the lump sum premium is available for the Save & Prosper Group to invest at the start of the contract. The Save & Prosper Group invests the premium into cash assets, and carries all the investment risk. Certain annuities are written as variable cases, with the regular payment being defined in terms of a fixed number of units in a specified unit-linked fund. In this case the policyholder is exposed to the investment risk as the Save & Prosper Group matches the liability with the assets of the appropriate number of units in the fund. The Save & Prosper Group continues to take the longevity risk, as described above.

Swedish Business

(a) Group contracts

Group contracts, which are issued by Moderna through intermediated sales, insure policyholders in respect of death with the option to include additional accident and disability benefits. Policyholders may also include their spouse and children (up to the age of 25) on the policy. These group contracts which are sold in Sweden allow the policyholder to choose the sum assured level. All contracts are for an annual period and premium payments are made usually on either an annual or quarterly basis.

(b) Individual contracts

In relation to individual contracts, Moderna writes contracts which include death and morbidity benefits on term assurance with disability, waiver of premium and income protection options. Policies are sold in Sweden and all sales are intermediated.

In relation to the income protection and the waiver of premium benefits within the Individual contracts, the monthly benefits upon a claim may be payable to the policyholders over a long period up to their retirement. All individual contracts are for an annual period and payments are made on a monthly basis.

(c) Management of risk associated with group and individual contracts

The main risk associated with the group and individual contracts is the frequency of claims (for either death or accident or sickness). Claims experience can be variable, with the main factors being the age, sex and occupation of the policyholder. In addition, for the group contracts, Moderna is exposed to a single loss event that covers a number of employees of an organisation.

The key risks are managed through appropriate product design and pricing of the policies to ensure that the potential cost to Moderna of these events (and associated expenses of underwriting and administration) are reflected in the price charged to the policyholder. Key controls implemented include a defined pricing structure based on the characteristics of the policyholder and the regular review of management information on the type and frequency of accidents.

Group contracts are issued on an annual basis which means that Moderna's exposure runs for a period of 12 months, after which the Swedish Business has the option to decline, to renew or can increase the price on renewal. Individual contracts are long-term contracts but Moderna has the option to review the premiums on an annual basis.

For both the group and individual contracts, between 80 per cent. to 90 per cent. of the premiums and claims relating to this product are ceded to a reinsurer which reduces the overall insurance risk exposure to Moderna. In respect of group contracts, the business is exposed to multiple employees of the same organisation being involved in a single loss event.

Failure by the Enlarged Group to correctly price or mitigate insurance risk or to manage the risks associated with one or more of the types of insurance contract set out above could materially adversely affect the financial results of the Enlarged Group and may ultimately affect the trading price of the Ordinary Shares.

2.2 Financial risk

The Enlarged Group is exposed to a range of financial risks through its insurance contracts, financial assets (including assets representing shareholder assets), financial liabilities (including investment contracts and borrowings) and its reinsurance assets. Accordingly, the key financial risk is that, in the long-term, its investment proceeds are not sufficient to fund the obligations arising from its insurance and investment contracts. The most important components of this financial risk are market risk (interest rate risk, equity price risk and foreign currency exchange risk) and credit risk, including the risk of reinsurer default. These risks arise from open positions in interest rate, equity and currency products, all of which are exposed to general and specific market movements.

For unit-linked contracts the Enlarged Group's objective will be to match the liabilities, both insurance and investment contract liabilities, with units in the assets of the funds to which the value of the liabilities is linked, such that the policyholder bears the market risk. This minimises the impact of market risks and of credit risk on these contracts, such that the primary exposure to market risk is the risk of volatility in asset management fees due to the impact of interest rate, equity price and foreign currency movements on the value of the unit-linked assets, on which management fees are based.

For non unit-linked business, the Enlarged Group's objective will be to match the timing of cash flows from insurance and investment contract liabilities with the timing of cash flows from assets subject to identical or similar risks. By matching the cash flows of liabilities with those of suitable assets, market risk is managed effectively whilst liquidity risk is minimised. With respect to the Save & Prosper Group, there is specific additional risk insofar as investment returns on policyholder assets supporting the with-profits business may result in insufficient policyholder assets to meet contractual obligations to with-profits policyholders because of the impact of contract guarantees (see Section 4 below).

Notwithstanding that the Group employs similar techniques in managing financial risk, the disparate characteristics of the products and of the market and regulatory environment of the UK and Swedish Businesses are such that the operation of the Group's overall management of financial risk is devolved as between the UK and Swedish Businesses. Accordingly, the description of the specific management of financial risk is set out separately below for the UK and Swedish Businesses.

2.2.1 Market risk

UK Business

CALH and the Save & Prosper Group manage their market risks within an asset liability management (ALM) framework that has been developed to achieve long-term investment returns at least equal to their obligations under insurance and investment contracts, with minimal risk. Within the ALM framework the businesses periodically produce reports at legal entity and asset and liability class level, which are circulated to their respective key management. The principal technique of the ALM framework is to match assets to the liabilities arising from insurance and investment contracts by reference to the type of benefits payable to policyholders, with separate portfolios of assets being maintained for each distinct class of liability.

The terms and conditions of insurance contracts which have a material impact on the amount, timing and uncertainty of future cash flows are set out in Section 2.1 above. The terms and conditions of investment contracts which have a material effect on the amount, timing and uncertainty of future cash flows are set out below.

CALH

CALH provides three types of investment contract, predominantly written in the UK: unit-linked savings, unit-linked pensions and guaranteed income and growth bonds.

• (i) Unit-linked savings are typically single premium contracts, with the premiums invested in a pooled investment fund, where the policyholder's investment is represented by units.
• (ii) Unit-linked pensions are single or regular premium contracts resulting in a pot of cash which is used to purchase an open-market annuity.
• (iii) Guaranteed income bonds are mainly single premium contracts for a fixed term offering fixed-income payments plus a return of capital at maturity. A guaranteed growth bond offers no income, but a higher guaranteed payment at maturity date.

Save & Prosper Group

The characteristics of investment contracts provided by the Save & Prosper Group are set out in Note 5 of the Notes to the Consolidated Financial Information within Part III of this document.

The risks associated with these CALH and the Save & Prosper Group contracts are principally market risk (interest rate risk, fixed interest and equity price risk and liquidity risk), persistency risk (see section 2.3 below) and expense risk (see section 2.4 below). It should be noted that, with respect to the Save & Prosper Group, liquidity risk management in policyholder funds is enhanced by only investing in readily realisable investments, with the exception of property investments, where property sales and purchases are closely monitored to match net cash flows with policyholders. Further, there are provisions in fund particulars to defer redemptions in times of adverse market conditions, or where they may be material relative to the fund size.

Swedish Business

The insurance and investment elements of unit-linked contracts provided by Moderna have been unbundled. The characteristics of the insurance contracts are set out in Section 2.1 above. The characteristics of investment contracts that could have a material effect on the amount, timing and uncertainty of future cash flows arising from investment contracts are set out as follows.

Moderna provides two types of investment contract:

(i) Unit-linked savings

These are single premium or regular premium contracts, with the premiums invested in unit-linked funds or trust accounts where the policyholder decides where to invest. On certain contracts there is a small additional benefit payable on death which is deemed not to transfer significant insurance risk to the business for these contracts. The benefits payable at maturity or surrender of the contracts are the underlying value of the investment in the unit-linked funds or trust accounts.

(ii) Unit-linked pensions

The contractual features are similar to unit-linked savings. The savings can be transferred to another pension provider or can be cashed on retirement over a period of least five years. There is no annuity linked to the unit-linked pensions.

In contrast to CALH and the Save & Prosper Group, Moderna's investment contracts are wholly unit-linked and, as the business matches all the financial liabilities with assets on which the unit liabilities are based, this approach results in the business having no significant market risk (being interest rate, equity price and currency risks) on its investment contracts.

As to its insurance contracts Moderna has specific liquidity risk. The liquidity risk is limited, since premiums are collected in advance and any large claims payments are usually known within a short period of their occurrence. To reduce the remaining liquidity risk, the business's cash flow is analysed continuously. The main part of the business's assets is placed in securities which can be sold with short notice, without the price being greatly affected. Investments are also made into listed securities where the liquidity risk is deemed to be limited.

Failure to adequately manage market risks through the ALM framework, or through investment strategies, could result in a lower value of investment assets that back the liabilities arising from insurance and investment contracts, could materially adversely affect the financial results of the Enlarged Group and may ultimately affect the trading price of the Ordinary Shares.

2.2.2 Credit risk

UK Business

CALH and the Save & Prosper Group each have exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. Key areas where the businesses are exposed to credit risk are:

• . Reinsurers' share of insurance liabilities;
• . Amounts deposited with reinsurer in relation to investment contracts;
• . Amounts due from reinsurers in respect of claims already paid; and
• . Counterparty risk with respect to corporate bond, deposits and debt securities.

In addition there will be some exposures to individual policyholders, on amounts due on insurance contracts. These are tightly controlled, with plans being terminated or benefits amended if amounts owed are for more than 3 months, so there is no significant risk to the results of the business.

The business structures the levels of credit risk it accepts by placing limits on its exposure to a single counterparty, or group of counterparties. Such risks are subject to at least an annual review.

Although the business holds a significant proportion of its financial assets in securities, the risk of default on these is mitigated to the extent that any losses arising in respect of unit-linked funds backing the insurance and investment contracts which the business issues, would effectively be passed on to policyholders and investors through the unit-linked funds backing the insurance and investment contracts.

However, CALH and the Save & Prosper Group, whilst maintaining the objective of earning competitive returns by investing in a diversified portfolio of securities, retain residual credit risk on corporate bond deposits and debt securities, as follows:

CALH

CALH bears residual risk on assets which support annuities and guaranteed investment bonds. These risks are monitored: a key aspect of this is the business's current policy of investing new monies only in high-quality bonds of supra-national corporations and in government-backed debt. The business has never purchased assets rated below AA by Standard & Poors. Watch lists are maintained for exposures requiring additional review and all credit exposures are reviewed monthly.

Save & Prosper Group

Although, in normal circumstances, all credit risk on deposits and debt securities remains with policyholders, there is a risk that the shareholders bear the credit risk on such securities where otherwise, there would be insufficient with-profits policyholder assets to fund minimum guaranteed amounts.

Reinsurance is used to manage insurance risk in CALH and the Save & Prosper Group. This does not however discharge the business's liability as primary insurer. If a reinsurer fails to pay a claim for any reason, the business remains liable for the payment to the policyholder. The creditworthiness of major reinsurers is considered on an annual basis by reviewing their financial strength.

It should be noted that:

• (i) For historical reasons, CALH has a significant exposure of £232.9 million as at 31 December 2009 (31 December 2008: £200.6 million) to Guardian, a subsidiary of Aegon NV., which does not have a published credit rating. Of this amount £204.1 million (31 December 2008: £182.5 million) is in respect of currently guaranteed benefits. The exposure which relates to reinsured insurance contract liabilities, and which relates to amounts deposited with Guardian in respect of investment contract liabilities, was mitigated during 2006 when Guardian granted to Countrywide Assured plc (CALH's main operating subsidiary) a floating charge over related investment assets, which ranks that company equally with Guardian policyholders. In order to monitor the ongoing creditworthiness of Guardian, CALH reviews the financial statements and regulatory returns submitted by Guardian to the FSA on an annual basis.
• (ii) The Save & Prosper Group bears the credit risk on an investment contract valued at £98 million as at 30 June 2010 (31 December 2009: £101 million) with JPMorgan Life Limited (JPML) and this exposure is offset by a counterparty exposure that JPML has to the Save & Prosper Group of £12 million as at 31 June 2010 (31 December 2009: £11 million) under a separate investment contract that JPML has with the Save & Prosper Group.

Swedish Business

Key areas where Moderna is exposed to credit risk are:

• . Reinsurers' share of insurance liabilities;
• . Amounts due from reinsurers in respect of claims already paid;
• . Counterparty risk with respect to corporate bond, deposits and debt securities; and
• . Amounts paid to independent financial advisers representing advances of commission not yet earned by them.

Amounts due from policyholders are insignificant and claims against policyholders carry a limited credit risk as non-payment leads to cancellation of the insurance policy. Unit-linked assets are only acquired upon receipt of the premium from the policyholder.

The business structures the levels of credit risk it accepts by placing limits on its exposure to a single counterparty, or group of counterparties. Such risks are subject to at least an annual review. By far the largest credit risk to the business is in relation to its reinsurance assets.

The business retains some residual risks on assets which support shareholders' equity. The business's objective is to earn competitive relative returns by investing in a diversified portfolio of securities. Watch lists are maintained for exposures requiring additional review and all credit exposures are reviewed monthly.

Reinsurance is used to manage insurance risk in Moderna. This does not however discharge the business's liability as primary insurer. If a reinsurer fails to pay a claim for any reason, the business remains liable for the payment to the policyholder. The creditworthiness of major reinsurers is considered on an annual basis by reviewing their financial strength. The current rules state that reinsurance should only be made using reinsurance companies with a credit rating from Standard & Poor's of A or higher (except for the reinsurer which is an associate of Moderna).

The business has entered into reinsurance arrangements with four reinsurers. With the main reinsurer, there is an associated financial reinsurance agreement in place whereby the amount due to the reinsurer is more than the reinsurer's share of the claims.

In relation to the other significant reinsurer (which is an associate of Moderna), there is a credit risk exposure which is managed by Moderna being represented on the Board of the reinsurer. Moderna is therefore closely involved and can influence its strategy.

The failure of the Enlarged Group's credit risk management strategies may result in a counterparty being unable to pay amounts in full when due which could materially adversely affect the financial results of the Enlarged Group and may ultimately affect the trading price of the Ordinary Shares.

2.3 Persistency risk

Persistency risk is the risk that the policyholder cancels the contract or discontinues paying new premiums into the contract, thereby exposing the Enlarged Group to losses resulting from adverse movements in actual experience compared to that expected in product pricing or from lower future levels of management fees.

In a substantially closed book any divergence in persistency rates from those assumed may have a greater impact than in an open book where other factors may offset some of this risk. The Enlarged Group will regularly monitor the persistency rates of its policies in force. However, there remains uncertainty as to whether the Enlarged Group's core assumptions relating to policy persistency will prove to be sufficient, as rates of persistency may be impacted by unexpected or unforeseen events. Decreased persistency rates could materially adversely affect the financial results of the Enlarged Group and may ultimately affect the trading price of the Ordinary Shares.

2.4 Expense risk

The effective management of expenses is critical to the UK and Swedish Businesses. Any significant variation in actual experience from that expected in product pricing will expose the Enlarged Group to losses. The strategy of CALH and the Save & Prosper Group, being substantially in run off, is to outsource all operational activities to third-party administrators in order to reduce the significant expense inefficiencies that would arise from fixed and semi-fixed costs on a diminishing policy base. There are, however, consequential risks associated with outsourcing: in particular, in order to continue to manage expense risk, there will be a need to renegotiate outsourcing arrangements on appropriate terms, as existing arrangements expire (see also Section 3.2 and 4.2 below). The failure to continue to manage effectively the expenses of the operations of the Enlarged Group could materially adversely affect the financial results of the Enlarged Group and may ultimately affect the trading price of the Ordinary Shares.

2.5 Regulatory compliance

UK Business

CALH and the Save & Prosper Group are subject to regulation in respect of long-term insurance business in the United Kingdom. Regulatory agencies, including the FSA, have broad administrative power over many aspects of insurance business, which may include capital adequacy, premium rates, marketing and selling practices, advertising, licensing agents, policy forms and permitted investments. Government regulators are concerned primarily with the protection of policyholders rather than shareholders or creditors. In addition, the Financial Ombudsman Service is empowered to settle disputes between CALH or the Save & Prosper Group and individual policyholders up to an amount of £100,000. Insurance laws, regulations and policies currently affecting CALH and the Save & Prosper Group may change at any time, having a material adverse effect on its business. Furthermore, it is not possible to accurately predict the timing or form of any future regulatory initiatives. In this regard, HM Treasury has begun a consultation on ''A new approach to financial regulation: judgment, focus and stability'' (July 2010) in which, among other things, it has proposed that the prudential supervision of insurance companies be moved from the FSA to a new Prudential Regulation Authority (''PRA''), which would be a subsidiary of the Bank of England. It is also proposed that the conduct of insurers' business with policyholders should be supervised by a new Consumer Protection and Markets Authority (''CPMA''). The PRA and CPMA would both be responsible for making rules within their respective spheres of competence. It is expected that this new regulatory architecture will be introduced, subject to any changes, within the next two years. The detailed terms and practical effects of these changes, as they will affect the Enlarged Group and other life assurers, are likely to remain uncertain for some considerable time.

Swedish Business

Moderna is subject to government regulation in Sweden through the Finansinspektion ('FI') which is the equivalent of the FSA in the UK and has similar oversight and powers to those outlined above. Therefore, similarly, failure by Moderna to comply with the relevant regulatory requirements applicable to its business could materially adversely affect the financial performance and the reputation of Moderna which could in turn adversely affect the results of the Enlarged Group. Insurance laws, regulations and policies currently affecting Moderna may also change at any time, having a material adverse effect on its business. Furthermore, it is not possible to accurately predict the timing or form of any future regulatory initiatives.

2.6 Regulatory capital: Solvency II

The EU Commission is carrying out a wide-ranging review in relation to solvency margins and reserves (the project being known as ''Solvency II''). Solvency II is expected to come into force in late 2012, barring major delays in the production of detailed implementing rules and guidance. The reforms proposed by Solvency II are broadly based on a three-pillar structure which deal with minimum capital requirements, supervisory review processes and public transparency and market discipline. It is intended that the new regime for insurers and reinsurers (apart from very small firms) will apply more risk-sensitive standards to capital requirements, bring insurance regulation more closely in line with banking and securities regulation with a view to avoiding regulatory arbitrage, align regulatory capital with economic capital and bring about an enhanced degree of public disclosure on a yearly basis. Solvency II could have an impact on the reported results for insurance businesses within the Enlarged Group and hence on any return on its investment in such businesses, and could, among other things, result in the Enlarged Group being required to reserve additional capital in respect of its liabilities.

2.7 Regulatory enforcement

Insurance regulatory authorities may from time to time make enquiries of companies within their jurisdiction regarding compliance with regulations governing the conduct of insurance business. Past investigations include, among other things, the process of marketing and sale of insurance policies. The incumbent Boards believe they dedicate sufficient resources to their compliance programmes, and endeavour to respond to such enquiries in an appropriate way and take corrective action when warranted. However, the Enlarged Group does face the risk that the FSA, FI or another governmental or regulatory body could find it has failed to comply with applicable regulations or has not undertaken corrective action as required. In this case, regulatory proceedings could result. The result may be a public reprimand and/or monetary fines. However, other consequences may result. Regulatory proceedings could result in adverse publicity for, or negative perceptions regarding, the Enlarged Group as well as diverting management's attention from the day-to-day operations of the business. A significant regulatory action against the Enlarged Group could have a material adverse effect on its business, result of operations and/or financial condition.

2.8 Failure of information systems

The Enlarged Group's ability to maintain financial controls and provide high quality customer service to customers depends, in part, on the efficient and uninterrupted operation of their management information systems, including their computer systems. The Enlarged Group's information systems are vulnerable to damage or interruption from floods, fires, power loss, telecommunication failures and similar events. These systems may also be subject to sabotage, vandalism or similar misconduct. The same is true of third party service and software providers on which the Enlarged Group depends. There can be no assurance that systems will function as designed. Whilst the Enlarged Group will put in place disaster recovery plans covering current critical business requirements, which are subject to a rolling programme of testing, any damage to or failure of their management information systems could result in interruptions to the Enlarged Group's financial controls and customer service. Such interruption could have a material adverse effect on the Enlarged Group's operations, results of operations and/or financial condition.

2.9 Highly skilled personnel

The Enlarged Group's continued success depends on its ability to attract, motivate and retain highly skilled managers and finance, actuarial, compliance, IT and customer services personnel. The loss of key personnel from the business may have a material adverse effect on its ability to manage the

substantially closed books of the business because it may result in the loss of their technical and management skills, as well as their knowledge of the legacy issues of the business. As a result, the inability to attract and/or retain the necessary highly skilled personnel could have a material adverse effect on the Enlarged Group's operations, results of operations and/or financial condition. This challenge will also apply to employees of the Save & Prosper Group in the Enlarged Group following completion of the Acquisition.

2.10 Operating risks

As at 30 June 2010, CALH is responsible for the administration of approximately 169,000 policies. Although the UK Business is confident that its operating systems and controls are robust, there can be no assurance that all historical operational errors have been identified, nor that operational errors will not arise in the future. The identification of previously unidentified historical errors or new operational errors may result in adverse publicity and may have a material adverse effect on the Enlarged Group's operations, results of operations and/or financial condition. Following the Acquisition the same risks will apply as CALH and the Save & Prosper Group will together be responsible for the administration of approximately 343,000 policies (as at 30 June 2010). The Swedish Business is responsible for the administration of 89,000 pension and savings policies (as at 30 June 2010) and the operating risks outlined earlier in this section equally apply to this business. In total, the Enlarged Business will be responsible for the administration of 432,000 policies (as at 30 June 2010).

3. ADDITIONAL RISKS RELATING TO CALH

3.1 Endowment mortgage policies

Endowment policies were designed to allow policyholders to pay only the interest due on the mortgage, together with premiums on the endowment policy. Policyholders expected that their policy would produce a sufficient amount of capital to pay off the mortgage in full at the end of the term of the policy. However, this was not guaranteed and the sales process should have made it clear that it was possible that, at the end of the mortgage term, there might be a shortfall of capital needed to repay the mortgage in full. Whenever stock markets have fallen, this has directly affected returns on unit-linked policies. Lower interest rates and inflation in recent years have also created a climate of lower investment returns going forward. The premiums payable were calculated based on the projections at the time of the sale of the policy. There is a risk in these circumstances that premiums paid and future investment returns will not be adequate to avoid a shortfall of proceeds upon maturity of a significant proportion of mortgage-related endowment policies that have been issued. In 2000, regulators required companies which had sold endowment policies, to undertake a mailing programme to all endowment policyholders and, from May 2003, CALH has engaged in further mailing programmes. In addition, CALH has provided information to policyholders on a periodic basis regarding premium adequacy. As a result of these various mailings, FSA public awareness campaigns, the increase in comment and profile in the media and by consumer organisations in connection with the issue of endowment mis-selling and volatility in stock market values, CALH has experienced lapses and surrenders of endowment policies and complaints about alleged mis-selling. CALH is dealing with complaints in accordance with the FSA's procedural requirements. CALH continues to closely monitor the volume of complaints and the value of compensation paid. CALH has established a reserve in respect of these liabilities based on its current and expected experience; however, failure to adequately provide for the number and quantum of endowment complaints could, in the longer term, result in a deterioration of the Enlarged Group's solvency position, surplus available for distribution and thus its capacity to pay dividends.

3.2 Outsourcing risks

The operating model of CALH's life business is directed towards maintaining Shareholder value by outsourcing all support activities to professional specialists. This typically embraces policy administration, systems, accounting and investment management and reduces the impact of potential fixed and semi-fixed cost issues which would otherwise occur as the income streams arising from a declining in-force portfolio diminish. By securing long-term contracts to support these activities CALH obtains a relatively fixed cost per policy per year, which ensures that the overall cost is more predictable and reduces broadly in line with the size of the policy portfolio. It also leads to the avoidance of the full weight of systems development costs, as these will, generally, be shared with other users of the outsourcers' platforms. CALH closely monitors its outsourcers to ensure

they meet all necessary regulatory requirements, maintain suitably robust information systems and disaster recovery procedure and utilise adequately skilled and experienced personnel to administer its requirements. CALH is not aware of any prospect of either the outsourcer ceasing to trade or defaulting on their responsibilities under the contract. Should such circumstances arise, CALH has ''step-in'' rights which could be utilised whilst alternative arrangements are finalised. There is no guarantee that the replacement services could be procured at the same cost, notwithstanding the availability of any compensation, and therefore default may give rise to a material adverse effect on the financial position, results and prospects of the Enlarged Group.

4. ADDITIONAL RISKS RELATING TO THE SAVE & PROSPER GROUP

4.1 Endowment mortgage policies

The Save & Prosper Group has some exposure to to endowment mortgage policies as outlined for CALH in section 3.1 above. The Save & Prosper Group's exposure is relativley low in comparison to CALH as the Save & Prosper Group was more focussed on writing investment and pension business than endowment business. The Save & Prosper Group deals with complaints in accordance with the FSA's procedural requirements and continues to closely monitor the volume of complaints and the value of compensation paid. The Save & Prosper Group has not established a reserve in respect of these liabilities as it regards all endowment policies to be time-barred from complaints as it has issued the requisite letters to policyholders for this to be the case. However, should their understanding of the rules be incorrect or the letters ineffective then the number and quantum of endowment complaints could, in the longer term, result in a deterioration of the Enlarged Group's solvency position, surplus available for distribution and thus its capacity to pay dividends.

4.2 Outsourcing risks

As the Save & Prosper Group operates a substantially equivalent operating model to that detailed for CALH in section 3.2 above, including using one of the outsource providers currently used by CALH, the above risk applies equally to its activities.

4.3 FSA's review of its with-profits regime

The FSA has recently undertaken a comprehensive review of compliance with its rules and guidance by life insurance companies operating within the with-profits sector (''with-profits firms''). The review was prompted by the FSA's experience of supervising with-profits firms' compliance with the enhanced regulatory regime introduced in 2005, and by concerns raised by the Treasury Select Committee and consumer organisations. These concerns included that the with-profits sector was stated to be generally producing poor outcomes for policyholders due, among other things, to poor or unfair operation of funds and the imposition of market value reductions (MVRs) when policyholders surrendered their with-profits policies. As part of its review, the FSA carried out detailed assessments on governance, consumer communications, payouts on surrender and maturity of policies, charges, new business and issues specific to closed funds.

The FSA published a report of its findings in June 2010. It found that the majority of with-profits firms reviewed did not, in the FSA's view, satisfactorily demonstrate that their practices were consistent with well run with-profits businesses in one or more areas that were assessed, potentially exposing with-profits policyholders to risk. In particular, the FSA identified material shortcomings in the effectiveness of how with-profits firms were governing relevant funds, especially in respect of the independent challenge provided by firms' with-profits committees. The FSA also criticised significant weaknesses which it observed in the clarity and timeliness of information provided to with-profits policyholders. The report also contained findings from a ''lessons learned'' exercise undertaken on the reattribution of assets held within with-profits funds, following the reattribution completed by a major firm recently.

As a result of its findings, the FSA has stated that it is undertaking enforcement investigations with certain with-profits firms, and may take further enforcement action in respect of other firms, depending on their response to mitigate risks identified by the FSA. It is also considering further review and change to the regulatory regime applying to with-profits funds. Any changes to the existing regime would be the subject of consultation with the industry and the public before the end of 2010 and during 2011. The FSA has also required firms to review its findings to ensure that they meet existing requirements to operate funds fairly and transparently.

The Save & Prosper Group operates two with-profits funds, and is thus considering carefully the FSA's report. The Save & Prosper Group is not one of the firms which is currently the subject of an enforcement investigation by the FSA in this regard. Though the Save & Prosper Group's review of the issues raised by the FSA's report is not complete, Chesnara has no reason to believe, based on its due diligence enquiries, that any measures which the Save & Prosper Group takes to address the findings of the FSA's report would be likely to have a material adverse effect on the business of the Enlarged Group. However, no assurance can be given that this will prove to be the case, or that regulatory proceedings will not be taken in this regard. Any such proceedings could have a material adverse effect on the Enlarged Group's business, results of operations and/or financial condition. Any future changes to the rules and guidance affecting with-profits firms may also have similar adverse effect.

4.4 Guaranteed benefits attributed to with-profits policies

With-profits deferred annuity contracts provide for guaranteed minimum pension funds at retirement and the with-profits endowments provide for guaranteed minimum lump sums. These with-profits policies issued by the Save & Prosper Group are entitled to participate in the profits arising from the relevant with-profits fund. This participation is in the form of a contractual growth rate in the value of the units allocated to the policy. The contractual growth rate is set at 5 per cent. for the majority of such policies with a lesser number benefiting from a 3.5 per cent. rate. In addition to the contractual growth rate a terminal bonus may be paid at retirement depending on the investment performance of the with-profits policyholder assets. Should the assets of the fund backing the liabilities arising from the with-profits policies be insufficient at any time to meet claims arising on policies participating in the fund, whether through the death of a policyholder or a policy's maturity date being reached, then Shareholders may be required to meet the deficit in the with-profits fund. This effect could occur in times of volatile or falling investment returns, where assumptions as to future growth are not borne out in reality. However the Save & Prosper Group may make a deduction from the asset shares of with-profits policyholders to meet the future cost of guarantees. The amount deducted remains part of the assets in the with-profit policyholder fund. The size of the deduction is reassessed at least annually. The deduction in the Save & Prosper Group's pension subsidiary company was 0.75 per cent. per annum during the period 1 January 2008 to 30 June 2009 and 1.50 per cent. per annum during the period 1 July 2009 to 30 June 2010. A similar deduction of 0.25 per cent. has been made since 1 July 2010 in the Save & Prosper Group's insurance company. In the event of a transfer the amount payable is not guaranteed and is based on the asset share.

5. ADDITIONAL RISKS RELATING TO MODERNA

5.1 Competitive landscape

Moderna's life insurance business is active in marketing, selling and writing new business, unlike CALH and the Save & Prosper Group. In seeking new business, Moderna is operating in a highly competitive area and the performance of the business is dependent upon its ability to attract new, and retain existing, customers. Moderna distributes, predominantly, through independent financial advisers. Moderna has proved popular with independent financial advisers as it, since its inception in 2002, has designed its systems and products to meet the requirements of this distribution sector. For example, many of its products allow significant flexibility including the right to transfer without penalty. Failure to capitalise upon Moderna's market presence and reputation and to grow its business may have a material adverse effect on Moderna's results and ultimately on the trading price of the Ordinary Shares.

5.2 Outsourcing

The operating model in Sweden is different from that in the UK as the business is, and will remain, open to new business. Rather than outsource core functions, we believe that it is important that the drive and team ethic of Moderna is preserved. We do, however, outsource the provision of IT infrastructure as this mitigates this particular operational risk. Moderna's management of their IT outsourcers is in accord with the structure outlined in Section 3.2 above.

5.3 Failure of information systems development

Moderna's ability to provide high quality customer service has a high dependency on the efficient and uninterrupted operation of its computer systems. The risks to these systems are similar to those existing within Chesnara (as detailed in paragraph 2.8 above). In addition Moderna is part way through a sizeable systems upgrade which will enhance its competitive advantage in its primary distribution channel. Failure to successfully implement the improved systems could materially affect the performance of Moderna's business.

5.4 Tax treatment of commissions

Industry practice in Sweden is to treat commissions received by insurance companies from fund managers for investing their funds as exempt from corporation income tax. Management is aware that the Swedish tax authority has questioned, in respect of another unit-linked business, whether such commissions receivable from fund managers should be part of the Group's income and be subject to corporation tax of 26.3 per cent. (the Swedish corporation tax rate for the year 2010). Whilst strategies are being developed to mitigate a successful challenge by the tax authorities no certainty can be provided that these will prove successful.

5.5 Additional reinsurance and financing risk

Moderna currently obtains reinsurance as well as a material portion of the financing of external acquisitions costs (commissions) from Hannover Ru¨ ckversicherung AG and Swiss Re. Although there is no indication that either reinsurer intends to do so, a risk exists that should either decide to discontinue their contract then Moderna would have to negotiate a similar contract with a replacement financial reinsurer or determine an alternative means of financing the business.

6 RISKS RELATING TO CHESNARA

There are a number of risks relating to Chesnara which arise from the nature of its operations as the parent company of the Enlarged Group, as set out below. Failure to manage these risks effectively, or the incidence of extreme interest rate movements, could have a material adverse impact on the financial position and reported results of the Enlarged Group and may ultimately affect the trading price of the Ordinary Shares.

6.1 Interest rate risk

The interest rate relating to bank debt raised in connection with the Acquisition (see Part VI, Section 5) is variable insofar as it is based on a margin above LIBOR. Chesnara is, therefore, exposed to the adverse impact of extreme upward movements in LIBOR over the term of the borrowing.

6.2 Foreign exchange risk

Foreign exchange risk arises in Chesnara in connection with its Swedish Business in two ways:

• (i) Chesnara presents its consolidated financial statements in pounds sterling and translates the financial position and results of its Swedish Business from Swedish Krona to pounds sterling. Its financial position and trading results, as reported in pounds sterling, are, therefore, exposed to the adverse impact of the depreciation of the Swedish Krona against the pound.
• (ii) Over the next two to three years Chesnara intends to continue to finance the development of its Swedish Business through capital contributions made by way of transfer of Swedish Krona cash assets. As these transfers will be made from existing sterling cash resources, Chesnara is exposed to the adverse impact of the appreciation of the Swedish Krona against the pound.

Notwithstanding that Chesnara intends to manage the impact of these risks through hedging its positions, where appropriate, there will, nevertheless, be a residual level of risk.

7. RISKS RELATING TO THE ORDINARY SHARES

7.1 Possible volatility of the price of Ordinary Shares

The market price of the Ordinary Shares may be affected by a variety of factors including, but not limited to, changes in sentiment regarding the Ordinary Shares, variations in the Enlarged Group's operating results compared with the expectations of market analysts and investors, the operating performance of the Enlarged Group's competitors, speculation about the Enlarged Group's business, or regulatory changes affecting the Enlarged Group's operations. Shareholders should be aware that the value of the Ordinary Shares can go down as well as up and may not always reflect the underlying asset value or prospects of the Enlarged Group.

7.2 Dividend payments

The ability of Chesnara to pay dividends on the Ordinary Shares is a function of its profitability, primarily linked to the performance of the Enlarged Group's investments, and the extent to which, as a matter of law, Chesnara has available to it sufficient distributable reserves out of which any proposed dividend may be paid. A final dividend of 10.3p per Ordinary Share was approved at Chesnara's annual general meeting on 13 May 2010, giving rise to total dividends of 15.95p per Ordinary Share for 2009, representing a 2.6 per cent. increase over total dividends in 2008. In its Interim results which were announced on 26 August 2010 the group declared an interim dividend of 5.8p per share: an increase of 2.65 per cent. over the dividend of 5.65p declared for the comparable period in 2009. However Chesnara can give no assurances that it will be able to continue with its undertaking to pursue a progressive dividend policy in the future.

PART III

FINANCIAL INFORMATION ON THE SAVE & PROSPER GROUP

(A) Accountants' report on the financial information

PricewaterhouseCoopers LLP 101 Barbirolli Square Lower Mosley Street Manchester M2 3PW

.

The Directors Chesnara plc Harbour House Portway Preston Lancashire PR2 2PR

Hawkpoint Partners Limited 41 Lothbury London EC2R 7AE

29 November 2010

Dear Sirs

Save & Prosper Group

We report on the financial information set out in Part III (B) below (the ''IFRS Financial Information Table''). The IFRS Financial Information Table has been prepared for inclusion in the Circular dated 29 November 2010 (the ''Circular'') of Chesnara plc (the ''Company'') on the basis of the accounting policies set out in note 2. This report is required by item 13.5.21R of the Listing Rules and is given for the purpose of complying with that item and for no other purpose.

We have not audited or reviewed the financial information for the six month period ended 30 June 2009 and accordingly do not express an opinion thereon.

Responsibilities

The Directors of the Company are responsible for preparing the IFRS Financial Information Table in accordance with International Financial Reporting Standards as adopted by the European Union.

It is our responsibility to form an opinion as to whether the IFRS Financial Information Table gives a true and fair view, for the purposes of the Circular and to report our opinion to you.

Save for any responsibility which we may have to those persons to whom this report is expressly addressed and which we may have to shareholders of the Company as a result of the inclusion of this report in the Circular, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such person as a result of, arising out of, or in accordance with this report or our statement, required by and given solely for the purposes of complying with item 13.4.1R(6) of the Listing Rules, consenting to its inclusion in the Circular.

PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The registered office of PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and regulated by the Financial Services Authority for designated investment business.

Basis of opinion

We conducted our work in accordance with the Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. Our work included an assessment of evidence relevant to the amounts and disclosures in the financial information. It also included an assessment of significant estimates and judgments made by those responsible for the preparation of the financial information and whether the accounting policies are appropriate to the Save & Prosper Group's circumstances, consistently applied and adequately disclosed.

We planned and performed our work so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial information is free from material misstatement whether caused by fraud or other irregularity or error.

Opinion

In our opinion, the Financial Information Table gives, for the purposes of the Circular dated 29 November 2010, a true and fair view of the state of affairs of the Save & Prosper Group as at the dates stated and of its profits, losses, cash flows and changes in equity for the periods then ended in accordance with International Financial Reporting Standards as adopted by the European Union and has been prepared in a form that is consistent with the accounting policies adopted in the Company's latest annual accounts.

Yours faithfully

PricewaterhouseCoopers LLP Chartered Accountants

(B) Financial information for the six months ended 30 June 2010 and 2009, and for the years ended 31 December 2009, 2008 and 2007

Save & Prosper Group

Consolidated Statement of Comprehensive Income

	Note	Six months ended 30 June		Year ended 31 December
		2010 £000	2009 (unaudited) £000	2009 £000	2008 £000	2007 £000
Insurance premium revenue	7	6,602	7,769	14,721	17,574	26,857
Insurance premium ceded to reinsurers	7	(108)	(162)	(189)	1,237	(10,579)
Net insurance premium revenue Fee and commission income:		6,494	7,607	14,532	18,811	16,278
Insurance contracts	8	711	632	1,329	1,695	2,117
Investment contracts	8	88	84	149	212	227
Net investment return	9	11,422	7,148	176,832	(309,760)	55,024
Total revenue (net of reinsurance payable) Other operating income	10	18,715 4,299	15,471 3,527	192,842 7,752	(289,042) 8,321	73,646 10,296
Total income		23,014	18,998	200,594	(280,721)	83,942
Insurance contract claims and benefits incurred: Claims and benefits paid to insurance contract holders Net increase/(decrease) in insurance contract provisions Reinsurers' share of claims and benefits paid to insurance contract holders Reinsurers' share of net (decrease)/ increase in insurance contract provisions Movement in unallocated divisible surplus		(60,872) 18,672 599 (643) 615	(46,109) 6,513 317 246 –	(102,277) (27,663) 1,279 848 (2,017)	(129,309) 307,818 928 (4,005) 23,186	(207,022) 291,535 11,228 (145,025) 21,024
Net insurance contract claims and benefits	11	(41,629)	(39,033)	(129,830)	198,618	(28,260)
(Increase)/decrease in investment contract liabilities Fees, commission and other	12	(2,667)	1,558	(10,060)	30,566	(1,068)
acquisition costs Administrative expenses	13 14	(46) (3,338)	(97) (3,897)	(141) (7,344)	(156) (7,195)	(350) (10,258)
Total expenses		(47,680)	(41,469)	(147,375)	221,833	(39,936)
(Loss)/profit before income taxes Income tax credit/(expense)	15	(24,666) 6,692	(22,471) 6,440	53,219 (15,506)	(58,888) 24,278	44,006 (11,072)
(Loss)/profit for the period, being the total comprehensive income for the period		(17,974)	(16,031)	37,713	(34,610)	32,934

Consolidated Balance Sheet

		30 June	31 December
	Note	2010 £000	2009 £000	2008 £000	2007 £000
Assets
Investment properties	16	111,852	104,898	105,100	145,032
Reinsurers' share of insurance contract provisions	23	6,621	6,936	5,553	9,431
Financial assets:
Equity securities at fair value through income	17	32,866	34,091	33,701	169,158
Holdings in collective investment schemes at fair
value through income Debt securities at fair value through income	17 17	1,152,535 79,091	1,218,823 76,311	1,111,565 108,408	1,371,081 108,910
Insurance and other receivables	18	14,533	8,683	14,898	9,039
Prepayments and accrued income	18	64	67	771	1,105
Derivative financial instruments	19	227	279	–	–
Total financial assets		1,279,316	1,338,254	1,269,343	1,659,293
Reinsurers' share of accrued policyholder claims	28	3	329	864	991
Income taxes	20	6,902	–	6,188	–
Cash and cash equivalents	21	13,457	13,006	8,628	8,499
Total assets		1,418,151	1,463,423	1,395,676	1,823,246
Liabilities
Bank overdrafts	21	142	216	293	223
Insurance contract provisions	23	1,121,997	1,141,290	1,115,274	1,423,388
Financial liabilities:
Investment contracts at fair value through income	24	105,288	106,061	102,106	142,774
Total financial liabilities		105,288	106,061	102,106	142,774
Unallocated divisible surplus	25	1,402	2,017	–	23,186
Deferred tax liabilities	26	7,967	9,710	12,404	25,843
Reinsurance payables	27	65	54	854	985
Payables related to direct insurance and investment
contracts	28	9,869	9,824	9,300	10,461
Income taxes	29	1,987	7,472	112	6,719
Other payables	30	12,437	11,808	8,075	7,799
Total liabilities		1,261,154	1,288,452	1,248,418	1,641,378
Net assets		156,997	174,971	147,258	181,868
Shareholders' equity
Share capital	31	20,000	20,000	20,000	20,000
Retained earnings	32	136,997	154,971	127,258	161,868
Total Shareholders' equity		156,997	174,971	147,258	181,868

Consolidated Statement of Cash Flows

	Six months ended 30 June		Year ended 31 December
	2010 £000	2009 (unaudited) £000	2009 £000	2008 £000	2007 £000
(Loss)/profit for the period	(17,974)	(16,031)	37,713	(34,610)	32,934
Adjustments for:
Tax (recovery)/expense	(6,692)	(6,440)	15,506	(24,278)	11,072
Interest receivable	(425)	(208)	(447)	(250)	(2,539)
Dividends receivable	(8,711)	(10,088)	(24,901)	(42,280)	(50,278)
Rental receivable	(3,904)	(3,654)	(7,394)	(7,086)	(7,069)
Loss on sale of subsidiary	–	–	–	–	89
Change in fair value of investment properties	(4,144)	9,006	(1,003)	40,024	5,169
Fair value losses/(gains) on financial assets	5,601	(2,364)	(143,412)	311,798	(11,039)
Interest received	432	493	874	247	2,901
Dividends received	8,714	10,701	25,605	42,614	50,198
Rental received	3,926	3,740	7,402	7,196	6,912
Changes in operating assets and liabilities:
Decrease in financial assets	59,184	29,541	67,582	83,677	195,122
Purchase of investment properties	(4,828)	(24)	–	(662)	(36,964)
Sale of investment properties	2,018	–	1,205	570	7,601
Decrease/(increase) in reinsurers' share of
insurance contract provisions	641	(246)	(848)	4,005	145,026
(Increase)/decrease in insurance and other
receivables	(5,882)	(10,204)	5,076	(6,300)	(1,419)
Decrease/(increase) in prepayments	3	613	704	334	(80)
(Decrease)/increase in insurance contract
provisions	(19,908)	(8,190)	28,033	(331,300)	(313,329)
(Decrease)/increase in investment contract
liabilities	(773)	(3,734)	3,955	(40,668)	4,750
Increase/(decrease) in reinsurance payables	11	66	(800)	(131)	(7,444)
Increase/(decrease) in payables related to direct
insurance and investment contracts	45	1,141	524	(1,161)	(1,068)
Increase/(decrease) in other payables	629	8,435	3,733	276	(1,336)
Cash generated by operations	7,963	2,553	19,107	2,015	29,209
Income tax (paid)/received	(7,438)	4,074	(4,652)	(1,956)	(13,345)
Net cash generated by operating activities	525	6,627	14,455	59	15,864
Cash flows from financing activities
Dividends paid	–	–	(10,000)	–	(15,000)
Net cash utilised by financing activities	–	–	(10,000)	–	(15,000)
Net increase in cash and cash equivalents	525	6,627	4,455	59	864
Cash and cash equivalents at beginning of the period	12,790	8,335	8,335	8,276	7,412
Cash and cash equivalents at end of the period	13,315	14,962	12,790	8,335	8,276
Assets: Cash and cash equivalents	13,457	15,035	13,006	8,628	8,499
Liabilities:
Bank overdrafts	(142)	(73)	(216)	(293)	(223)
Cash and cash equivalents at end of the period	13,315	14,962	12,790	8,335	8,276

Consolidated Statement of Changes in Equity

	Share capital	Retained earnings	Total
Equity shareholders' funds at 1 January 2010 Loss for the period attributable to shareholders	£000 20,000 –	£000 154,971 (17,974)	£000 174,971 (17,974)
Dividends paid Equity shareholders' funds at 30 June 2010	– 20,000	– 136,997	– 156,997

	Year ended 31 December 2009
	Share capital	Retained earnings	Total
Equity shareholders' funds at 1 January 2009	£000 20,000	£000 127,258	£000 147,258
Profit for the year attributable to shareholders Dividends paid	– –	37,713 (10,000)	37,713 (10,000)
Equity shareholders' funds at 31 December 2009	20,000	154,971	174,971

Share capital Retained earnings Total £000 £000 £000 Equity shareholders' funds at 1 January 2008 20,000 161,868 181,868 Loss for the year attributable to shareholders – (34,610) (34,610) Dividends paid – – –

Equity shareholders' funds at 31 December 2008 20,000 127,258 147,258

Year ended 31 December 2007

Year ended 31 December 2008

Six months ended 30 June 2010

Equity shareholders' funds at 31 December 2007	20,000	161,868	181,868
Dividends paid	–	(15,000)	(15,000)
Profit for the year attributable to shareholders	–	32,934	32,934
Equity shareholders' funds at 1 January 2007	20,000	143,934	163,934
	£000	£000	£000
	capital	earnings	Total
	Share	Retained

Notes to the Consolidated Financial Information

(Forming part of the financial information)

1 General information

Save & Prosper Insurance Limited and Save & Prosper Pensions Limited (together ''the Save & Prosper Group'') are private companies incorporated in the UK. The address of the registered office for both companies is 125 London Wall, London, EC2Y 5AJ. The main address from which the Save & Prosper Group operates is Finsbury Dials, 20 Finsbury Street, London, EC2Y 9AQ. The Save & Prosper Group underwrites primarily life insurance risks and provides a portfolio of contracts for the saving and retirement needs of customers through asset management, and is effectively closed to new business.

2 Significant accounting policies

(a) Statement of compliance

The consolidated financial information has been prepared in accordance with International Financial Reporting Standards (''IFRS'') as adopted by the European Union (''Adopted IFRS'').

The consolidated Save & Prosper Group financial information has been prepared and approved by the Directors of Chesnara plc (''the directors'') in accordance with Adopted IFRS. This financial information was authorised for issue by the Directors of Chesnara plc on 25 November 2010.

The following Standards and Interpretations which have not been applied in this financial information were in issue but not yet effective (and in some cases have not been endorsed by the European Union):

Those that apply and are expected to have an impact on the financial information:

. None

Those that apply and are not expected to have a significant impact on the financial information:

• . Amendments to IFRS 1 (July 2009) Additional Exemptions for First-time Adopters
• . Amendment to IFRS 1 (January 2010) Limited Exemption from Comparative IFRS 7 Disclosures for First-time Adopters
• . IFRS 1 (revised November 2008) First-time Adoption of International Financial Reporting Standards
• . Amendments to IFRS 7 (March 2009) Improving Disclosures about Financial Instruments
• . IFRS 9 Financial Instruments
• . Amendments to IAS 1 (September 2007) Presentation of Financial Statements
• . IAS 24 (revised November 2009) Related Party Disclosures
• . Improvements to IFRSs 2009 (April 2009) Improvements to IFRSs 2009
• . Improvements to IFRSs 2008 (May 2008) Improvements to IFRSs 2008
• . Amendments to IAS 27 (January 2008) Consolidated and Separate Financial Statements
• . Amendments to IFRS 1 and IAS 27 (May 2008) Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate
• . IFRS 8 Operating Segments

Those that do not apply to the Save & Prosper Group:

• . Amendment to IAS 23 (March 2007) Borrowing Costs
• . Amendment to IAS 32 (October 2009) Classification of Rights Issues
• . Amendments to IFRIC 9 and IAS 39 (March 2009) Embedded Derivatives
• . Amendment to IAS 39 (July 2008) Eligible Hedged Items
• . IFRS for SMEs IFRS for small and medium-sized entities
• . Amendments to IFRS 2 (June 2009) Group Cash-settled Share-based Payment Transactions
• . IFRS 3 (revised January 2008) Business Combinations
• . Amendment to IFRS 2 (January 2008) Vesting Conditions and Cancellations
• . Amendments to IAS 32 and IAS 1 (February 2008) Puttable Financial Instruments and Obligations Arising on Liquidation
• . IFRIC 18 Transfers of Assets from Customers
• . IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments

(b) Basis of preparation

General

The consolidated financial information consolidates that of Save & Prosper Insurance Limited and its subsidiary, Save & Prosper Pensions Limited and has been prepared on a going concern basis. The Directors believe that they have a reasonable expectation that the Save & Prosper Group has adequate resources to continue in operational existence for the foreseeable future. In making this assessment, the Directors have taken into consideration the Save & Prosper Group's forecast performance, its capital position (including regulatory capital) and liquid resources.

The financial information is presented in pounds sterling, rounded to the nearest thousand, and are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments, financial instruments at fair value through income, investment property and investment contract liabilities at fair value through income.

Assets and liabilities are presented on a current and non-current basis in the notes to the financial information. If assets are expected to be recovered and liabilities expected to be settled within a year, they are classified as current. If they are expected to be recovered or settled in more than one year, they are classified as non-current.

The preparation of financial information in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Judgements made by management in the process of applying the Group's accounting policies that have a significant effect on the financial information and estimates with a significant risk of material adjustment in the next year are set out in Note 3.

The accounting policies set out below have been applied consistently to all years presented in this consolidated financial information.

This financial information has also been prepared in accordance with the disclosure provisions of FRS27 'Life Assurance'.

(c) Basis of consolidation

The consolidated financial information incorporates the financial information of Save & Prosper Insurance Limited and its subsidiary, Save & Prosper Pensions Limited. The financial information of subsidiaries are included in the consolidated financial information from the date that control commences until the date that control ceases.

All intra-group transactions, balances, income and expenses are eliminated in preparing the consolidated financial information.

(d) Product classification

The Save & Prosper Group's products are classified at inception as either insurance or investment contracts for accounting purposes. Insurance contracts are contracts that transfer significant insurance risk and remain as insurance contracts until all rights and obligations are extinguished or expire. They may also transfer financial risk. Investment contracts are contracts which carry financial risk, with no significant insurance risk. Where contracts contain both insurance and investment components and the investment components can be measured reliably, the contracts are unbundled and the components are separately accounted for as insurance contracts and investment contracts respectively.

In some insurance contracts and investment contracts the financial risk is borne by the policyholders. Such contracts are usually unit-linked contracts.

All with-profits contracts contain a discretionary participation feature (''DPF'') which entitles the holder to receive, as a supplement to guaranteed benefits, additional benefits or bonuses:

• . that may be a significant portion of the total contractual benefits;
• . whose amount or timing is contractually at the discretion of the Save & Prosper Group; and
• . that are contractually based on realised and/or unrealised investment returns on a specified pool of assets held by the Save & Prosper Group.

The terms and conditions of these contracts, together with UK regulations, set out the bases for the determination of the amounts on which the additional discretionary benefits are based and within which the Save & Prosper Group may exercise its discretion as to the quantum and timing of their payment to contract holders.

All of the with-profits contracts are classified as insurance contracts.

(e) Insurance contracts

(i) Premiums

Premiums are accounted for when due, or in the case of unit-linked insurance contracts, when the liability is recognised, and exclude any taxes or duties based on premiums. Outward reinsurance premiums are accounted for when due.

(ii) Claims and benefits

Claims are accounted for in the accounting period in which they are due or notified. Maturities and surrenders are accounted for on the earlier of the date when paid or when the policy ceases to be included in insurance or investment contract provisions. Claims include policyholder bonuses allocated in anticipation of a bonus declaration. Reinsurance recoveries are accounted for in the same period as the related claim.

(iii) Measurement of insurance contract provisions

Long-term insurance contract provisions are determined following an annual investigation of the long-term funds and are calculated initially on a statutory solvency basis to comply with the reporting requirements under the Prudential Sourcebook for insurers (Chapter 1: 'Capital resources requirements and technical provisions for insurance business'). The valuation is then adjusted to remove certain contingency and other reserves.

Unit-linked contracts which transfer significant insurance risk, including guaranteed benefits, are classified as insurance contracts and are carried in the balance sheet at an amount determined by the valuation of the related units on the valuation date. Deferred tax on unrealised capital gains on the underlying investments in the unitised funds is also reflected in the measurement of the respective unit-linked liabilities.

Insurance contract provisions are tested for adequacy by discounting current estimates of all contractual cash flows and comparing this amount to the carrying value of the provision and any related assets: this is known as the liability adequacy test. Where a shortfall is identified, an additional provision is made and the Save & Prosper Group recognises the deficiency in income for the year.

Insurance contract provisions can never be definitive as to their timing or the amount of claims and are therefore subject to subsequent reassessment on a regular basis.

(f) Investment contracts

(i) Amounts collected

Amounts collected on investment contracts, which primarily involve the transfer of financial risk such as long-term savings contracts, are accounted for using deposit accounting, under which the amounts collected, less any initial fees deducted, are credited directly to the balance sheet as an adjustment to the liability to the investor.

(ii) Benefits

For investment contracts, benefits paid are not included in the income statement but are instead deducted from investment contract liabilities in the accounting period in which they are paid.

(iii) Liabilities

All investment contract liabilities are designated on initial recognition as held at fair value through income. The Save & Prosper Group has designated investment contract liabilities at fair value through income as this more closely reflects the basis on which the businesses are managed.

The financial liability in respect of unit-linked investment contracts is measured by reference to the value of the underlying net asset value of the unitised investment funds, determined on a bid value basis, at the balance sheet date. Deferred tax on unrealised capital gains on the underlying investments in the unitised funds is also reflected in the measurement of the respective unit-linked liabilities.

(g) Unallocated divisible surplus

The unallocated divisible surplus represents the excess of policyholder assets over policyholder liabilities for the Save & Prosper Group's with-profits funds. As allowed under IFRS 4, the Save & Prosper Group has opted to continue to record an unallocated surplus of with-profits funds wholly as a liability. The annual excess or shortfall of income over expenditure of the with-profits funds, after declaration and attribution of the cost of bonuses to policyholders is transferred to or from the unallocated divisible surplus each year through a charge or credit to the income statement. The balance retained in the unallocated divisible surplus represents cumulative income arising on the with-profits business that has not been allocated to policyholders or shareholders. The balance of the unallocated divisible surplus is determined after full provision for deferred tax on unrealised appreciation on investments. In the event of the estimated liability attributable to policyholders exceeding available funds, the balance is transferred to shareholder funds.

(h) Reinsurance

The Save & Prosper Group cedes reinsurance in the normal course of business for the purpose of avoiding the retention of undue concentration of risk on any one life, policyholder or loss event. Assets, liabilities and income and expense arising from ceded reinsurance contracts are presented separately from the related assets, liabilities, income and expenses from the related insurance contracts because the reinsurance arrangements do not relieve the Save & Prosper Group from its direct obligations to its policyholders.

Only rights under contracts that give rise to a significant transfer of insurance risk are accounted for as reinsurance assets, which comprise amounts due from insurance companies for paid and unpaid losses and ceded life policy benefits. Rights under contracts that do not transfer significant insurance risk are accounted for as financial instruments and are presented as amounts deposited with reinsurers.

The net premiums payable to a reinsurer may be more or less than the reinsurance assets recognised by the Save & Prosper Group in respect of the reinsurance cover purchased. Any gain or loss is recognised in the income statement in the period in which the reinsurance premiums are payable.

Rights under reinsurance contracts comprising the reinsurers' share of insurance contract provisions and accrued policyholder claims are estimated in a manner that is consistent with the measurement of the provisions held in respect of the related insurance contracts and in accordance with the terms of the reinsurance contract. Such assets are deemed impaired if there is objective evidence, as a result of an event that occurred after its initial recognition, that the Save & Prosper Group may not recover all amounts due and the event has a reliably measurable impact on the amounts that the Save & Prosper Group will receive from the reinsurer. Impairment losses reduce the carrying value of the related reinsurance assets to their recoverable amount and are recognised as an expense in the income statement.

(i) Fee and commission income

Fees charged for investment management services provided in connection with investment contracts are recognised as revenue as the services are provided. Initial fees which exceed the level of recurring fees and relate to the future provision of services are deferred and amortised over the anticipated period in which services will be provided.

Initial fees charged for investment management services provided in connection with insurance contracts are recognised as revenue when earned.

For both insurance and investment contracts, initial fees, annual management charges and contract administration charges are recognised as revenue on an accruals basis. Surrender charges are recognised as a reduction to policyholder claims and benefits incurred when the surrender benefits are paid.

Benefit-based fees comprising charges made to unit-linked insurance and investment funds for mortality and morbidity benefits are recognised as revenue on an accruals basis.

For insurance and investment contracts, commissions received or receivable which do not require the Save & Prosper Group to render further services are recognised as revenue by the Save & Prosper Group on the effective commencement or renewal dates of the related contract. However, when it is probable that the Save & Prosper Group will be required to render further services during the life of the contract, the commission, or part thereof, is deferred and recognised as revenue over the period in which services are rendered.

(j) Investment income

Investment income comprises income from financial assets and rental income from investment properties.

Income from financial assets comprises dividend and interest income, net fair value gains and losses (both unrealised and realised) in respect of financial assets classified as at fair value through income, and realised gains on financial assets classified as loans and receivables.

Dividends are accrued on an ex-dividend basis. Interest received and receivable in respect of interest-bearing financial assets classified as at fair value through income is included in net fair value gains and losses. For loans and receivables and cash and cash equivalents interest income is calculated using the effective interest method.

Rental income from investment properties under operating leases is recognised in the income statement on a straight-line basis over the term of each lease. Lease incentives are recognised in the income statement as an integral part of the total lease income.

(k) Income taxes

Income tax on the profit or loss for the year comprises current and deferred tax and is recognised in the income statement. Tax that relates directly to transactions reflected within equity is also presented within equity.

(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, and any adjustment to tax payable in respect of previous years.

(ii) Deferred tax

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of 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 that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

(l) Investment properties

Investment properties are properties which are held either to earn rental income or for capital appreciation or for both. On initial recognition investment properties are measured at cost, including attributable transaction costs, and are subsequently measured at fair value. Independent external valuers, having an appropriate recognised professional qualification and recent experience in the location and category of property being valued, value the portfolio every twelve months.

The fair values reflect market values at the balance sheet date, being the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arms' length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.

Any gain or loss arising from a change in fair value is recognised in the income statement. Rental income from investment property is accounted for as described in accounting policy (j).

(m) Financial assets

Financial assets are classified into different categories depending on the type of asset and the purpose for which it is acquired.

All financial assets held for investment purposes other than derivative financial instruments are designated at fair value through income on initial recognition since they are managed, and their performance is evaluated, on a fair value basis in accordance with documented investment and risk management strategies. This designation is also applied to the Save & Prosper Group's investment contracts, since the investment contract liabilities are managed together with the investment assets on a fair value basis as part of the documented risk management strategy.

Purchases and sales of 'regular way' financial assets are recognised on the trade date, which is when the Save & Prosper Group commits to purchase, or sell, the assets.

The fair values of financial assets quoted in an active market are their bid prices at the balance sheet date.

Financial assets are derecognised when contractual rights to receive cash flows from the financial assets expire, or where the financial assets have been transferred together with substantially all the risks and rewards of ownership.

(n) Financial liabilities

Financial liabilities are initially measured at fair value net of transaction costs. Financial liabilities (excluding investment contract liabilities which are measured at fair value through income) are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an expected yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, so that when applied at the date the liability is initially recognised, the discounted value equates to the fair value net of transaction costs.

(o) Derivative financial instruments

Derivative financial instruments are recognised at fair value. The gain or loss on remeasurement to fair value is recognised immediately in profit or loss. Hedge accounting has not been applied.

The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price.

(p) Cash and cash equivalents

Cash and cash equivalents include cash in hand, deposits held at call with banks and other short-term highly liquid investments. Highly liquid is defined as realisable into cash within 90 days.

(q) Provisions

Provisions are recognised when the Save & Prosper Group has a present, legal or constructive obligation as a result of past events such that it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Where the effect of the time value of money is material, the amount of the provision is the present value of the expenditures expected to be required to settle the obligation. The Save & Prosper Group recognises provisions for onerous contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract.

(r) Employee benefits

Employee benefits and costs are incorporated within a recharge from JPMorgan Asset Management Marketing Limited.

(s) Dividends

Dividend distributions to the Save & Prosper Group's shareholders are recognised in the period in which the dividends are paid, and, for the final dividend, when approved by the Save & Prosper Group's shareholders at the annual general meeting.

(t) Other payables and payables related to direct insurance and investment contracts

Insurance and investment contract payables and other payables are recognised when due and are measured on initial recognition at the fair value of the consideration paid. Subsequent to initial recognition, payables are measured at amortised cost using the effective interest rate method.

3 Accounting estimates and judgements

The Save & Prosper Group makes estimates and assumptions that affect the reported amounts of assets and liabilities and also makes critical accounting judgements in applying the Save & Prosper Group's accounting policies. Such estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable. The more critical areas, where accounting estimates and judgements are made, are described below.

(a) Classification of long-term contracts

The Save & Prosper Group has exercised judgement in its classification of long-term business as between insurance and investment contracts, which fall to be accounted for differently in accordance with the policies set out in Note 2 Significant Accounting Policies. Insurance contracts are those where significant risk is transferred to the Save & Prosper Group under the contract and judgement is applied in assessing whether the risk so transferred is significant, especially with regard to pensions contracts, which are predominantly, but not exclusively, created for investment purposes.

(b) Estimates of future benefits payments arising from long-term insurance contracts

The Save & Prosper Group makes estimates of the expected number of deaths for each of the years that it is exposed to risk. These estimates are based on standard mortality tables as appropriate, adjusted to reflect the Save & Prosper Group's own experience.

The Save & Prosper Group makes estimates of future deaths, voluntary contract terminations, investment returns and administration expenses at the inception of long-term insurance contracts with fixed and guaranteed terms. These estimates, which are reconsidered annually, form the assumptions used to calculate the liabilities arising from these contracts.

The assumptions used to establish insurance contract liabilities and appropriate sensitivities relating to variations in critical assumptions are disclosed in Note 23.

As at 30 June 2010, the carrying value of insurance contract liabilities was £1,122m (31 December 2009: £1,141m; 31 December 2008: £1,115m; 31 December 2007: £1,423m).

(c) Contracts which contain discretionary participation features

All with-profits contracts contain a discretionary participation feature (''DPF'') which entitles the holder to receive, as a supplement to guaranteed benefits, additional benefits or bonuses:

• . that may be a significant portion of the total contractual benefits;
• . whose amount or timing is contractually at the discretion of the Save & Prosper Group; and
• . that are contractually based on realised and/or unrealised investment returns on a specified pool of assets held by the Save & Prosper Group.

The terms and conditions of these contracts, together with UK regulations, set out the bases for the determination of the amounts on which the additional discretionary benefits are based and within which the Save & Prosper Group may exercise its discretion as to the quantum and timing of their payment to contract holders.

As at 30 June 2010, the carrying value of insurance contract liabilities which contain discretionary participation features was £362m (31 December 2009: £333m; 31 December 2008: £371m; 31 December 2007: £354m).

4 Management of insurance risk

The Save & Prosper Group's management of insurance risk is a critical aspect of the business.

The primary insurance activity carried out by the Save & Prosper Group comprises the assumption of the risk of loss from persons that are directly subject to the risk. Such risks in general relate to life, accident, health and financial perils that may arise from an insurable event, with the majority of the Save & Prosper Group's exposure relating to mortality risk on individual lives, predominantly in the UK. As such, the Save & Prosper Group is exposed to the uncertainty surrounding the timing and severity of claims under the related contracts.

The Save & Prosper Group is effectively closed to new insurance business, but will continue to accept increases to existing policies and may accept business from the JPMorgan Group. The assumption of new insurance risks is, accordingly, limited.

The principal risk is that the frequency and severity of claims is adverse to that expected. The theory of probability is applied to the pricing and provisioning for a portfolio of insurance contracts. Insured events are, by their nature, random, and the actual number and size of events during any one year may vary from those estimated using established statistical techniques.

The Save & Prosper Group uses reinsurance to manage its exposure to insurance risk, through a strategy that avoids the retention of undue concentration of risk on any one life.

Ceded reinsurance contains credit risk, and such reinsurance recoverables are reported after deductions for known insolvencies and uncollectable items. The Save & Prosper Group monitors the financial condition of reinsurers on an ongoing basis and reviews its reinsurance arrangements periodically.

Terms and conditions of insurance contracts

The terms and conditions of insurance contracts that have a material effect on the amount, timing and uncertainty of future cash flows arising from insurance contracts are set out in the product analyses below, which give an assessment of the main products of the Save & Prosper Group and of the ways in which the associated risks are managed.

	Benefits – gross and net of reinsurance
	30 June 2010		31 December 2009		31 December 2008		31 December 2007
	Gross £000	Net £000	Gross £000	Net £000	Gross £000	Net £000	Gross £000	Net £000
Long-term with DPF –
lump sum benefits*	507,316	480,304	522,782	494,536	560,520	530,047	599,679	564,472
Long-term with DPF –
deferred annuity benefits*	3,256	3,256	3,401	3,401	3,700	3,700	4,117	4,117
Long-term non-linked without DPF– lump sum
benefits*	112,941	93,079	118,677	98,245	135,902	112,734	155,054	130,780
Long-term unit-linked without DPF– lump sum
benefits*	642,851	642,425	662,666	662,224	687,293	686,797	724,107	723,540
Immediate annuities	866	787	963	877	1,136	1,069	1,745	1,745

* For products with lump sum benefits, the amounts quoted are sums assured. For those products paying annuities, amounts quoted are annuity per annum.

Long-term insurance contracts – with discretionary participation features

Product features

At retirement the with-profits deferred annuity contracts provide for guaranteed minimum pension funds and the with-profits endowments provide for guaranteed minimum lump sums. With-profits whole of life policies guarantee a minimum amount payable on death. The guaranteed pension funds or lump sums represent investment returns on contributions within a range of 3 per cent. to 5 per cent., predominately at the upper end of this range. A terminal bonus may be paid at maturity or retirement, and on death, depending on the investment performance of the with-profits policyholder assets when the policyholder receives the higher of the smoothed asset share and the minimum guaranteed amount. The asset share is based on the contributions invested plus an allocation of investment return less costs and expenses, and smoothing is used to avoid significant short-term fluctuations in the benefits payable arising from movements in the market value of assets. In accordance with the Principles and Practices of Financial Management for its with DPF business the Save & Prosper Group may make a deduction of up to 1.5 per cent. per annum from the asset shares of with-profits policyholders to meet the future cost of guarantees. The amount deducted remains part of the assets in the with-profits policyholder funds. The size of the deduction is reassessed at least annually. In the event of a policyholder choosing to transfer out, the amount payable is not guaranteed and is based on the asset share.

Management of risks

For life endowment and whole of life policies, mortality risk is material. This risk is mitigated to some extent by the use of reinsurance. The risk is to increases in mortality rates, which are most likely to be from epidemics (such as AIDS, SARS or a flu pandemic) or widespread changes in lifestyle, such as eating, smoking and exercise habits, resulting in earlier or more claims than expected.

For deferred annuity contracts, the risk is to improving mortality. The risk is managed through the initial pricing, and technical provisions are assessed allowing for future mortality improvements based on industry available information on mortality experience.

Concentration of insurance risk

The tables for long term insurance contracts with discretionary participation features set out below illustrate the concentration of risk based on five bands of contracts grouped by benefits assured for each policy assured.

Benefits assured for each life assured – with DPF

		Total benefits assured
	Before reassurance		After reassurance
As at 30 June 2010 £0 – £250,000 £250,000 – £500,000 £500,000 – £750,000 £750,000 – £1,000,000 More than £1,000,000 As at 31 December 2009 £0 – £250,000 £250,000 – £500,000 £500,000 – £750,000 £750,000 – £1,000,000 More than £1,000,000 As at 31 December 2008 £0 – £250,000 £250,000 – £500,000 £500,000 – £750,000 £750,000 – £1,000,000 More than £1,000,000 As at 31 December 2007 £0 – £250,000 £250,000 – £500,000 £500,000 – £750,000	£000	%	£000	%
	498,070	98.2	475,152	98.9
	6,378	1.3	3,377	0.7
	2,067	0.4	976	0.2
	800	0.1	800	0.2
	–	–	–	–
	507,315	100.0	480,305	100.0
	513,210	98.2	489,335	98.9
	6,705	1.3	3,427	0.7
	2,067	0.4	974	0.2
	800	0.1	800	0.2
	–	–	–	–
	522,782	100.0	494,536	100.0
	551,060	98.3	524,879	99.0
	6,612	1.2	3,395	0.6
	2,048	0.4	973	0.2
	800	0.1	800	0.2
	–	–	–	–
	560,520	100.0	530,047	100.0
	588,183	98.1	558,284	98.9
	7,979	1.3	4,362	0.8
	2,717	0.5	1,026	0.2
£750,000 – £1,000,000	800	0.1	800	0.1
More than £1,000,000	–	–	–	–
	599,679	100.0	564,472	100.0

Long-term non-linked and unit-linked insurance contracts – without discretionary participation features

Product features

The Save & Prosper Group has written both non-linked and unit-linked contracts, which include death and morbidity benefits on a whole life, endowment and term assurance basis.

For contracts where death is the insured risk, the most significant factors that could increase risk are epidemics (such as AIDS, SARS or a flu pandemic) or widespread changes in lifestyle such as eating, smoking and exercise habits, resulting in earlier or more claims than expected.

Management of risks

Unit-linked insurance contracts are contracts where the primary purpose is to provide an investment return to policyholders. In addition, the policyholder is insured against death and serious injury. Unit-linked contracts operate by investing the policyholders' premiums into pooled investment funds, the policyholders' share of the fund being represented by units. The benefit is payable on death, or maturity if earlier, the amount payable on death being subject to a guaranteed minimum amount. Therefore, the Save & Prosper Group is exposed to insurance risk insofar as the value of the unit-linked fund is lower than the guaranteed minimum death benefit. The maturity or surrender value depends on the investment performance of the underlying fund and on the level of charges levied by the Save & Prosper Group for policy administration fees, mortality and other charges.

For contracts with fixed and guaranteed benefits and fixed future premiums, there are no mitigating terms and conditions that reduce the insurance risk accepted. This is the case for a small proportion (approximately 7.6 per cent. of total sums assured) of the life assurance business sold by the Save & Prosper Group.

Reinsurance is used on the business described above to mitigate concentrations of insurance risk. The insurance risk is further managed through pricing, product design and, for non-linked contracts, appropriate investment strategy.

For units held under unit-linked contracts all of the investment risk is borne by the policyholder.

Concentration of insurance risk

The tables for long term insurance contracts set out below illustrate the concentration of risk, based on five bands of contracts grouped by benefits assured for each policy assured.

Benefits assured for each life assured – without DPF

Total benefits assured
		After reassurance
£000	%	£000	%
			98.7
			1.0
			0.1
			–
1,163	0.2	1,163	0.2
642,851	100.0	642,425	100.0
			98.8
			0.9
514	0.1	514	0.1
–	–	–	–
1,148	0.2	1,148	0.2
662,666	100.0	662,224	100.0
			99.0
5,274	0.8	5,274	0.7
–	–	–	–
784	0.1	784	0.1
			0.2
687,293	100.0	686,797	100.0
717,428	99.1	716,861	99.1
4,839	0.7	4,839	0.7
749	0.1	749	0.1
			–
1,091	0.1	1,091	0.1
724,107	100.0	723,540	100.0
	634,121 6,027 1,540 – 654,442 6,562 680,116 1,119 –	Before reassurance 98.7 1.0 0.1 – 98.7 1.0 99.0 0.1 –	633,695 6,027 1,540 – 654,000 6,562 679,620 1,119 –

Long-term insurance contracts – immediate annuities

Product features

This type of annuity is purchased with a single premium at outset, and is paid to the policyholder whilst alive, either for the remainder of his/her lifetime or for a maximum term. Annuities may be level or escalate at a fixed rate.

There are two types of immediate annuities: retirement and voluntary. Voluntary annuities are made at the discretion of the policyholder, and in many cases are for funding regular commitments such as school fees. Policyholders of personal pensions may have to purchase an immediate annuity on retirement. Other variations (joint life annuities) are to continue the annuity (at the same level or lower) to the surviving spouse or partner.

Profit on existing contracts arises when mortality is higher and investment experience is better than expected. All risks and rewards associated with this type of product accrue to shareholders.

Management of risks

The main risk associated with this product is longevity, as annuities are paid whilst the life assured remains alive, and this risk is managed through the initial pricing of the annuity and through the maintenance of appropriate reserves.

The key risks are managed through appropriate pricing and product design. Reinsurance and underwriting are not used for this product.

In respect of mortality risk (longevity), the pricing assumption is based on both historic in-house and industry available information on mortality experience for the population of policyholders, including allowances for future mortality improvements.

In respect of investment risk, with this type of product the lump sum premium is available for the Save & Prosper Group to invest at the start of the contract. The Save & Prosper Group invests the premium into cash assets, and carries all the investment risk.

Certain annuities are written as variable cases, with the regular payment being defined in terms of a fixed number of units in a specified unit-linked fund. In this case the policyholder is exposed to the investment risk as the Save & Prosper Group matches the liability with the assets of the appropriate number of units in the fund. The Save & Prosper Group continues to take the longevity risk, as described above.

Other risks on insurance contracts

Apart from financial risks relating to the financial assets, which support life assurance contracts, as set out in Note 5, there are other significant types of risk pertaining to life insurance contracts, as follows:

Expense risk

The strategy of the Save & Prosper Group is to outsource all operational activities to a third party administrator in order to reduce the significant expense inefficiencies that would arise with fixed and semi-fixed costs on a diminishing policy base. In particular, there is a risk that, at some point in the future, the third party administrator could default on its obligations. The Save & Prosper Group monitors the financial soundness of the third party administrator and it has retained step-in rights within the related services contract. There are also contractual arrangements in place which provide for financial penalties in the event of default by the administration service provider.

Persistency risk

Persistency risk is the risk that the investor cancels the contract or discontinues paying premiums into the contract, thereby exposing the Save & Prosper Group to a loss resulting from an adverse movement in the actual experience compared to that expected in the product pricing. Although changes in the levels of persistency would not adversely affect the result in the short term they would reduce future profits available from the contract.

Assumptions and sensitivities

The assumptions and sensitivities relating to insurance contract provisions for the Save & Prosper Group are set out in Note 23 Insurance Contract Provisions.

5 Management of financial risk

The Save & Prosper Group is exposed to a range of financial risks through its financial assets, financial liabilities, reinsurance assets and policyholder liabilities. In particular, the key financial risk is that the proceeds from financial assets are not sufficient to fund the obligations arising from contracts with policyholders as they fall due. The most significant financial risk is that investment returns on policyholder assets supporting the with-profits business may result in insufficient with-profits policyholder assets to meet the payments to with-profits policyholders because of the effect of contract guarantees. In this scenario shareholder funds would be required to meet any shortfall.

The most important components of this financial risk are market risk (including interest rate risk, equity price risk, property risk and currency risk), credit risk and liquidity risk. These risks arise from open positions in interest rate, equity and currency products, all of which are exposed to general and specific market movements.

The Save & Prosper Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Save & Prosper Group's financial performance. For unit-linked contracts the Save & Prosper Group's objective is to match the liabilities, both insurance and investment contract liabilities, with units in the assets of the funds to which the value of the liabilities is linked, such that the policyholder bears the market risk. This minimises the impact of market risks and of credit risk on these contracts, such that the primary exposure to market risk is the risk of volatility in asset management fees due to the impact of interest rate, equity price and foreign currency movements on the fair value of the unit-linked assets, on which management fees are based.

For non unit-linked, non with-profits business, the Save & Prosper Group matches the liabilities with cash and cashequivalent investments to manage the risks to help ensure that the Save & Prosper Group is able to meet its obligations under its contractual liabilities as they fall due.

Terms and conditions of investment contracts

The terms and conditions of insurance contracts that have a material effect on the amount, timing and uncertainty of future cash flows arising from insurance contracts are set out in Note 4. The terms and conditions of investment contracts that have a material effect on the amount, timing and uncertainty of future cash flows arising from investment contracts are set out in the product analysis below.

Unit-linked pension contracts

These contracts are single premium unit-linked contracts, with the premiums invested in a pooled investment fund, where the policyholder's investment in the fund is represented by units. The benefits are payable on transfer, retirement or on death.

The key variables affecting the timing and uncertainty of future cash flows are investment performance, interest rate risks, persistency and expense inflation.

Risks associated with investment contracts

The risks associated with investment contracts are expense risk, persistency risk and market risk. Market risk is the risk that the fair value of future cash flows will fluctuate because of a change in interest or foreign currency exchange rates or in equity prices and the consequent effect this has on the value of charges earned by the Save & Prosper Group. Expense risk is of the same nature as described under other risks on insurance contracts in Note 4. Persistency risk is the risk that the investor cancels the contract thereby exposing the Save & Prosper Group to loss resulting from an adverse movement in the actual experience compared to that expected in the product pricing. Although changes in the levels of persistency would not adversely affect the result in the short term they would reduce future profits available from the contract.

Market risk management

To manage interest risk, equity price risk and liquidity risk, the Save & Prosper Group manages its assets through the use of separate portfolios of assets for its insurance contracts with discretionary participation features, its unit-linked contracts and other corporate assets, which include assets matching non-linked non-profit liabilities. The following tables set out the assets and matching liabilities of these funds reconciled to the balance sheet.

	Insurance		Corporate,
30 June 2010	contracts with DPF	Unit-linked contracts	including non-profit	Total
Assets	£000	£000	£000	£000
Reinsurers' share of insurance contract provisions Investment properties	– 22,412	6,621 89,440	– –	6,621 111,852
Financial assets: Equity securities at fair value through income	–	32,866	–	32,866
Holdings in collective investment schemes at fair value through income	197,317	*699,484	255,734	1,152,535
Debt securities at fair value through income Insurance and other receivables	67,108 3,685	11,983 8,839	– 2,009	79,091 14,533
Prepayments	1	–	63	64
Derivative financial instruments	227	–	–	227
Total financial assets Reinsurers' share of accrued policyholder claims	268,338 –	753,172 –	257,806 3	1,279,316 3
Income taxes	–	–	6,902	6,902
Cash and cash equivalents	6,298	5,634	1,525	13,457
Manager's box	(598)	(4,638)	5,236	–
Total assets	296,450	850,229	271,472	1,418,151
Liabilities and shareholders' equity Shareholder's funds	–	–	156,997	156,997
Unallocated divisible surplus	(66,293)	–	67,695	1,402
Bank overdraft	–	142	–	142
Insurance contract provisions Financial liabilities:	361,900	740,850	19,247	1,121,997
Investment contracts	–	105,288	–	105,288
Total financial liabilities	–	105,288	–	105,288
Deferred tax liabilities Reinsurance payables	(247) –	(464) –	8,678 65	7,967 65
Payables related to direct insurance and investment
contracts Income taxes	– –	– –	9,869 1,987	9,869 1,987
Other payables	1,090	4,413	6,934	12,437
Total liabilities and shareholders' equity	296,450	850,229	271,472	1,418,151
	Insurance contracts	Unit-linked	Corporate, including
31 December 2009	with DPF	contracts	non-profit	Total
Assets	£000	£000	£000	£000
Reinsurers' share of insurance contract provisions Investment properties Financial assets:	– 20,844	6,936 84,054	– –	6,936 104,898
Equity securities at fair value through income	–	34,091	–	34,091
Holdings in collective investment schemes at fair value through income	205,175	763,211*	250,437	1,218,823
Debt securities at fair value through
income Insurance and other receivables	64,284 721	12,027 5,104	– 2,858	76,311 8,683
Prepayments	–	–	67	67
Derivative financial instruments Total financial assets	279 270,459	– 814,433	– 253,362	279 1,338,254
Reinsurers' share of accrued policyholder claims	–	–	329	329
Cash and cash equivalents	7,090	3,491	2,425	13,006
Manager's box Total assets	(335) 298,058	(4,266) 904,648	4,601 260,717	– 1,463,423
Liabilities and shareholders' equity
Shareholder's funds	–	–	174,971	174,971
Unallocated divisible surplus	(36,330)	–	38,347	2,017
Bank overdraft Insurance contract provisions	– 332,884	216 791,283	– 17,123	216 1,141,290
Financial liabilities:
Investment contracts	–	106,061	–	106,061
Total financial liabilities Deferred tax liabilities	– 692	106,061 2,326	– 6,692	106,061 9,710
Reinsurance payables	–	–	54	54
Payables related to direct insurance and investment contracts	–	–	9,824	9,824
Income taxes	179	397	6,896	7,472
Other payables Total liabilities and shareholders' equity	633 298,058	4,365 904,648	6,810 260,717	11,808 1,463,423

31 December 2008	Insurance contracts with DPF	Unit-linked contracts	Corporate, including non-profit	Total
Assets	£000	£000	£000	£000
Reinsurers' share of insurance contract provisions	–	5,553	–	5,553
Investment properties	24,957	80,143	–	105,100
Financial assets:
Equity securities at fair value through
income	1,332	32,369	–	33,701
Holdings in collective investment
schemes at fair value through income	175,638	*686,355	249,572	1,111,565
Debt securities at fair value through
income	94,605	13,803	–	108,408
Insurance and other receivables	1,656	4,914	8,328	14,898
Prepayments	25	–	746	771
Total financial assets	273,256	737,441	258,646	1,269,343
Reinsurers' share of accrued policyholder claims	–	–	864	864
Income taxes	–	–	6,188	6,188
Cash and cash equivalents	2,698	4,586	1,344	8,628
Manager's box	(778)	(3,939)	4,717	-
Total assets	300,133	823,784	271,759	1,395,676
Liabilities and shareholders' equity
Shareholder's funds	–	–	147,258	147,258
Unallocated divisible surplus	(71,613)	–	71,613	–
Bank overdraft	–	293	–	293
Insurance contract provisions	371,472	719,765	24,037	1,115,274
Financial liabilities:
Investment contracts	–	102,106	–	102,106
Total financial liabilities	–	102,106	–	102,106
Deferred tax liabilities	(1,230)	(2,335)	15,969	12,404
Reinsurance payables	–	–	854	854
Payables related to direct insurance and investment
contracts	–	–	9,300	9,300
Income taxes	–	–	112	112
Other payables	1,504	3,955	2,616	8,075
Total liabilities and shareholders' equity	300,133	823,784	271,759	1,395,676

31 December 2007	Insurance contracts with DPF	Unit-linked contracts	Corporate, including non-profit	Total
Assets	£000	£000	£000	£000
Reinsurers' share of insurance contract provisions	–	9,431	–	9,431
Investment properties	33,478	111,554	–	145,032
Financial assets:
Equity securities at fair value through
income	13,462	155,696	–	169,158
Holdings in collective investment
schemes at fair value through income	241,138	886,398*	243,545	1,371,081
Debt securities at fair value through
income	87,456	21,454	–	108,910
Insurance and other receivables	887	4,344	3,808	9,039
Prepayments	31	–	1,074	1,105
Total financial assets	342,974	1,067,892	248,427	1,659,293
Reinsurers' share of accrued policyholder claims	–	–	991	991
Cash and cash equivalents	1,578	4,752	2,169	8,499
Manager's box	(209)	(5,958)	6,167	–
Total assets	377,821	1,187,671	257,754	1,823,246
Liabilities and shareholders' equity
Shareholder's funds	–	–	181,868	181,868
Unallocated divisible surplus	23,186	–	–	23,186
Bank overdraft	–	223	–	223
Insurance contract provisions	353,618	1,039,357	30,413	1,423,388
Financial liabilities:
Investment contracts	–	142,774	–	142,774
Total financial liabilities	–	142,774	–	142,774
Deferred tax liabilities	20	1,111	24,712	25,843
Reinsurance payables	–	–	985	985
Payables related to direct insurance and investment
contracts	–	–	10,461	10,461
Income taxes	254	563	5,902	6,719
Other payables	743	3,643	3,413	7,799
Total liabilities and shareholders' equity	377,821	1,187,671	257,754	1,823,246

* Included within 'Holdings in collective investment schemes at fair value through income' is £97,881,000 (31 December 2009: £101,485,000; 31 December 2008: £112,852,000; 31 December 2007: £49,232,000) of unit-linked contracts held with JPMorgan Life Limited, a company within the JPMorgan Chase & Co. Group.

Unit-linked policyholder funds and the with-profits policyholder funds, which matches the liabilities for the insurance contracts with DPF, are managed to provide returns in line with expectations of policyholders. Market risk in these funds is normally borne by policyholders as investment returns on these funds are attributed to policyholders. However, where the with-profits assets are insufficient to meet the minimum guaranteed liability, the additional cost is borne by shareholders. The Save & Prosper Group's only market risk exposure on unit-linked policyholder funds is to changes in management fees. Market risk on corporate assets, which includes both non-profits non-linked business and assets attributable to the shareholder, are borne by the shareholder. The Save & Prosper Group manages these market risks by setting investment guidelines for each fund which restrict market exposures depending on each fund's investment objectives. The Save & Prosper Group receives management fees based on the market value of policyholder funds and its fee income is therefore subject to changes in the market value of policyholder assets. Management fee income will therefore be affected by lower market prices and higher volatility.

(a) Insurance contracts with DPF

The primary investment objective of the with-profits policyholder funds is that the guaranteed minimum benefits of the withprofits policyholders should be met entirely from the policyholder funds. The secondary investment objective is, where possible, to provide a surplus in excess of the guaranteed minimum benefits. The entire surplus in the policyholder fund accrues to the with-profits policyholders. Any deficit in the policyholder fund is ultimately borne by shareholders. Therefore the Save & Prosper Group has a significant exposure to market risk in relation to with-profits business should the with-profits policyholder assets be unable to fully meet the cost of guarantees.

To achieve the investment objectives, the funds may invest in a range of asset classes including property, equities, fixed interest securities, convertibles, cash and derivatives, and both in UK and overseas investments. Such exposure may be achieved by investment in collective investment schemes (including such schemes with total or absolute return objectives or which include investments in commodities). Investment guidelines restrict the level of exposure for certain asset categories. In respect of derivatives, these may only be used for the purposes of reduction of investment risks and efficient portfolio management.

The following analysis indicates the estimated amount and timing of the cash flows arising for this group of contracts, prepared on an estimated basis using estimates of mortality. No equivalent analysis is provided for the supporting asset portfolio, as materially all of these would be presented as occurring in the earliest period of the table.

Contractual cash flows (undiscounted)

	0-5 years	5-10 years	10-15 years	15-20 years	>20 years
	£000	£000	£000	£000	£000
As at 30 June 2010
Death outgo	8,463	7,039	7,681	8,111	7,180
Maturity outgo	108,427	82,067	86,235	88,940	55,748
Total	116,890	89,106	93,916	97,051	62,928
As at 31 December 2009
Death outgo	8,674	7,038	7,685	8,182	8,093
Maturity outgo	107,300	84,995	85,227	91,386	63,657
Total	115,974	92,033	92,912	99,568	71,750
As at 31 December 2008
Death outgo	8,728	6,981	7,530	8,107	8,119
Maturity outgo	98,642	96,099	96,783	103,089	78,439
Total	107,370	103,080	104,313	111,196	86,558
As at 31 December 2007
Death outgo	10,156	7,939	8,370	9,142	9,352
Maturity outgo	117,613	123,546	111,859	128,338	107,934
Total	127,769	131,485	120,229	137,480	117,286

Sensitivity analysis

At 30 June 2010 there was a deficit in the policyholder funds resulting in a negative unallocated divisible surplus which was eliminated by recognising a shareholder charge for the cost of guarantees of £68m (31 December 2009: £38m; 31 December 2008: £72m; 31 December 2007: £0m) as set out on Note 25.

(i) It is estimated that a 10 per cent. decrease in the value of equities and property within the with-profits policyholder funds as at 30 June 2010, with all other variables held constant, would increase the shareholder charge by approximately £22m (31 December 2009: £22m; 31 December 2008: £22m; 31 December 2007: £27m) and decrease profit for the six months ended 30 June 2010 by £16m (30 June 2009: £15m; 31 December 2009: £16m; 31 December 2008: £16m; 31 December 2007: £19m).

A 10 per cent. increase in the value of the with-profits policyholder funds would give rise to decreases in shareholder charges and increases in period profits of identical amounts, as at and for the corresponding periods shown above.

• (ii) It is estimated that a 0.25 per cent. increase in the yields on fixed interest assets within the with-profits funds as at the balance sheet date, with all other variables held constant, would decrease the shareholder charge by approximately £1.8m (31 December 2009: £2.0m; 31 December 2008: £0m; 31 December 2007: £0m) and increase profit for the six months ended 30 June 2010 by £1.3m (31 December 2009: £1.4m; 31 December 2008: £0m; 31 December 2007: £0m).
• (iii) It is estimated that a 0.25 per cent. decrease in the yields on fixed interest assets within the with-profits funds as at the balance sheet date, with all other variables held constant, would increase the shareholder charge by approximately £2.1m (31 December 2009: £1.3m; 31 December 2008: £0.5m; 31 December 2007: £3.4m) and decrease profit for the six months ended 30 June 2010 by £1.5m (31 December 2009: £0.9m; 31 December 2008: £0.3m; 31 December 2007: £2.4m).

(b) Unit-linked contracts

For unit-linked contracts, which may be insurance or investment contracts, the Save & Prosper Group matches all the financial liabilities with assets on which the unit prices are based. This approach results in the Save & Prosper Group having no significant market risk or credit risk on these contracts. Its primary exposure to market risk is the risk of volatility in asset management fees due to the impact of interest rate and equity price movements on the fair value of the assets held in the linked funds, on which investment management fees are based.

In practice there remain areas where there is a residual risk as follows:

(i) Surplus units

Market risk arises from the existence of surplus units (over and above requirements to match policyholder unit liabilities), which the Save & Prosper Group may hold to facilitate the creation and cancellation of units. These positions can result in temporary, but insignificant, market exposures which are monitored on a daily basis against specific limits.

(ii) Change in insurance contract provisions

When calculating insurance contract provisions for the non-unit component of liabilities under linked contracts, allowance is made for both future investment management charges and investment expenses as a proportion of unit funds. As investment charges are generally in excess of investment expenses this surplus is used to offset future administration expenses on the contracts. In a falling market the absolute amount of the surplus of investment charges over investment expenses would reduce and hence this might lead to an increase in insurance contract provisions.

Unit-linked contracts can be surrendered before maturity for cash surrender specified in the contractual terms and conditions. The terms are such that the surrender value will either be equal to the carrying amount of the contract liability, or in some cases lower, due to surrender penalties specified in the contract terms and conditions. The impact on the Save & Prosper Group's current year results would therefore be minimal. For all these contracts the Save & Prosper Group is not required to separately measure this embedded derivative at fair value.

A maturity analysis based on the earliest contractual repayment date would present all the liabilities as due in the earliest period of the table because the option to surrender can be exercised immediately by all policyholders.

Sensitivity analysis – equity risk

A decrease of 10 per cent. in the value of the assets would reduce asset management fees, which would result in a £0.4m decrease in profit for the six months' ended 30 June 2010 and in shareholder equity as at 30 June 2010 (six months' ended and as at 30 June 2009: £0.4m; year ended and as at 31 December 2009 £0.9m; year ended and as at 31 December 2008: £0.9m; year ended and as at 31 December 2007: £0.9m).

(c) Corporate assets including non-profit contracts

This category consists of a small amount of non-linked insurance contracts without DPF and corporate assets representing shareholder equity.

Financial risks within corporate assets are borne by the Save & Prosper Group. Corporate assets are invested to protect capital and to minimise market and credit risk. These assets are substantially invested in JPMorgan Sterling Liquidity Funds and the JPMorgan Global Corporate Bond Fund, which are funds that allow cash to be realised on a daily basis. At 30 June 2010 the value of these funds included in 'Holdings in collective investment schemes' were £256m (31 December 2009: £250m; 31 December 2008: £250m; 31 December 2007: £244m). The Save & Prosper Group has a risk of lower returns on these investments, due to changes in short term interest rates, but a limited risk of a fall in fair value.

Sensitivity analysis – interest rate risk

The effect of a 1 per cent. decrease/(increase) in money market interest rates at the balance sheet date would be to decrease/ (increase) post-tax profit for the six months ended 30 June 2010 by approximately £2m (30 June 2009: £2m; 31 December 2009: £2m; 31 December 2008: £2m; 31 December 2007: £2m).

The Save & Prosper Group has little currency risk as all policyholder contracts are sterling denominated. Foreign currency investments may be held in policyholder funds where the currency risk is borne by policyholders.

Use of derivatives is limited but may be used to gain or hedge market exposures or to hedge foreign currency investments in policyholder funds. All derivatives are recorded at fair value as the Save & Prosper Group does not use hedge accounting.

Credit risk management

The Save & Prosper Group has exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. Key areas where the business is exposed to credit risk are:

• . reinsurers' share of insurance liabilities;
• . amounts due from reinsurers in respect of claims already paid; and
• . counterparty risk with respect to corporate bond, deposits and debt securities.

In addition there will be some exposures to individual policyholders, on amounts due on insurance contracts. These are tightly controlled, with plans being terminated or benefits amended if amounts owed are for more than 3 months, so there is no significant risk to the results of the business.

The business structures the levels of credit risk it accepts by placing limits on its exposure to a single counterparty or group of counterparties. Such risks are subject to at least an annual review.

Reinsurance credit risk is used to manage insurance risk. However, this does not discharge the Save & Prosper Group's liability as primary insurer. If a reinsurer fails to pay a claim for any reason, the business remains liable for the payment to the policyholder. The creditworthiness of reinsurers in considered on a regular basis by reviewing their financial strength.

The Save & Prosper Group bears the credit risk on an investment contract, valued at £98m as at 30 June 2010 (31 December 2009: £101m; 31 December 2008: £113m; 31 December 2007: £49m), with JPMorgan Life Limited (JPML) included in ''Holdings in collective investment schemes'', as set out in Note 17. The counterparty exposure to JPML is off-set by a counterparty exposure that JPML has to the Save & Prosper Group of £12m (31 December 2009: £11m; 31 December 2008: £8m; 31 December 2007: £10m) under a separate investment contract held by JPML with the Save & Prosper Group. At 30 June 2010 the net exposure to JPML was £86m (31 December 2009: £90m; 31 December 2008: £105m; 31 December 2007: £39m).

Assets held to cover unit-linked liabilities, with the exception of the investment contract held with JPML and the reinsurers' share of insurance contract provisions, have been excluded in the following tables as substantially all the credit risk remains with policyholders. Assets held to cover with-profits liabilities are included as there is a risk that credit risk will be borne by the shareholder where this results in there being insufficient with-profits policyholder assets to fund the minimum guaranteed obligation. However, in normal circumstances (where the asset share is in excess of the minimum guaranteed amount) substantially all the credit risk remains with policyholders. Holdings in collective investment schemes have also been excluded from the table below as given the nature of the financial instrument, these do not directly expose the Save & Prosper Group to credit risk.

The Save & Prosper Group's exposure to credit risk is summarised below:

	Credit rating-debt securities	Cash balances	Total
As at 30 June 2010	AAA £000	AA £000	A £000	Unrated £000	£000	£000
Holdings in collective investment schemes Reinsurance assets:	–	–	97,881	–	–	97,881
Reinsurance contract with Phoenix Assurance Company Other reinsurance assets	– –	– –	– –	6,621 3	– –	6,621 3
Government or pseudo government deposits	67,108	–	–	–	–	67,108
Derivative contracts Insurance and other receivables Cash and cash equivalents	– – –	– – –	227 – –	– 5,694 –	– – 7,823	227 5,694 7,823
Total	67,108	–	98,108	12,318	7,823	185,357

	Credit rating-debt securities			Cash balances	Total
AAA £000	AA £000	A £000	Unrated £000	£000	£000
–	–	101,485	–	–	101,485
					6,936
					329
					64,284
					279
					3,579
–	–	–	–	9,515	9,515
64,284	–	101,764	10,844	9,515	186,407
	– – 64,284 – –	– – – – –	– – – 279 –	6,936 329 – – 3,579	– – – – –

	Credit rating-debt securities	Cash balances	Total
As at 31 December 2008	AAA £000	AA £000	A £000	Unrated £000	£000	£000
Holdings in collective investment
schemes	–	–	112,852	–	–	112,852
Reinsurance assets:
Reinsurance contract with
Phoenix Assurance Company	–	–	–	5,553	–	5,553
Other reinsurance assets	–	–	–	864	–	864
Government or pseudo government
deposits	94,605	–	–	–	–	94,605
Derivative contracts	–	–	–	–	–	–
Insurance and other receivables	–	–	–	9,984	–	9,984
Cash and cash equivalents	–	–	1,700	–	2,342	4,042
Total	94,605	–	114,552	16,401	2,342	227,900

	Credit rating-debt securities				Cash balances	Total
As at 31 December 2007	AAA £000	AA £000	A £000	Unrated £000	£000	£000
Holdings in collective investment schemes	–	49,232	–	–	–	49,232
Reinsurance assets: Reinsurance contract with Phoenix Assurance Company	–	–	–	9,431	–	9,431
Other reinsurance assets Government or pseudo government	–	–	–	991	–	991
deposits Derivative contracts	87,456 –	– –	– –	– –	– –	87,456 –
Insurance and other receivables Cash and cash equivalents	– –	– –	– –	4,695 –	– 3,747	4,695 3,747
Total	87,456	49,232	–	15,117	3,747	155,552

No credit limits were exceeded during the six month period ended 30 June 2010. No financial assets are past due or impaired at the reporting date and management expects no significant losses from non-performance by these counterparties.

Liquidity risk

Liquidity risk in policyholder funds is managed by investing only in readily realisable investments with the exception of property investments where property sales and purchases are closely monitored to match net flows with policyholders. The property fund is a small proportion of total assets. It maintains a prudent level of liquidity and there are provisions in the fund particulars to defer redemptions in times of adverse market conditions or where they might be material relative to the fund.

The table below provides a maturity analysis of the Save & Prosper Group's liabilities, including those which would be met from investment policyholder assets:

	Due in less than 1 year	Due in more than 1 year	Total
	£000	£000	£000
As at 30 June 2010:
Payables related to direct insurance and investment contract liabilities	9,869	–	9,869
Investment contracts at fair value through income	105,288	–	105,288
Other payables	12,437	–	12,437
Total	127,594	–	127,594
As at 31 December 2009:
Payables related to direct insurance and investment contract liabilities	9,824	–	9,824
Investment contracts at fair value through income	106,061	–	106,061
Other payables	11,808	–	11,808
Total	127,693	–	127,693
As at 31 December 2008:
Payables related to direct insurance and investment contract liabilities	9,300	–	9,300
Investment contracts at fair value through income	102,106	–	102,106
Other payables	8,075	–	8,075
Total	119,481	–	119,481
As at 31 December 2007:
Payables related to direct insurance and investment contract liabilities	10,461	–	10,461
Investment contracts at fair value through income	142,774	–	142,774
Other payables	7,799	–	7,799
Total	161,034	–	161,034

Financial liabilities under unit-linked investment contracts do not have contractual maturity dates and are shown as due in less than one year. These liabilities do not pose a material liquidity risk as there are matching policyholder assets which could be realised to meet surrenders.

The Save & Prosper Group's substantial holding of money market funds serves to minimise liquidity risk.

6 Operating segments

In the opinion of the Directors of Chesnara plc, the Save & Prosper Group operates in a single business segment, being that of long-term insurance business in the UK.

7 Net insurance premium revenue

		Six months ended 30 June 2010
	Unit-linked: without DPF		Non-linked: without DPF		With DPF		Total
	Regular premium £000	Single premium £000	Regular premium £000	Single premium £000	Regular premium £000	Single premium £000	£000
Insurance premium revenue Insurance premium ceded	3,418	350	248	–	2,580	6	6,602
to reinsurers	(18)	–	(89)	72	(73)	–	(108)
Net insurance premium revenue	3,400	350	159	72	2,507	6	6,494

		Six months ended 30 June 2009 (unaudited)
	Unit-linked: without DPF		Non-linked: without DPF		With DPF		Total
	Regular premium £000	Single premium £000	Regular premium £000	Single premium £000	Regular premium £000	Single premium £000	£000
Insurance premium revenue Insurance premium ceded	4,046	480	279	–	2,936	28	7,769
to reinsurers	(20)	–	(71)	–	(71)	–	(162)
Net insurance premium revenue	4,026	480	208	–	2,865	28	7,607

		Year ended 31 December 2009
	Unit-linked: without DPF		Non-linked: without DPF		With DPF		Total
	Regular premium £000	Single premium £000	Regular premium £000	Single premium £000	Regular premium £000	Single premium £000	£000
Insurance premium revenue Insurance premium ceded	7,586	845	534	–	5,723	33	14,721
to reinsurers	(40)	–	(144)	138	(143)	–	(189)
Net insurance premium revenue	7,546	845	390	138	5,580	33	14,532

		Year ended 31 December 2008
	Unit-linked: without DPF		Non-linked: without DPF		With DPF		Total
	Regular premium £000	Single premium £000	Regular premium £000	Single premium £000	Regular premium £000	Single premium £000	£000
Insurance premium revenue Insurance premium ceded	9,024	1,284	593	–	6,601	72	17,574
to reinsurers	(87)	–	(243)	1,744	(177)	–	1,237
Net insurance premium revenue	8,937	1,284	350	1,744	6,424	72	18,811

		Year ended 31 December 2007
	Unit-linked: without DPF		Non-linked: without DPF		With DPF		Total
	Regular premium £000	Single premium £000	Regular premium £000	Single premium £000	Regular premium £000	Single premium £000	£000
Insurance premium revenue Insurance premium ceded	10,525	6,298	658	–	7,506	1,870	26,857
to reinsurers	35	–	(122)	(10,367)	(125)	–	(10,579)
Net insurance premium revenue	10,560	6,298	536	(10,367)	7,381	1,870	16,278

Insurance premium ceded to reinsurers (single premium without DPF) includes the effect of the Part VII transfer that took place in 2007: see Note 11 for further details.

8 Fees and commission income

		Six months ended 30 June
	2010		2009 (unaudited)
	Insurance contracts £000	Investment contracts £000	Insurance contracts £000	Investment contracts £000
Fee income Commission income	576 135	88 –	538 94	84 –
Total fee and commission income	711	88	632	84

			Year ended 31 December
	2009		2008		2007
	Insurance contracts £000	Investment contracts £000	Insurance contracts £000	Investment contracts £000	Insurance contracts £000	Investment contracts £000
Fee income Commission income	1,123 206	149 –	1,457 238	212 –	1,837 280	227 –
Total fee and commission income	1,329	149	1,695	212	2,117	227

9 Net investment return

2010	2009 (unaudited)	2009	2008	2007 £000
				39,546
				2,539
				7,069
				17,539
				(6,500)
				–
4,144	(9,005)	1,003	(40,024)	(5,169)
11,422	7,148	176,832	(309,760)	55,024
	£000 8,711 264 3,904 (9,574) (1,547) 5,520	Six months ended 30 June £000 10,088 47 3,654 4,517 (995) (1,158)	£000 24,576 447 7,394 140,197 17,575 (14,360)	Year ended 31 December £000 41,955 250 7,086 (318,751) (276) –

Net fair value gains and losses in respect of holdings in collective investment schemes are included in the line that is most appropriate taking into account the nature of the underlying investments.

10 Other operating income

		Six months ended 30 June		Year ended 31 December
	2010	2009	2009	2008	2007
	£000	(unaudited) £000	£000	£000	£000
Investment management fee rebate	4,299	3,527	7,752	8,321	10,296
Total other operating income	4,299	3,527	7,752	8,321	10,296

11 Insurance contract claims and benefits

		Six months ended 30 June 2010
	Unit-linked: without DPF £000	Non-linked without DPF £000	With DPF £000	Total £000
Claims and benefits paid to insurance contract holders Net (decrease)/increase in insurance contract provisions	47,470 (49,860)	447 2,151	12,955 29,037	60,872 (18,672)
Total insurance contract claims and benefits	(2,390)	2,598	41,992	42,200
Reinsurers' share of claims and benefits paid to insurance contract holders Reinsurers' share of net (increase)/decrease in insurance	(405)	(1)	(193)	(599)
contract provisions	451	–	192	643
Net claims Movement in unallocated divisible surplus	(2,344) –	2,597 –	41,991 (615)	42,244 (615)
Net insurance contract claims and benefits incurred	(2,344)	2,597	41,376	41,629

Six months ended 30 June 2009 (unaudited) Unit-linked: Non-linked With without DPF without DPF DPF £000 £000 £000 29,475 612 16,022 (20,308) 1,427 12,368 9,167 2,039 28,390 (115) (21) (181) (425) 20 159 8,627 2,038 28,368
			Total £000
			46,109 (6,513)
			39,596
			(317)
			(246)
–	–	–	39,033 –

Net insurance contract claims and benefits incurred 8,627 2,038 28,368 39,033

	Year ended 31 December 2009 Unit-linked: Non-linked With without DPF without DPF DPF £000 £000 £000 69,523 1,656 31,098 73,544 (6,977) (38,904) 143,067 (5,321) (7,806) (445) (642) (192) (1,476) 640 (12) 141,146 (5,323) (8,010) – – 2,017
				Total £000
Claims and benefits paid to insurance contract holders Net increase/(decrease) in insurance contract provisions				102,277 27,663
Total insurance contract claims and benefits Reinsurers' share of claims and benefits paid to insurance				129,940
contract holders Reinsurers' share of net (increase)/decrease in insurance				(1,279)
contract provisions				(848)
Net claims Movement in unallocated divisible surplus				127,813 2,017
Net insurance contract claims and benefits incurred	141,146	(5,323)	(5,993)	129,830

Year ended 31 December 2008

With

	without DPF £000	without DPF £000	DPF £000	Total £000
Claims and benefits paid to insurance contract holders Net (decrease)/increase in insurance contract provisions	92,872 (319,983)	1,863 (6,464)	34,574 18,629	129,309 (307,818)
Total insurance contract claims and benefits Reinsurers' share of claims and benefits paid to insurance	(227,111)	(4,601)	53,203	(178,509)
contract holders Reinsurers' share of net decrease /(increase) in insurance	(817)	(64)	(47)	(928)
contract provisions	4,091	58	(144)	4,005
Net claims Movement in unallocated divisible surplus	(223,837) –	(4,607) –	53,012 (23,186)	(175,432) (23,186)
Net insurance contract claims and benefits incurred	(223,837)	(4,607)	29,826	(198,618)

Non-linked

		Year ended 31 December 2007
	Unit-linked: without DPF £000	Non-linked without DPF £000	With DPF £000	Total £000
Claims and benefits paid to insurance contract holders Net decrease in insurance contract provisions	152,241 (107,671)	12,789 (165,626)	41,992 (18,238)	207,022 (291,535)
Total insurance contract claims and benefits Reinsurers' share of claims and benefits paid to insurance	44,570	(152,837)	23,754	(84,513)
contract holders Reinsurers' share of net decrease in insurance contract	(834)	(9,788)	(606)	(11,228)
provisions	450	144,275	300	145,025
Net claims Movement in unallocated divisible surplus	44,186 –	(18,350) –	23,448 (21,024)	49,284 (21,024)
Net insurance contract claims and benefits incurred	44,186	(18,350)	2,424	28,260

Unit-linked:

During the year ended 31 December 2006 the Save & Prosper Group entered into a reinsurance arrangement with Prudential Retirement Income Limited (PRIL) in respect of certain pension annuity policies. On 31 October 2007 the Save & Prosper Group transferred the reinsured policies to PRIL by means of a scheme of transfer under Part VII of the Financial Services and Markets Act 2000 and the reinsurance agreement was subsequently terminated. As a result of the Part VII transfer, technical provisions decreased. The effect can be seen in the 2007 Reinsurers' share of net decrease/ (increase) in insurance contract provisions, in Reinsurers' share of claims and benefits paid to insurance contract holders and also Insurance premium ceded to reinsurers (see Note 7).

12 Change in investment contract liabilities

	Six months ended 30 June		Year ended 31 December
	2010 2009 2009	(unaudited)		2008	2007
	£000	£000	£000	£000	£000
(Increase)/decrease in the fair value of investment contracts designated on initial recognition as fair value through income:	(2,667)	1,558	(10,060)	30,566	(1,068)
(Increase)/decrease in investment contract liabilities	(2,667)	1,558	(10,060)	30,566	(1,068)

Investment contract benefits comprise benefits accruing to holders of investment contracts issued by the Save & Prosper Group.

13 Fees, commission and other acquisition costs

	Six months ended 30 June			Year ended 31 December
	2010	2009 (unaudited)	2009	2008	2007
	£000	£000	£000	£000	£000
Directly expensed costs: Insurance contracts – renewal commission	46	97	141	156	350
Total	46	97	141	156	350

14 Administrative expenses

	Six months ended 30 June			Year ended 31 December
	2010	2009 (unaudited)	2009	2008	2007
	£000	£000	£000	£000	£000
Personnel costs	130	128	242	219	242
Claims handling costs	228	171	381	481	735
Costs paid to third-party administrators	2,107	2,479	4,672	5,074	4,672
Other goods and services	873	1,119	2,049	1,421	4,609
Total	3,338	3,897	7,344	7,195	10,258

Included in Other Goods and Services above are the following amounts payable to the Auditor and its associates, exclusive of VAT.

	Six months ended 30 June			Year ended 31 December
	2010	2009 (unaudited)	2009	2008	2007
	£000	£000	£000	£000	£000
Fees payable to the Company's Auditor for the audit of the Company's annual accounts	–	–	132	102	116
Fees payable to the Company's Auditor and its associates for other services:
Audit of regulatory returns	46	–	50	50	30
Other services	16	–	–	–	–
Total	62	–	182	152	146

15 Income tax expense

	Six months ended 30 June			Year ended 31 December
	2010 £000	2009 (unaudited) £000	2009 £000	2008 £000	2007 £000
Current tax (credit)/expense Current year Adjustment to prior years	(4,914) (35)	(3,618) (78)	18,493 (293)	(10,882) 43	13,408 1
Net (credit)/expense Deferred tax credit Origination and reversal of temporary differences	(4,949) (1,743)	(3,696) (2,744)	18,200 (2,694)	(10,839) (13,439)	13,409 (2,337)
Total income tax (credit)/expense	(6,692)	(6,440)	15,506	(24,278)	11,072
(Loss)/profit before tax	(24,666)	(22,471)	53,219	(58,888)	44,006
Income tax (credit)/expense using the domestic corporation tax rate of 28% (2009: 28%, 2008: 28.5%, 2007: 30%) Movement in property revaluations Unrealised loss on investment in subsidiary not subject to corporation tax (Overprovided)/underprovided in prior years Other	(6,906) 403 – (35) (154)	(6,292) (328) – (78) 258	14,901 179 – (293) 719	(16,783) (2,704) – 43 (4,834)	13,202 (855) 26 1 (1,302)
Total income tax (credit)/expense	(6,692)	(6,440)	15,506	(24,278)	11,072

16 Investment properties

	30 June 2010 £000	31 December
		2009 £000	2008 £000	2007 £000
Balance at 1 January	104,898	105,100	145,032	120,838
Acquisitions	4,828	–	662	36,964
Disposals	(2,018)	(1,205)	(570)	(7,601)
Fair value adjustments	4,144	1,003	(40,024)	(5,169)
Balance at 31 December	111,852	104,898	105,100	145,032
Current	–	–	–	–
Non-current	111,852	104,898	105,100	145,032
Total	111,852	104,898	105,100	145,032

Investment properties were bought for investment purposes in accordance with the investment strategy of the Save & Prosper Group. The properties are independently valued in accordance with International Valuation Standards to determine the open market value of the investment properties on an annual basis. The latest valuations were conducted as at 31 December 2009.

Income arises from investment properties in two streams:

• (i) fair value gains arising as a result of market appreciation in the value of the properties; and
• (ii) rental income arising from leases granted on the properties.

Both of these amounts are disclosed in Net Investment Return (see Note 9).

17 Financial assets

	30 June 2010 £000		31 December
		2009 £000	2008 £000	2007 £000
Financial assets by measurement category
Fair value through income:
Designated at fair-value through
income on initial recognition	1,264,492	1,329,225	1,253,674	1,649,149
Derivative financial instruments	227	279	–	–
Insurance and other receivables	14,533	8,683	14,898	9,039
Prepayments	64	67	771	1,105
Total	1,279,316	1,338,254	1,269,343	1,659,293

Fair value is the amount for which an asset could be exchanged between willing parties in an arms' length transaction. The tables below show the determination of fair value according to a three-level valuation hierarchy. Fair values are generally determined at prices quoted in active markets (Level 1). However, where such information is not available, the Save & Prosper Group applies valuation techniques to measure such instruments. These valuation techniques make use of market-observable data for all significant inputs where possible (Level 2), but, in some cases it may be necessary to estimate other than market-observable data within a valuation model for significant inputs (Level 3).

Financial assets at fair value through income

	Fair value measurement at 30 June 2010
	Level 1	Level 2	Level 3	Total
	£000	£000	£000	£000
Equities:
Listed	32,866	–	–	32,866
Debt securities – fixed rate:
Government Bonds	77,006	–	–	77,006
Listed	2,085	–	–	2,085
Total debt securities	79,091	–	–	79,091
Holdings in collective investment schemes	1,054,654	97,881	–	1,152,535
Derivative financial instruments	–	227	–	227
Total	1,166,611	98,108	–	1,264,719
Current				1,264,719
Non-current				–
Total				1,264,719

	Fair value measurement at 31 December 2009
	Level 1	Level 2	Level 3	Total
	£000	£000	£000	£000
Equities:
Listed	34,091	–	–	34,091
Debt securities – fixed rate:
Government Bonds	74,275	–	–	74,275
Listed	2,036	–	–	2,036
Total debt securities	76,311	–	–	76,311
Holdings in collective investment schemes	1,117,338	101,485	–	1,218,823
Derivative financial instruments	–	279	–	279
Total	1,227,740	101,764	–	1,329,504
Current				1,329,504
Non-current				–
Total				1,329,504

	Fair value measurement at 31 December 2008
	Level 1	Level 2	Level 3	Total
	£000	£000	£000	£000
Equities:
Listed	33,701	–	–	33,701
Debt securities – fixed rate:
Government Bonds	106,838	–	–	106,838
Listed	1,570	–	–	1,570
Total debt securities	108,408	–	–	108,408
Holdings in collective investment schemes	998,713	112,852	–	1,111,565
Derivative financial instruments	–	–	–	–
Total	1,140,822	112,852	–	1,253,674
Current				1,253,674
Non-current				–
Total				1,253,674

	Fair value measurement at 31 December 2007
	Level 1	Level 2	Level 3	Total
	£000	£000	£000	£000
Equities:
Listed	169,158	–	–	169,158
Debt securities – fixed rate:
Government Bonds	105,185	–	–	105,185
Listed	3,725	–	–	3,725
Total debt securities	108,910	–	–	108,910
Holdings in collective investment schemes	1,321,849	49,232	–	1,371,081
Derivative financial instruments	–	–	–	–
Total	1,599,917	49,232	–	1,649,149
Current				1,649,149
Non-current				–
Total				1,649,149

Included within ''Holdings in collective investment schemes'' are amounts held with JPMorgan Life Limited through a reinsurance arrangement, under which the Save & Prosper Group has reassured certain unit-linked liabilities. The contract does not transfer significant insurance risk and is accounted for as 'Holdings in collective investment schemes', representing the substance of the arrangement in place. The amounts held with JPMorgan Life Limited as at 30 June 2010 amounted to £97,881,000 (31 December 2009: £101,485,000; 31 December 2008: £112,852,000; 31 December 2007: £49,232,000) and have been classified as a level 2 in the above hierarchy tables as the reinsurance contract itself is not quoted but is valued using market-observable data.

18 Insurance and other receivables and prepayments

Insurance and other receivables
	30 June	31 December
	2010 £000	2009 £000	2008 £000	2007 £000
Other receivables:
Accrued interest income	181	188	615	612
Related party receivables	552	827	6,551	1,263
Sundry assets held to cover linked liabilities	8,839	5,104	4,914	4,344
Other	4,961	2,564	2,818	2,820
Total	14,533	8,683	14,898	9,039
Current	14,533	8,683	14,898	9,039
Non-current	–	–	–	–
Total	14,533	8,683	14,898	9,039

The carrying amount is a reasonable approximation of fair value.

Prepayments	30 June		31 December
Prepayments	2010	2009	2008	2007
	£000	£000	£000	£000
	64	67	771	1,105
Current	64	67	771	1,105
Non-current	–	–	–	–
Total	64	67	771	1,105

The carrying amount is a reasonable approximation of fair value.

19 Derivative financial instruments

Exchange rate futures

	30 June	31 December
Euro/sterling	2010	2009	2008	2007
	£000	£000	£000	£000
	227	279	–	–
Current	227	279	–	–
Non-current	–	–	–	–
Total	227	279	–	–

Derivatives within with-profits funds

As part of its investment management strategy, the Save & Prosper Group enters into a limited range of derivative instruments to manage its exposure to various risks.

The Save & Prosper Group uses equity index futures in order to economically hedge equity market risk in the with-profits funds' investments.

The change in fair value of the futures contracts is intended to offset the change in fair value of the underlying equities being hedged. The Save & Prosper Group settles the market value of the futures contracts on a daily basis by paying or receiving a variation margin. The futures contracts are not discounted as this daily settlement is equal to the change in fair value of the futures. As a result, there is no additional fair value to recognise in relation to these derivatives on the Save & Prosper Group balance sheet at the period end.

The Save & Prosper Group also purchases exchange rate futures to mitigate exchange rate risk within its with-profits funds.

These contracts are not traded in active markets but are valued using inputs that are directly observable: they are, accordingly, determined at Level 2 in the three-level fair value determination hierarchy set out in Note 17.

20 Income tax assets

Income tax assets, which are all current, comprise:	30 June	31 December
	2010 £000	2009 £000	2008 £000	2007 £000
Corporation tax recoverable	6,902	–	6,188	–

The carrying amount is a reasonable approximation of fair value.

21 Cash and cash equivalents

	30 June 2010 £000	31 December
		2009 £000	2008 £000	2007 £000
Bank and cash balances Call deposits due within 1 month	13,457 –	13,006 –	8,628 –	8,499 –
Total cash and cash equivalents Bank overdrafts	13,457 (142)	13,006 (216)	8,628 (293)	8,499 (223)
Cash and cash equivalents in the statement of cash flows	13,315	12,790	8,335	8,276

The effective interest rate on short term bank deposits as at 30 June 2010 was 0.45 per cent. (31 December 2009: 0.25 per cent.; 31 December 2008: 1.45 per cent.; 31 December 2007: 5.85 per cent.), with an average maturity of 1 day (31 December 2009: 4 days; 31 December 2008: 2 days; 31 December 2007: 2 days). All deposits included in cash and cash equivalents are capable of being realised as cash within 90 days.

22 Capital Management

(a) Objective

The Save & Prosper Group's objective when managing capital is to maintain a strong capital base to protect policyholders' and creditors' interests and to satisfy regulators, while continuing to maintain shareholder value. This is achieved through:

• (i) safeguarding the Save & Prosper Group's ability to continue as a going concern so that it can continue to provide returns to shareholders and benefits for other stakeholders;
• (ii) providing an adequate return to shareholders by pricing insurance and investment contracts commensurately with the level of risk; and
• (iii) complying with the insurance capital requirements established by the regulators of the insurance markets where the Save & Prosper Group's regulated companies operate.

Throughout the period from 1 January 2007 to 30 June 2007 the Save & Prosper Group operated principally in the UK and throughout the period from 1 July 2007 to 30 June 2010 the Save & Prosper Group operated exclusively in the UK. Accordingly, the Save & Prosper Group's regulatory capital requirements were substantially determined by the regulations established by the FSA in the UK for the period 1 January 2007 to 30 June 2007 and exclusively by these regulations from 1 July 2007 to 30 June 2010. The disclosure in parts (b) and (c) hereunder relates only to the operation of the UK regulatory regime.

(b) Operation of the UK regulatory regime

The operation of FSA regulation with respect to the regulated life assurance entities, Save & Prosper Insurance Limited and Save & Prosper Pensions Limited, is such as to specify the minimum amount of capital that must be held in addition to the insurance liabilities as determined for regulatory purposes. This is established by reference to two calculations, being:

• (i) the Pillar 1 calculation, which compares regulatory capital based on the characteristics of the in-force life assurance business with a concomitant measure of capital as prescribed by regulation; and
• (ii) the Pillar 2 calculation, which compares a risk-based assessment of economic capital with a concomitant measure of capital based on a realistic assessment of insurance liabilities.

As at 30 June 2010, the minimum capital requirement for both regulated companies was determined by the first calculation, as it gives rise to the lesser measure of surplus capital. At certain times, during the period covered by this financial information, the second measure was relevant for determining the minimum capital. Set out below, in Section (c) Regulatory capital resources and requirements, the results of the first calculation are presented. At no point would, having used the more onerous of the two tests, resulted in the company failing to meet its regulatory requirements.

The Save & Prosper Group's life assurance businesses, which fall outside the scope of the FSA's 'realistic capital' regime, comprise with-profits business and unit-linked and non-linked non-profit business.

(c) Regulatory capital resources and requirements

The following table summarises the capital resources and requirements of Save & Prosper Insurance Limited, as determined for UK regulatory purposes. As this statement presents the capital resources and requirements of Save & Prosper Insurance Limited and its subsidiary company, Save & Prosper Pensions Limited, on a combined basis, a stand-alone statement for Save & Prosper Pensions Limited is not presented.

30 June 2010
	2009 £m	2008 £m	2007 £m
62.0	165.4	141.3	174.4
23.6 1.9	22.9 4.1	23.9 2.5	27.3 5.4
25.5	27.0	26.4	32.7
36.5	138.4	114.9	141.7
243%	613%	535%	533%
	£m		31 December

For each of the periods reported on, the excess of the CR of Save & Prosper Pensions Limited was significantly in excess of its CRR on a stand-alone basis.

Available capital resources as at 30 June 2010 are stated after provision for dividends totalling £91 million which were approved by the Save & Prosper Group Board subsequent to 30 June 2010.

The Boards of Save & Prosper Insurance Limited and of Save & Prosper Pensions Limited have not established formal targets for CR cover for total CRR. The high level of capital retention within both of these regulated entities has given rise to significant excesses of CR over CRR for each entity for each reported period.

(d) Save & Prosper Group capital position statement

The following tables set out the principal forms of capital on an IFRS basis within the Save & Prosper Insurance Limited group and summarise the regulatory capital resources arising in the combined regulated entities:

As at 30 June 2010:

Total £000 20,000 106,314 126,314
30,683
156,997
1,402
(4,854)
(545)
(48)
152,952 (91,000)
61,952

As at 31 December 2009:

With-Profits Funds	Non-Profit Funds	Share-holder Funds	Total
			£000
– –	– –	20,000 95,129	20,000 95,129
– 55,761	– 4,081	115,129 –	115,129 59,842
55,761	4,081	115,129	174,971
2,017	–	–	2,017 (4,852)
–	(916)	–	(916)
(5,748)	(91)	–	(5,839)
54,626	626	110,129	165,381
	£000 2,596	£000 (2,448)	UK Life business £000 (5,000)

As at 31 December 2008:

	UK Life business
	With-Profits Funds	Non-Profit Funds	Share-holder Funds	Total
	£000	£000	£000	£000
Shareholder funds outside long-term insurance funds: Share capital Retained earnings	– –	– –	20,000 87,405	20,000 87,405
Total Shareholder funds in long-term insurance funds	– 27,170	– 12,683	107,405 –	107,405 39,853
Total shareholder funds IFRS basis Adjustment onto regulatory basis:	27,170	12,683	107,405	147,258
Unallocated divisible surplus Adjustments to net assets Deferred tax adjustment on conversion to IFRS Adjustment for non-fungible capital in subsidiary company	– 2,259 – –	– (2,116) (1,107) –	– (5,000) – –	– (4,857) (1,107) –
Total available capital resources	29,429	9,460	102,405	141,294

As at 31 December 2007:

	UK Life business
	With-Profits Funds	Non-Profit Funds	Share-holder Funds	Total
	£000	£000	£000	£000
Shareholder funds outside long-term insurance funds: Share capital Retained earnings	– –	– –	20,000 86,169	20,000 86,169
Total Shareholder funds in long-term insurance funds	– 74,909	– 790	106,169 –	106,169 75,699
Total shareholder funds IFRS basis Adjustment onto regulatory basis:	74,909	790	106,169	181,868
Unallocated divisible surplus	23,186	–	–	23,186
Adjustments to net assets Deferred tax adjustment on conversion to IFRS Adjustment for non-fungible capital in	6,026 –	(2,004) 2,479	(5,000) –	(978) 2,479
subsidiary company	(31,508)	(649)	–	(32,157)
Total available capital resources	72,613	616	101,169	174,398

The following tables summarise the movement in the available capital resources of the constituent funds of the life businesses:

Six months ended 30 June 2010:

With-Profits Funds	Non-Profit Funds	Share-holder Funds	Total
£000	£000	£000	£000
			165,381
			(23,698)
500	(792)	–	(292)
(11,000)	–	11,000	–
			5,585
			185
5,748	43	–	5,791
30,429	1,209	121,314	152,952
	54,626 (23,338) 3,893 –	626 (360) 1,692 –	UK Life business 110,129 – – 185

Year ended 31 December 2009:

	UK Life business
	With-Profits Funds	Non-Profit Funds	Share-holder Funds	Total
	£000	£000	£000	£000
At beginning of year	29,429	9,460	102,405	141,294
Effect of investment variances	19,576	2,016	–	21,592
Effect of changes in assumptions	4,000	2,952	–	6,952
Surplus arising in the year, net of the effect of the
items shown above	8,311	2,289	–	10,600
Net profit arising in shareholders' funds	–	–	782	782
Movement on adjustment for non-fungible capital
in subsidiary company	(5,748)	(91)	–	(5,839)
Fund transfers	(942)	(16,000)	16,942	–
Dividends paid	–	–	(10,000)	(10,000)
At end of year	54,626	626	110,129	165,381

Year ended 31 December 2008:

	UK Life business
	With-Profits Funds	Non-Profit Funds	Share-holder Funds	Total
	£000	£000	£000	£000
At beginning of year	72,613	616	101,169	174,398
Effect of investment variances	(72,489)	(2,574)	–	(75,063)
Effect of change in assumption
– Following adoption of provisions of
Policy Statement 06/14	–	2,574	–	2,574
– Other	(3,825)	3,503	–	(322)
Surplus arising in the year, net of the effect of the
items shown above	3,000	5,692	–	8,692
Net loss arising in shareholders' funds	–	–	(1,142)	(1,142)
Movement on adjustment for non-fungible capital
in subsidiary company	31,508	649	–	32,157
Fund transfers	(1,378)	(1,000)	2,378	–
At end of year	29,429	9,460	102,405	141,294

Year ended 31 December 2007:

	UK Life business
	With-Profits Funds	Non-Profit Funds	Share-holder Funds	Total
	£000	£000	£000	£000
At beginning of year	89,967	1,272	85,869	177,108
Effect of investment variances	(12,662)	140	–	(12,522)
Effect of change in assumption
– Following adoption of provisions of
Policy Statement 06/14	–	12,495	–	12,495
– Other	(1,137)	(2,118)	–	(3,255)
(Deficit)/surplus arising in the year, net of the effect
of the items shown above	(2,095)	8,227	–	6,132
Net profit arising in shareholders' funds	–	–	3,331	3,331
Movement on adjustment for non-fungible capital
in subsidiary company	509	–	–	509
Fund transfers	(1,969)	(25,000)	26,969	–
Dividends paid	–	–	(15,000)	(15,000)
Effect of transfer of annuity business	–	5,600	–	5,600
At end of year	72,613	616	101,169	174,398

In respect of the years ended 31 December 2007 and 31 December 2008 the Save & Prosper Group availed itself of certain of the provisions of Policy Statement 06/14 issued by the FSA in 2006, as set out above. Except for these changes, there were no changes in available capital resources for the six months ended 30 June 2010 or the years ended 31 December 2009, 31 December 2008 and 31 December 2007 due to changes in management policy, regulatory changes or external factors. The effect of new business written in the period on available capital resources is not considered to be significant.

There has been no material change in the Save & Prosper Group's management of capital during the period from 1 January 2007 to 30 June 2010.

Subject to the regulatory constraints and capital management policy of the Save & Prosper Group as set out above, capital resources are available for use elsewhere in the Save & Prosper Group.

(e) Technical provisions net of reassurance

(i) The technical provisions established to determine the regulatory capital resources as set out above are:

	30 June		31 December
	2010 £000	2009 £000	2008 £000	2007 £000
Technical provisions	£000	£000	£000	£000
Unit-linked:
Insurance contracts	740,850	791,283	719,765	1,039,357
Investment contracts	105,288	106,061	102,106	142,774
Non-participating:
Insurance contracts	21,899	20,213	26,735	32,930
With discretionary participation features	361,900	332,884	371,472	353,618
Total	1,229,937	1,250,441	1,220,078	1,568,679

(ii) The principal assumptions underlying the calculation of the technical provisions are:

Mortality

A base mortality table is selected which is most appropriate for each type of contract taking into account rates charged to the Save & Prosper Group by reinsurers. The mortality rates reflected in these tables are periodically adjusted, allowing for emerging experience and changes in reinsurer rates.

Persistency

For non-linked business, no allowance is made for lapses or surrenders within the valuation of insurance contract liabilities. This is a prudent assumption.

For unit-linked business, when assessing additional reserves for expenses and mortality risk, allowance has been made for lapses at a prudent level of 75 per cent. (31 December 2009: 75 per cent.; 31 December 2008: 75 per cent.; 31 December 2007: 50 per cent.) of the expected level as indicated by recent experience, the rates used being:

Rate of lapse	30 June 2010		31 December 2009 31 December 2008		31 December 2007
	SPI*	SPP*	SPI*	SPP*	SPI	SPP	SPI	SPP
Assurances:
Regular premium plans	3.75%	3.00%	3.75%	3.00%	4.50%	3.00%	3.00%	2.00%
Single premium contracts	3.75%	3.75%	3.75%	3.75%	4.50%	3.75%	3.00%	2.50%
Linked TIC**	–	7.50%	–	7.50%	–	7.50%	–	5.00%

* Save & Prosper Insurance Limited (''SPI'') and Save & Prosper Pensions Limited (''SPP'')

** Trustee Investment Contract, a unit-linked contract (''TIC'')

Discount rates

The following rates of interest have been used in discounting the projected liabilities:

Rate of interest	30 June 2010		31 December 2009 31 December 2008		31 December 2007
	SPI	SPP	SPI	SPP	SPI	SPP	SPI	SPP
Assurances:
With profit: non linked business	2.15%	3.00%	2.50%	3.85%	2.25%	3.40%	3.00%	3.50%
Without profit: term assurances	0.31%	0.39%	0.27%	0.34%	1.08%	1.35%	3.00%	3.25%
Without profit: annuities	–	0.39%	–	0.34%	–	1.35%	–	4.0% or 4.1%*

* The rate of interest depends on the characteristics of the relevant product.

The rates of interest shown above have been set after consideration of the risk of default on non-government bonds by applying the following adjustments to the earned yield:

• (i) a deduction of 30 per cent. of the credit spread as at 30 June 2010, 30 per cent. as at 31 December 2009, 25 per cent. as at 31 December 2008, and for 31 December 2007 a standard risk deduction varying by credit rating of 0.1 per cent. for 'AAA'-rated bonds, 0.15 per cent. for 'AA'-rated bonds, 0.25 per cent. for 'A'-rated bonds and 0.75 per cent. for 'BBB'-rated bonds; and
• (ii) an overall maximum margin over the equivalent term government fixed interest security of 2.5 per cent. as at 30 June 2010, 3.5 per cent. as at 31 December 2009. At 31 December 2008 rather than a margin over government securities an absolute yield cap of 10 per cent. was applied, and a cap of 5 per cent. at 31 December 2007.

Technical provisions for with-profits contracts are particularly sensitive to the interest rate used when discounting. Sensitivity analysis is provided in Note 5. For annuities in payment and assurances the provision is sensitive to the assumed future mortality experience of policyholders.

Renewal expenses and inflation

The renewal expenses assumed are based on the charges made to SPI and SPP by its third party insurance administration services provider, with appropriate margins. Explicit allowance is also made for those governance expenses which are charged to the long-term funds. Expenses were assumed to inflate at the following rates:

	30 June		31 December
	2010	2009	2008	2007
Expense inflation	4.75%pa	4.75%pa	4.00%pa	4.50%pa

Taxation

The Save & Prosper Group has assumed that current tax legislation and tax rates will not change.

Sensitivities

The sensitivities of technical provisions and of components of capital to changes in assumptions are materially the same as those disclosed in Note 23.

(f) Valuation of options and guarantees

Deferral of retirement ages

Policyholders with a Personal Retirement Account and Guaranteed Plus Retirement Plan may defer their retirement age on terms that may be beneficial to the policyholder. The cost of policyholders exercising this benefit is assessed using a prudent assumption as to the level of take-up of the option and deferral to age 75. The reserve for this option as at 30 June 2010 was £6.5m (31 December 2009: £3.4m; 31 December 2008: £5.0m; 31 December 2007: £2.5m).

Increase of Premiums on Personal Retirement Account

Policyholders with a Personal Retirement Account may increase their regular premium contribution on terms that can be beneficial to the policyholder. The cost of policyholders exercising this benefit is assessed using a prudent assumption as to the level of take-up of the option. The reserve for this option as at 30 June 2010 was £0.3m (31 December 2009: £0.3m; 31 December 2008: £0.3m; 31 December 2007: £0.7m).

Insurability options

Policyholders with certain contracts have the right to increase their sum assured without underwriting, in certain circumstances. The reserve for this option as 30 June 2010 was £0.3m (31 December 2009: £0.3m; 31 December 2008: £0.3m; 31 December 2007: £0.3m).

(g) Management of risk

The Save & Prosper Group's approach to the management of risk which may have an impact on the measurement of capital resources and requirements, as measured on a regulatory basis, is set out in Notes 4 and 5 to this financial information.

23 Insurance contract provisions

(a) Analysis of insurance contract provisions by type

	30 June 2010
	Gross £000	Reinsurance £000	Net £000
Unit-linked without DPF	740,850	6,621	734,229
Non-linked without DPF	19,247	–	19,247
With DPF	361,900	–	361,900
Total insurance contract provisions	1,121,997	6,621	1,115,376
Current	100,980	596	100,384
Non-current	1,021,017	6,025	1,014,992
Total	1,121,997	6,621	1,115,376
		31 December 2009
	Gross	Reinsurance	Net
	£000	£000	£000
Unit-linked without DPF	791,283	6,936	784,347
Non-linked without DPF With DPF	17,123 332,884	– –	17,123 332,884
Total insurance contract provisions	1,141,290	6,936	1,134,354
Current	102,716	624	102,092
Non-current	1,038,574	6,312	1,032,262
Total	1,141,290	6,936	1,134,354
		31 December 2008
	Gross £000	Reinsurance £000	Net £000
Unit-linked without DPF	719,765	5,553	714,212
Non-linked without DPF	24,037	–	24,037
With DPF	371,472	–	371,472
Total insurance contract provisions	1,115,274	5,553	1,109,721

Total	1,115,274	5,553	1,109,721
Non-current	1,014,899	5,053	1,009,846
Current	100,375	500	99,875

	31 December 2007
	Gross £000	Reinsurance £000	Net £000
Unit-linked without DPF	1,039,357	9,431	1,029,926
Non-linked without DPF	30,413	–	30,413
With DPF	353,618	–	353,618
Total insurance contract provisions	1,423,388	9,431	1,413,957
Current	128,105	849	127,256
Non-current	1,295,283	8,582	1,286,701
Total	1,423,388	9,431	1,413,957

(b) Analysis of movement in insurance contract provisions

	Six months ended June 2010
Unit-linked without DPF Balance at 1 January Premiums received Fees deducted Reserves released in respect of benefits paid Investment return Other movements	Gross £000 791,283 3,768 (576) (47,466) (5,472) (687)	Reinsurance £000 6,936 18 – (405) (134) 206	Net £000 784,347 3,750 (576) (47,061) (5,338) (893)
Balance at 30 June	740,850	6,621	734,229
Non-linked without DPF Balance at 1 January Premiums received Reserves released in respect of benefits paid Investment return Other movements*	17,123 144 (282) 40 2,222	– – – – –	17,123 144 (282) 40 2,220
Balance at 30 June	19,247	–	19,247
With DPF Balance at 1 January Premiums received Reserves released in respect of benefits paid Investment return Other movements*	332,884 2,327 (12,614) 5,733 33,570	– – – – –	332,884 2,327 (12,614) 5,733 33,570
Balance at 30 June	361,900	–	361,900
Unit-linked withiut DPF Balance at 1 January Premiums received Fees deducted Reserves released in respect of benefits paid Investment return Other movements	Gross £000 719,765 8,431 (1,123) (70,357) 135,807 (1,240)	Reinsurance £000 5,553 23 – (356) 1,858 (142)	Net £000 714,212 8,408 (1,123) (70,001) 133,949 (1,098)
Balance at 31 December	791,283	6,936	784,347
Non-linked without DPF Balance at 1 January Premiums received Reserves released in respect of benefits paid Investment return Other movements*	24,037 342 (1,659) 304 (5,901)	– – – – –	24,037 342 (1,659) 304 (5,901)
Balance at 31 December	17,123	–	17,123
With DPF Balance at 1 January Premiums received Reserves released in respect of benefits paid Investment return Other movements*	371,472 5,005 (30,547) 11,201 (24,247)	– – – – –	371,472 5,005 (30,547) 11,201 (24,247)
Balance at 31 December			332,884
	332,884	–

		Year ended 31 December 2008
Unit-linked without DPF Balance at 1 January Premiums received Fees deducted Reserves released in respect of benefits paid	Gross £000 1,039,357 10,308 (1,457) (90,583)	Reinsurance £000 9,431 25 – (797)	Net £000 1,029,926 10,283 (1,457) (89,786)
Investment return Other movements	(237,626) (234)	(3,163) 57	(234,463) (291)
Balance at 31 December	719,765	5,553	714,212
Non-linked without DPF Balance at 1 January Premiums received Reserves released in respect of benefits paid Investment return	30,413 298 (2,329) 1,062	– – – –	30,413 298 (2,329) 1,062
Other movements*	(5,407)	–	(5,407)
Balance at 31 December	24,037	–	24,037
With DPF Balance at 1 January Premiums received Reserves released in respect of benefits paid Investment return Other movements*	353,618 5,635 (32,098) 11,597 32,720	– – – – –	353,618 5,635 (32,098) 11,597 32,720
Balance at 31 December	371,472	–	371,472
Unit-linked without DPF Balance at 1 January Premiums received Fees deducted Reserves released in respect of benefits paid Investment return	Gross £000 1,147,826 16,823 (1,837) (150,640) 39,135	Year ended 31 December 2007 Reinsurance £000 9,989 27 – (781) 1	Net £000 1,137,837 16,796 (1,837) (149,859) 39,134
Other movements Balance at 31 December	(11,950) 1,039,357	195 9,431	(12,145) 1,029,926
Non-linked without DPF Balance at 1 January Premiums received Reserves released in respect of benefits paid Investment return Other movements*	195,902 397 (3,330) 2,169 (164,725)	144,467 – – – (144,467)	51,435 397 (3,330) 2,169 (20,258)
Balance at 31 December	30,413	–	30,413
With DPF Balance at 1 January Premiums received Reserves released in respect of benefits paid Investment return Other movements*	371,938 6,889 (37,629) 12,105 315	– – – – –	371,938 6,889 (37,629) 12,105 315
Balance at 31 December	353,618	–	353,618

* For ''With DPF'' business other movements includes changes arising from valuation basis changes such as changes to interest rates, expenses, mortality, expected death strain and contingency reserves. For ''Non-linked without DPF'' business other movements includes changes arising from valuation basis changes such as expected death strain and changes to sterling reserves. For the year ended 31 December 2007 other movements for ''Non-linked without DPF business'' was also significantly impacted by the transfer of the annuity business (see Note 11).

(c) Assumptions and sensitivities for insurance contract provisions

The information which follows relates to the characteristics of the Save & Prosper Group's insurance contracts which principally relate to long-term life cover.

(i) Process used to determine the assumptions

The process used to determine the assumptions is intended to result in conservative estimates of the most likely, or expected, outcome. The assumptions that are considered include the expected number and timing of deaths, other claims and investment returns, over the period of risk exposure. A reasonable allowance is made for the level of uncertainty within the contracts.

For linked business, the insurance contract provision contains a unit reserve equal to the value of matching unit-linked assets, plus a sterling reserve calculated on a gross premium basis, by subtracting the present value of future income from the present value of future costs associated with the policy, until it ceases at maturity, or death if earlier. The gross premium method makes explicit allowance for future policy maintenance costs. If the net present value of the future discounted cash flows is positive, an asset will only be recognised in circumstances where the total reserve for the contract, including the unit reserve, is at least as great as the surrender value.

Technical provisions for with-profits contracts are based on the guaranteed minimum benefits. Provision is not made for future bonuses as all bonuses are terminal bonuses. The insurance contract provision is calculated on a gross premium basis, by subtracting the present value of future premiums from the present value of future benefits payable under the policy, until it ceases at maturity, or death if earlier. The gross premium method makes explicit allowance for future policy maintenance costs. If the net present value of the future discounted cash flows is positive, no asset is recognised.

For immediate annuities in payment the provision is calculated as the discounted value of the expected future annuity payments under the policies, allowing for mortality, interest rates and expenses.

For regular premium term assurance contracts the provision is calculated on a net premium basis.

(ii) Assumptions

The principal assumptions underlying the calculation of the insurance contract provisions are:

Mortality

A base mortality table is selected which is most appropriate for each type of contract taking into account rates charged to the Save & Prosper Group by reinsurers. The mortality rates reflected in these tables are periodically adjusted, allowing for emerging experience and changes in reinsurer rates.

Persistency

For non-linked business, no allowance is made for lapses or surrenders within the valuation of insurance contract liabilities. This is a prudent assumption.

For unit-linked business, when assessing additional reserves for expenses and mortality risk as at 30 June 2010, allowance has been made for lapses at a prudent level of 75 per cent. (31 December 2009: 75 per cent.; 31 December 2008: 75 per cent.; 31 December 2007: 50 per cent.) of the expected level as indicated by recent experience, the rates used being:

Rate of lapse	30 June 2010		31 December 2009		31 December 2008		31 December 2007
	SPI*	SPP*	SPI*	SPP*	SPI	SPP	SPI	SPP
Assurances
Regular premium plans	3.75%	3.00%	3.75%	3.00%	4.50%	3.00%	3.00%	2.00%
Single premium contracts	3.75%	3.75%	3.75%	3.75%	4.50%	3.75%	3.00%	2.50%
Linked TIC**	–	7.50%	–	7.50%	–	7.50%	–	5.00%

* Save & Prosper Insurance Limited (''SPI'') and Save & Prosper Pensions Limited (''SPP'')

** Trustee Investment Contract, a unit-linked contract (''TIC'')

Discount rates

The following rates of interest have been used in discounting the projected liabilities:

Rate of interest	30 June 2010		31 December 2009		31 December 2008			31 December 2007
	SPI	SPP	SPI	SPP	SPI	SPP	SPI	SPP
Assurances
With profit: non linked
business	2.15%	3.00%	2.50%	3.85%	2.25%	3.40%	3.00%	3.50%
Without profit: term
assurances	0.31%	0.39%	0.27%	0.34%	1.08%	1.35%	3.00%	3.25%
								4.0% or
Without profit: annuities	–	0.39%	–	0.34%	–	1.35%	–	4.1%*

* The rate of interest depends on the characteristics of the relevant product.

The rates of interest shown above have been set after consideration of the risk of default on non-government bonds by applying the following adjustments to the earned yield:

• (iii) a deduction of 30 per cent. of the credit spread as at 30 June 2010, 30 per cent. as at 31 December 2009, 25 per cent. as at 31 December 2008, and as at 31 December 2007 a standard risk deduction varying by credit rating of 0.1 per cent. for 'AAA'-rated bonds, 0.15 per cent. for 'AA'-rated bonds, 0.25 per cent. for 'A'-rated bonds and 0.75 per cent. for 'BBB'-rated bonds; and
• (iv) an overall maximum margin over the equivalent term government fixed interest security of 2.5 per cent. as at 30 June 2010, 3.5 per cent. as at 31 December 2009. At 31 December 2008 rather than a margin over government securities an absolute yield cap of 10 per cent. was applied, and a cap of 5 per cent. at 31 December 2007.

Technical provisions for with-profits contracts are particularly sensitive to the interest rate used when discounting. Sensitivity analysis is provided in Note 5. For annuities in payment and assurances the provision is sensitive to the assumed future mortality experience of policyholders.

Renewal expenses and inflation

The renewal expenses assumed are based on the charges made to SPI and SPP by its third party insurance administration services provider, with appropriate margins. Explicit allowance is also made for those governance expenses which are charged to the long-term funds. Expenses were assumed to inflate at the following rates:

	30 June	31 December
	2010	2009	2008	2007
Expense inflation	4.75%pa	4.75%pa	4.00%pa	4.50%pa

Taxation

The Save & Prosper Group has assumed that current tax legislation and tax rates will not change.

(iii) Changes in assumptions and sensitivity to changes in assumptions

Assumptions are adjusted for changes in mortality, investment return, policy maintenance expenses and expense inflation to reflect anticipated changes in market conditions and market experience and price inflation.

The Save & Prosper Group re-runs its valuation models on various bases. An analysis of sensitivity around various scenarios provides an indication of the sensitivity of the estimates to changes in assumptions in respect of its life assurance contracts. The table presented below demonstrates the sensitivity of assets and insured liability estimates to particular movements in assumptions used in the estimation process. Certain variables can be expected to impact on life assurance liabilities more than others, and consequently a greater degree of sensitivity to these variables may be expected.

Impact on reported net of tax profits and equity to changes in key variables:

	Change in variable			Change in net of tax profits and equity
		Six months ended 30 June 2010	Year ended 31 December 2009	Year ended 31 December 2008	Year ended 31 December 2007
		£m	£m	£m	£m
Investment return	+1%	4.7	2.0	(0.6)	5.6
Investment return	-1%	(0.8)	0.6	1.5	(1.3)
Mortality	+10%	(1.2)	(1.2)	(1.2)	(1.2)
Policy maintenance expenses	+10%	(2.4)	(2.4)	(2.4)	(2.3)

The above sensitivities are calculated as an expected impact on IFRS-based profits, net of reinsurance and tax and the analysis has been prepared for a change in the stated variable, with all other assumptions remaining constant.

The sensitivities to the changes in investment returns are calculated taking into account the consequential changes to valuation assumptions.

The sensitivities to mortality rates shown above are calculated on the assumption that there would be no consequential change in rates to policyholders.

The main expense risk is that of unforeseen changes to third party administration expenses, as discussed in Note 4. The impact shown above quantifies a 10 per cent. increase in those expenses.

24 Investment contracts at fair value through income

	Six months ended 30 June 2010 £000	Year ended 31 December
		2009 £000	2008 £000	2007 £000
Unit-linked investment contracts
Balance at start of period	106,061	102,106	142,774	138,024
Deposits received	–	3,000	877	11,423
Fees deducted from account balances	(88)	(149)	(212)	(227)
Account balances paid on terminations in the year	(3,352)	(8,956)	(10,767)	(7,514)
Investment yield	2,667	10,060	(30,566)	1,068
Balance at end of period	105,288	106,061	102,106	142,774
Current	8,423	8,485	8,168	11,422
Non-current	96,865	97,576	93,938	131,352
Total	105,288	106,061	102,106	142,774

The fair values of the Save & Prosper Group's investment contract liabilities are determined according to a three-level valuation hierarchy which is explained in Note 17.

The fair value of unit-linked liabilities is based on the aggregation of prices quoted in active markets of their associated assets (Level 1).

25 Unallocated divisible surplus

	Six months ended 30 June		Year ended 31 December
	2010 £000	2009 £000	2008 £000	2007 £000
Balance at start of period Transfer to profit and loss account	2,017 (615)	– 2,017	23,186 (23,186)	44,210 (21,024)
Balance at end of period	1,402	2,017	–	23,186
The closing balance comprises: With-profits policyholders' funds With-profits long-term business provision Balance before shareholder charge Shareholder charge for cost of guarantees	295,607 (361,900) (66,293) 67,695	296,554 (332,884) (36,330) 38,347	299,859 (371,472) (71,613) 71,613	376,804 (353,618) 23,186 –
Balance after shareholder charge	1,402	2,017	–	23,186

The long-term business provision for contracts with discretionary participation features provides for the present value of projected payments to policyholders based on guaranteed minimum investment returns, mainly at 5 per cent. per annum. Where the policyholders' funds for contracts with discretionary participation features is greater than the long-term business provision, the Save & Prosper Group establishes an unallocated divisible surplus fund. This fund represents unallocated surplus of the with-DPF business that has not been allocated to a specific policyholder.

In 2008 a negative unallocated divisible surplus arose as the with-DPF policyholders' funds became less than the long-term business provision. This was eliminated by recognising a shareholder charge for the cost of guarantees amounting to £71,613,000. In 2009 the negative unallocated divisible surplus and corresponding shareholder charge for the cost of guarantees reduced from £71,613,000 to £38,347,000. In the 6 month period ended 30 June 2010 this balance has increased to £67,695,000.

The actual cost to shareholders, if any, depends on future investment performance of the with-DPF policyholders' assets. Changes in the value of policyholders' assets together with changes in the long-term business provision will result in further charges to, or release from, the profit and loss account until such time as the unallocated divisible surplus becomes positive (after releasing any accumulated shareholder charges to the profit and loss account).

26 Deferred tax liabilities

(a) Recognised deferred tax assets and liabilities

	Assets	Liabilities	Net
As at 30 June 2010	£000	£000	£000
Insurance contract provisions	–	2,814	2,814
Unrealised gains	–	5,592	5,592
Property and equipment	(810)	371	(439)
Total	(810)	8,777	7,967
Current	–	–	–
Non-current	(810)	8,777	7,967
Total	(810)	8,777	7,967
As at 31 December 2009
Insurance contract provisions	–	3,285	3,285
Unrealised gains	–	7,269	7,269
Property and equipment	(1,116)	272	(844)
Total	(1,116)	10,826	9,710
Current	–	–	–
Non-current	(1,116)	10,826	9,710
Total	(1,116)	10,826	9,710
As at 31 December 2008
Insurance contract provisions	–	4,500	4,500
Unrealised gains	–	8,934	8,934
Property and equipment	(1,292)	262	(1,030)
Total	(1,292)	13,696	12,404
Current	–	–	–
Non-current	(1,292)	13,696	12,404
Total	(1,292)	13,696	12,404
As at 31 December 2007
Insurance contract provisions	–	10,149	10,149
Unrealised gains	–	14,027	14,027
Property and equipment	–	1,667	1,667
Total	–	25,843	25,843
Current	–	–	–
Non-current	–	25,843	25,843
Total	–	25,843	25,843

(b) Movement in temporary differences during the year

	2010
	Balance at 1 January £000	Recognised in income £000	Balance at 30 June £000
Insurance contract provisions Unrealised gains Property and equipment	3,285 7,269 (844)	(471) (1,677) 405	2,814 5,592 (439)
Total	9,710	(1,743)	7,967
		2009
	Balance at 1 January £000	Recognised in income £000	Balance at 31 December £000
Insurance contract provisions Unrealised gains Property and equipment	4,500 8,934 (1,030)	(1,215) (1,665) 186	3,285 7,269 (844)
Total	12,404	(2,694)	9,710
		2008

	Balance at 1 January £000	Recognised in income £000	Balance at 31 December £000
Insurance contract provisions	10,149	(5,649)	4,500
Unrealised gains	14,027	(5,093)	8,934
Property and equipment	1,667	(2,697)	(1,030)
Total	25,843	(13,439)	12,404

	2007
	Balance at 1 January £000	Recognised in income £000	Balance at 31 December £000
Insurance contract provisions	8,813	1,336	10,149
Unrealised gains	16,852	(2,825)	14,027
Property and equipment	2,515	(848)	1,667
Total	28,180	(2,337)	25,843

27	Reinsurance payables	30 June		31 December
		2010 £000	2009 £000	2008 £000	2007 £000
	Payables in respect of insurance contracts	65	54	854	985
	Total	65	54	854	985
	Current Non-current	65 –	54 –	854 –	985 –
	Total	65	54	854	985

The carrying value of payables to reinsurers is a reasonable approximation of fair value.

28 Payables related to direct insurance contracts

		30 June 2010
	Gross £000	Reinsurance £000	Net £000
Accrued claims	9,869	3	9,866
Total	9,869	3	9,866
Current Non-current	9,869 –	3 –	9,866 –
Total	9,869	3	9.866
		31 December 2009
	Gross £000	Reinsurance £000	Net £000
Accrued claims	9,824	329	9,495
Total	9,824	329	9,495
Current Non-current	9,824 –	329 –	9,495 –
Total	9,824	329	9,495
		31 December 2008
	Gross	Reinsurance	Net
Accrued claims	£000 9,300	£000 864	£000 8,436
Total	9,300	864	8,436
Current	9,300	864	8,436
Non-current	–	–	–
Total	9,300	864	8,436
		31 December 2007
	Gross £000	Reinsurance £000	Net £000
Accrued claims	10,461	991	9,470
Total	10,461	991	9,470
Current Non-current	10,461 –	991 –	9,470 –
Total	10,461	991	9,470

The carrying value of payables related to the direct insurance is a reasonable approximation of fair value.

29 Income tax liabilities

	30 June		31 December
Corporation tax	2010 £000 1,987	2009 £000 7,472	2008 £000 112	2007 £000 6,719
	1,987	7,472	112	6,719
Current Non-current	1,987 –	7,472 –	112 –	6,719 –
Total	1,987	7,472	112	6,719

The carrying value of income tax liabilities is a reasonable approximation of fair value.

30 Other payables

	30 June	31 December
	2010 £000	2009 £000	2008 £000	2007 £000
Amounts due to other JPMorgan Chase & Co
Group companies	5,292	4,384	372	1,148
Automatic payments – uncleared	1,360	1,699	1,208	2,889
Property fund creditors	1,986	1,668	1,797	1,533
Output VAT	978	591	421	90
Other sundry creditors	2,821	3,466	4,277	2,139
Total	12,437	11,808	8,075	7,799
Current	12,437	11,808	8,075	7,799
Non-current	–	–	–	-
Total	12,437	11,808	8,075	7,799

The carrying value of other payables is a reasonable approximation of fair value.

31 Share capital

	30 June 2010 and 31 December 2009, 2008 and 2007
Authorised	Number of shares 20,000,000	Share capital £000 20,000
Issued and fully paid	20,000,000	20,000

There have been no changes in the share capital of Save & Prosper Insurance Limited during the six months' ended 30 June 2010 and the years ended 31 December 2009, 31 December 2008 and 31 December 2007.

32 Retained earnings

	30 June	31 December
	2010 £000	2009 £000	2008 £000	2007 £000
Balance at 1 January	154,971	127,258	161,868	143,934
(Loss)/profit for the period/year	(17,974)	37,713	(34,610)	32,934
Dividends
Dividends paid – 2007	–	–	–	(15,000)
Dividends paid – 2009	–	(10,000)	–	–
Balance at 30 June/31 December	136,997	154,971	127,258	161,868

No dividends have been paid in the 6 months ended 30 June 2010 (2009: 50 pence per share; 2008: nil; 2007: 75 pence per share).

On 9 August 2010 an interim dividend of £80m was paid, representing a dividend of 400 pence per share. On 7 October 2010 a further interim dividend of £11m was paid, representing 55 pence per share.

33 Employee benefit expense

The Save & Prosper Group has no employees.

Personnel costs are recharged from other JPMorgan Chase & Co Group companies, which employ these personnel, on an allocation basis. Personnel costs are disclosed in Note 14 'Administrative expenses'.

These costs include salary and pension costs and the company has no further liability in respect of employee benefits.

34 Directors

The Directors of Save & Prosper Insurance Limited in office from 1 January 2007 to 30 June 2010 were:

• . J B Broderick
• . R M J Thompson

The Directors of Save & Prosper Insurance Limited in office for part of the period 1 January 2007 to 30 June 2010 were:

• . P J Ball (appointed 20 June 2008)
• . C D Fleming (resigned 30 October 2009)
• . C S Brown (resigned 11 December 2009)
• . J E Staley (appointed 1 May 2007; resigned 12 October 2009)
• . I W Roberts (appointed 15 February 2010)
• . D J Watkins (appointed 18 January 2010)

The Directors are employed by other members of the JPMorgan Chase & Co. Group

		Year ended 31 December
	2009	2008	2007
Aggregate remuneration	£000 75	£000 221	£000 200
		Year ended 31 December
	2009	2008	2007
Number of Directors to whom defined contribution pension rights accrued	4	5	4
Number of Directors who received shares as part of
long-term incentive schemes	6	6	5
Number of Directors who exercised share options	–	2	2

Remuneration of the highest paid director in the year ended 31 December 2009 is not disclosed because aggregate Directors' remuneration was less than £200,000. The highest paid director in 2008 received emoluments of £136,000 and contributions to a defined contribution pension scheme of £1,000 (2007: emoluments £60,000, contributions to defined contribution pension scheme of £1,000).

35 Capital commitments

There were no capital commitments as at 30 June 2010, 31 December 2009, 31 December 2008 or 31 December 2007.

36 Related party transactions

(a) Identity of related parties

The immediate parent undertaking of Save & Prosper Pensions Limited is Save & Prosper Insurance Limited. Save and Prosper Insurance Limited is wholly owned by JPMorgan Asset Management Marketing Limited which is a company within the JPMorgan Chase & Co. Group.

As a result, the Save & Prosper Group has related party relationships with:

• (i) any company which is in the group that is headed by JPMorgan Chase & Co; and
• (ii) key management personnel, who comprise only the Directors of the Save & Prosper Group.

(b) Related party transactions

(i) Transactions with companies in the group headed by JPMorgan Chase & Co.

The Save & Prosper Group transacts with certain other companies within the JPMorgan Chase & Co. Group for various reasons, including for the provision of investment management services and other administrative functions.

The related party transactions are conducted on an arm's length basis.

Transactions with the immediate parent company, JPMorgan Asset Management Marketing Limited, represent the recharge of administrative costs to the Save & Prosper Group. These costs are included within Note 14 and mainly consist of the recharge of third party administration expenses incurred on the Save & Prosper Group's behalf, as well as recharges for personnel costs.

Payments charged to the Save & Prosper Group's income statement, and the balances remaining outstanding to JPMorgan Asset Management Marketing Limited at each respective period end were as follows:

		Six months ended 30 June		Year ended 31 December
	2010	2009 (unaudited)		2008	2007
	£000	£000	£000	£000	£000
Payments made to JPMorgan Asset Management
Marketing Limited	2,866	3,264	6,286	6,460	8,634

	30 June		31 December
	2010 £000	2009 £000	2008 £000	2007 £000
Payable to JPMorgan Asset Management Marketing
Limited	477	198	127	666

Transactions with fellow subsidiaries in the JPMorgan Chase & Co. Group mainly represent investment management fees and rebates. Investment management fee rebates are received when the Save & Prosper Group invests in collective investment schemes within the JPMorgan Chase & Co. Group, managed by JPMorgan Funds Limited and JPMorgan Asset Management (Europe) S.a.r.l. These rebates are received net of investment management fees paid by the Save & Prosper Group to JPMorgan Asset Management (UK) Limited, which acts as the Save & Prosper Group's investment manager.

Receipts credited to the Save & Prosper Group's income statement, and the balances remaining outstanding from fellow subsidiaries at the year-end were as follows:

	Six months ended 30 June			Year ended 31 December
	2010	2009 (unaudited)	2009	2008	2007
	£000	£000	£000	£000	£000
Receipts from JPMorgan Asset Management (UK) Limited	516	405	936	811	1,085
Receipts from JPMorgan Funds Limited	2,755	2,422	5,183	6,226	7,428
Receipts from JPMorgan Asset Management (Europe) S.a.r.l	1,018	673	1,607	1,125	1,639
		30 June		31 December
		2010 £000	2009 £000	2008 £000	2007 £000
Receivable from JPMorgan Asset Management (UK) Limited		162	91	50	85
Receivable from JPMorgan Funds Limited		407	485	437	559
Receivable from JPMorgan Asset Management (Europe) S.a.r.l		176	150	69	559

The value of the funds invested by the Save & Prosper Group into the collective investments schemes managed by JPMorgan Funds Limited and JPMorgan Asset Management (Europe) S.a.r.l. at 30 June 2010 amounted to £1,092,232,000 (31 December 2009: £1,159,622,000; 31 December 2008: £1,047,917,000; 31 December 2007: £1,335,372,000).

The Save & Prosper Group has also entered into a reinsurance contract with JPMorgan Life Limited in order to gain investment exposure into certain life funds administered by that company. JPMorgan Life Limited also reinsures the investment risk of a life fund into the Save & Prosper Group in order to gain investment exposure to certain of the Save & Prosper Group's internal life funds. Receipts credited to the Save & Prosper Group's income statement and the balances remaining outstanding from JPMorgan Life Limited at the year-end were as follows:

	Six months ended 30 June			Year ended 31 December
	2010	2009 (unaudited)	2009	2008	2007
	£000	£000	£000	£000	£000
Net receipts/(payments) from
JPMorgan Life Limited	4,003	15,471	21,770	(55,478)	1,693
Net payments to JPMorgan Life Limited	–	3,000	3,000	–	11,001
		30 June		31 December
		2010	2009	2008	2007
		£000	£000	£000	£000
Receivable from JPMorgan Life Limited		97,881	101,485	112,852	49,232
Payable to JPMorgan Life Limited		12,007	11,146	7,680	9,755

(ii) Transactions with key management personnel

Key management personnel comprise of the Directors of Save & Prosper Insurance Limited and Save & Prosper Pensions Limited. There are no executive officers other than the Directors. Key management compensation is recharged from JPMorgan Asset Management Marketing Limited on an allocation basis as follows:

		Six months ended 30 June		Year ended 31 December
	2010	2009	2009	2008	2007
		(unaudited)	£000	£000	£000
Short-term employee benefits	–	–	80	226	200

In addition to their salaries, the Directors were accruing defined contribution pension rights and had received shares in the JPMorgan Chase & Co. Group as part of long term incentive schemes. However, on the basis that the Directors are also employed by other members of the JPMorgan Chase & Co. Group these costs are not allocated to the Save & Prosper Group.

37 Group entities

The immediate parent undertaking is JPMorgan Asset Management Marketing Limited.

The ultimate holding company is JPMorgan Chase & Co. which is incorporated in the United States of America.

The following table lists the subsidiary undertakings of Save & Prosper Insurance Limited:

Group subsidiary companies – ownership interest

Name	Country of incorporation or registration	30 June		31 December
		2010	2009	2008	2007
Save & Prosper Pensions Limited	England & Wales	100% of all share capital	100% of all share capital	100% of all share capital	100% of all share capital

38 Post balance sheet event

On 9 August 2010 an interim dividend of £80m was paid, representing a dividend of 400 pence per share. On 7 October 2010 a further interim dividend of £11m was paid, representing 55 pence per share.

On 26 November 2010, it was announced that Chesnara plc, a company incorporated in England, agreed terms, subject to various approvals, with Save & Prosper Insurance Limited's parent company to acquire the entire share capital of Save & Prosper Insurance Limited.

39 Explanation of transition to IFRS

This is the Save & Prosper Group's first consolidated financial information prepared in accordance with IFRS. In preparing its opening balance sheet, the Save & Prosper Group has adjusted amounts reported previously in the financial information prepared in accordance with UK GAAP. An explanation of how the transition from UK GAAP to IFRS has affected the Save & Prosper Group's financial position and financial performance flows is set out below:

Unit linked investment contracts

Prior to conversion to IFRS, the Save & Prosper Group measured unit-linked investment contract liabilities at amortised cost. The amortised cost of these financial liabilities was equivalent to the amount payable on demand without penalty. On conversion to IFRS, the Save & Prosper Group has elected to recognise these liabilities at fair value, measured by reference to the value of the underlying net asset value of the unitised investment funds, determined on a bid value, at the balance sheet date.

No adjustment was required to the carrying value of the unit-linked investment contract liabilities.

Deferred tax

In converting from UKGAAP to IFRS, certain adjustments have been made to account for the differing treatments of deferred tax. The impact of this on the Save & Prosper Group's financial position and financial performance is set out in the following tables:

		30 June		31 December
Total equity under UKGAAP Deferred tax adjustment		2010 £000 156,452 545	2009 £000 174,055 916	2008 £000 146,151 1,107	2007 £000 184,347 (2,479)
Total equity under IFRS		156,997	174,971	147,258	181,868
	Six months ended 30 June			Year ended 31 December
	2010	2009 (unaudited)	2009	2008	2007
	£000	£000	£000	£000	£000
(Loss)/profit under UKGAAP	(17,603)	(16,372)	37,904	(38,196)	31,543
Deferred tax adjustment	(371)	341	(191)	3,586	1,391
(Loss)/profit under IFRS	(17,974)	(16,031)	37,713	(34,610)	32,934

PART IV

PRO FORMA FINANCIAL INFORMATION ON CHESNARA PLC

The unaudited pro forma financial information set out below has been prepared to illustrate the impact of the Acquisition and of the associated financing through equity placing and debt raising on the consolidated net assets of Chesnara. The pro forma financial information has been prepared for illustrative purposes only and, because of its nature, addresses a hypothetical situation and, therefore, does not and will not present Chesnara plc's actual financial position or results.

The pro forma financial information is based on the consolidated net assets of Chesnara as at 30 June 2010 and has been prepared on the basis that the Acquisition and associated financing and the payment of dividends subsequent to 30 June 2010, referred to in Note 32 of Part III of this document (and Note 5 below), took place on that date. The pro forma financial information takes no account of the results or any other changes in the financial or trading position of either Chesnara or the Save & Prosper Group for the period subsequent to 30 June 2010.

				Adjustments
	Chesnara net assets at 30 June 2010(1)	Equity placing & debt raising(2)	Acquisition of Save & Prosper Group & transaction expenses(3)	Consoli dated net assets of the Save & Prosper Group(4)	Dividends paid to the Seller sub sequent to 30 June 2010(5)	Consoli dation adjust ments(6)	Chesnara pro forma consoli dated at 30 June 2010
	£ million	£ million	£ million	£ million	£ million	£ million	£ million
Assets
Deferred acquisition costs	10.9	–	–	–	–	–	10.9
Internally developed software	5.5	–	–	–	–	–	5.5
Tangible fixed assets	0.7	–	–	–	–	–	0.7
Investment in subsidiary	–	–	63.5	–	–	(63.5)	–
Investment in associates	0.9	–	–	–	–	–	0.9
Acquired value of in-force
business	80.3	–	–	–	–	–	80.3
Acquired value of customer
relationships	3.5	–	–	–	–	–	3.5
Reinsurers' share of insurance
contract provisions	239.1	–	–	6.6	–	–	245.7
Amounts deposited with
reinsurers	26.6	–	–	–	–	–	26.6
Investment properties	3.4	–	–	111.9	–	–	115.3
Financial assets
Equity securities at fair value
through income	397.5			32.9	–	–	430.4
Holdings in collective
investment schemes at fair
value through income	1,537.2		–	1,152.5	(91.0)	–	2,598.7
Debt securities at fair value
through income	380.1	–		79.1	–	–	459.2
Policyholders' funds held by
the Group	44.3	–	–	–	–	–	44.3
Insurance and other
receivables	27.5	–	–	14.5	–	–	42.0
Prepayments	3.4	–		0.1	–	–	3.5
Derivative financial
instruments	7.4	–	–	0.2	–	–	7.6
Total financial assets	2,397.4		–	1,279.3	(91.0)	–	3,585.7
Reinsurers' share of accrued
policyholder claims	4.0		–	–	–	–	4.0
Income taxes	0.9	–	–	6.9	–	–	7.8
Cash and cash equivalents	174.2	64.6	(65.1)	13.5	–	–	187.2
Total assets	2,947.4	64.6	(1.6)	1,418.2	(91.0)	(63.5)	4,274.1

				Adjustments
	Chesnara net assets at 30 June 2010(1)	Equity placing & debt raising(2)	Acquisition of Save & Prosper Group & transaction expenses(3)	Consoli dated net assets of the Save & Prosper Group(4)	Dividends paid to the Seller sub sequent to 30 June 2010(5)	Consoli dation adjust ments(6)	Chesnara pro forma consoli dated at 30 June 2010
	£ million	£ million	£ million	£ million	£ million	£ million	£ million
Liabilities
Bank overdrafts	1.6	–	–	0.1	–	–	1.7
Insurance contract provisions	1,065.1	–	–	1,122.0	–	–	2,187.1
Unallocated divisible surplus Financial liabilities	–	–	–	1.4	–	–	1.4
Investment contracts Liabilities relating to policyholders' funds held by	1,564.8	–	–	105.3	–	–	1,670.1
the Group	44.3	–	–	–	–	–	44.3
Borrowings	22.5	39.2		–	–	–	61.7
Derivative financial
instruments	1.5	–	–	–	–	–	1.5
Total financial liabilities	1,633.1	39.2		105.3	–	–	1,777.6
Provisions	1.7	–	–	–	–	–	1.7
Deferred tax liabilities	9.6	–	–	8.0	–	–	17.6
Reinsurance payables Payables related to direct insurance and investment	22.1	–	–	0.1	–	–	22.2
contracts	29.1	–	–	9.9	–	–	39.0
Deferred income	12.3	–	–	–	–	–	12.3
Income taxes	7.5	–	–	2.0	–	–	9.5
Other payables	8.5	–	–	12.4	–	–	20.9
Total liabilities	2,790.6	39.2	–	1,261.2	–	–	4,091.0
Net assets	156.8	25.4	(1.6)	157.0	(91.0)	(63.5)	183.1

Notes:

1. The consolidated net assets of Chesnara have been extracted without adjustment from the interim financial statements of Chesnara for the six months ended 30 June 2010.

2. £26.7m (£25.4m net of related expenses) was raised as the result of the placing of 10,458,877 New Ordinary Shares and the sale of 2,897,183 Ordinary Shares, previously held as Treasury Shares, to institutional investors, as referred to in Part I of this document. In addition £40m (£39.2m net of related expenses) was raised as a result of an agreement for a new five year term bank facility, also referred to in Part I of this document.

3. The acquisition price of the Save & Prosper Group is the Purchase Price of £63.5m as disclosed in Part V of this document and transaction costs of £1.6m, incurred post 30 June 2010, will be expensed in the income statement.

4. The consolidated net assets of the Save & Prosper Group have been extracted without adjustment from the financial information included in Part III of this document.

5. Dividends were paid to the Seller post 30 June 2010 out of the Save & Prosper Group retained earnings as at that date, as follows:

(i) an interim dividend of £80m on 9 August 2010;

(ii) a further interim dividend of £11m on 7 October 2010.

This adjustment has been included in order that the proforma net asset statement better represents the net assets of the Save & Prosper Group that are being acquired by Chesnara.

1. The consolidation adjustment relates to the elimination of the cost of the Save & Prosper Group in Chesnara. Under IFRS acquisition accounting it is necessary to fair value the consideration paid and all the assets and liabilities of the acquired group. In the proforma net asset statement no adjustments have been made to the fair values of the individual net assets of the Save & Prosper Group to reflect any restatement to fair value which will arise on the Acquisition.

The net result is that the assumed excess of £2.5m of the net assets of the Save & Prosper Group acquired, adjusted for dividends paid to the Seller post 30 June 2010 (being £157m less £91m) over the acquisition price of £63.5m is included within Chesnara pro forma consolidated net assets as at 30 June 2010.

Hill House 1 Little New Street London EC4A 3TR

The Board of Directors on behalf of Chesnara plc Harbour House Portway Preston PR2 2PR

Hawkpoint Partners Limited 41 Lothbury London EC2R 7AE

29 November 2010

Dear Sirs,

Chesnara plc (the ''Company'')

We report on the pro forma financial information (the ''Pro forma financial information'') set out in Part IV of the Class 1 circular dated 29 November 2010 (the ''Investment Circular''), which has been prepared on the basis described on page 72, for illustrative purposes only, to provide information about how the transaction might have affected the financial information presented on the basis of the accounting policies adopted by the Company in preparing the financial information for the period ended 30 June 2010. This report is required by Annex I item 20.2 of Commission Regulation (EC) No 809/2004 (the ''Prospectus Directive Regulation'') as applied by Listing Rule 13.3.3R and is given for the purpose of complying with that requirement and for no other purpose.

Responsibilities

It is the responsibility of the directors of the Company (the ''Directors'') to prepare the Pro forma financial information in accordance with Annex I item 20.2 and Annex II items 1 to 6 of the Prospectus Directive Regulation as applied by Listing Rule 13.3.3R.

It is our responsibility to form an opinion, in accordance with Annex I item 20.2 of the Prospectus Directive Regulation, as to the proper compilation of the Pro forma financial information and to report that opinion to you in accordance with Annex II item 7 of the Prospectus Directive Regulation as applied by Listing Rule 13.3.3R.

Save for any responsibility which we may have to those persons to whom this report is expressly addressed and which we may have to Ordinary shareholders as a result of the inclusion of this report in the Investment Circular, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in accordance with this report or our statement, required by and given solely for the purposes of complying with Listing Rule 13.4.1R (6), consenting to its inclusion in the Investment Circular.

In providing this opinion we are not updating or refreshing any reports or opinions previously made by us on any financial information used in the compilation of the Pro forma financial information, nor do we accept responsibility for such reports or opinions beyond that owed to those to whom those reports or opinions were addressed by us at the dates of their issue.

Basis of Opinion

We conducted our work in accordance with the Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. The work that we performed for the purpose of making this report, which involved no independent examination of any of the underlying financial information, consisted primarily of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjustments and discussing the Pro forma financial information with the Directors.

We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with reasonable assurance that the Pro forma financial information has been properly compiled on the basis stated and that such basis is consistent with the accounting policies of the Company.

Our work has not been carried out in accordance with auditing or other standards and practices generally accepted in jurisdictions outside the United Kingdom, including the United States of America, and accordingly should not be relied upon as if it had been carried out in accordance with those standards or practices.

Opinion

In our opinion:

• (a) the Pro forma financial information has been properly compiled on the basis stated; and
• (b) such basis is consistent with the accounting policies of the Company.

Yours faithfully

Deloitte LLP Chartered Accountants

Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu Limited (''DTTL''), a UK private company limited by guarantee, whose member firms are legally separate and independent entities. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.

Member of Deloitte Touche Tohmatsu Limited

PART V

PRINCIPAL TERMS OF THE ACQUISITION AGREEMENT

1. Document and parties

The Acquisition Agreement is dated 26 November 2010 and is made between the Seller and the Company.

2. Acquisition and purchase price

• 2.1 The Company has agreed to acquire the Save & Prosper Group through purchasing the entire issued share capital of Save & Prosper Insurance Limited from the Seller for consideration of:
• (a) £63.5 million (the ''Purchase Price'') payable in cash on completion of the Acquisition Agreement (''Completion''); and
• (b) interest on the Purchase Price for the period from (and excluding) the date of the Acquisition Agreement up to (and including) the date of Completion at the rate of the London Interbank Offer Rate at the date of Completion (the ''Additional Cash Amount'').
• 2.2 The aggregate of the Purchase Price and the Additional Cash Amount will be paid, in cash, on Completion.

3. Conditions and closing

• 3.1 Completion is conditional upon:
• (a) the passing, at a general meeting of the Company, of the Resolution; and
• (b) the FSA not having revoked, or added conditions that are unacceptable to the Company (acting reasonably) to, its approval of the Company acquiring the Save & Prosper Group.

together, the ''Conditions''.

3.2 If the Conditions have not been satisfied by the date four months from the date of the Acquisition Agreement, or such date as the parties have otherwise agreed (the ''Long-Stop Date''), the Acquisition Agreement shall terminate.

4. Warranties, indemnities and contributions

• 4.1 The Acquisition Agreement contains customary warranties for an acquisition of this type.
• 4.2 The Seller will be giving the warranties as at the date of the Acquisition Agreement.
• 4.3 The Seller has agreed to indemnify the Company specifically in relation to:
• (a) claims made in connection with any error made in the calculation of either the value of any units or share of the property held, or the value of the property held, in any fund maintained by the Save & Prosper Group, but only where:
  • (i) such error occurred as a result of inaccurate information having been provided to HCL by, or on behalf of, any member of the Seller or its group and HCL has acted in accordance with terms of its contract, including by performing the agreed validations of unit pricing information; or
  • (ii) prior to the date of the Acquisition Agreement the Seller or a member of the Save & Prosper Group has expressly waived any claim that may have been made against HCL in relation to such error,

but, in either case, only to the extent that the Save & Prosper Group is not entitled to recover from HCL.

(b) any liabilities that either the Company and/or any member of the Save & Prosper Group may incur as a result of the Seller failing to observe the requirements of the Transfer of Undertakings (Protection of Employment) Regulations 2006 in relation to the transfer of the employees that, although employed by the Seller's group, are engaged in the business of the Save & Prosper Group.

(c) certain liabilities that may arise in connection with the Save & Prosper Group acting as trustee for certain small self administrated pension schemes.

5. Covenants

• 5.1 The Acquisition Agreement contains a number of customary covenants in respect of the Seller's conduct of the business of the Save & Prosper Group prior to Completion. In particular, the Seller has covenanted to procure that during the period from (and including) the date of the Acquisition Agreement to the date of Completion, the business of the Save & Prosper Group will be carried on in the normal course and certain specified actions will not be taken by either the Seller or any member of the Save & Prosper Group without the consent of the Company.
• 5.2 The Seller has also agreed that, for a period of 24 months from the date of Completion, it and, in the case of (a), its UK group or, in the case of (b) and (c), its wider global group shall refrain from:
• (a) soliciting or hiring the employees of any member of the Save & Prosper Group;
• (b) disclosing confidential information or trade secrets in relation to the business or affairs of the Save & Prosper Group, except for information that is in the public domain; and
• (c) conducting any marketing effort intended to induce or solicit any holders of policies issued by the Save & Prosper Group to surrender, cancel or terminate their policies or to suspend or cease the payment of premiums.

6. Termination

The Acquisition Agreement may only be terminated as follows:

• (a) by either party if the Conditions have not been satisfied by the Long-Stop Date;
• (b) by the Company if:
• (i) there is any material breach by the Seller of its pre-Completion obligations that would give rise to a material adverse effect on either the result of operations or financial condition of the Save & Prosper Group taken as a whole, and/or the embedded value of the Save & Prosper Group taken as a whole, other than any adverse effect resulting from or attributable to:
  • (A) changes in the UK or global economy;
  • (B) changes in law, regulation or practice affecting generally any or all of the sectors in which the Save & Prosper Group conducts its business;
  • (C) the negotiation, execution, announcement, performance of, or actions taken pursuant to the Acquisition Agreement and any agreement entered into pursuant to the terms of the Acquisition Agreement; or
  • (D) any of the matters fairly disclosed by the Seller to the Company prior to the date of the Acquisition Agreement; and/or
• (ii) by the Company if it has a claim or claims for breach of the warranties given by the Seller which, either individually or in aggregate, would be likely to exceed £5 million.

In the event that the Directors withdraw or adversely qualify their recommendation of the Resolution to the Shareholders, the Company must pay the Seller £500,000 in compensation. This compensation payment cannot be triggered in the event that the Seller materially breaches its obligations detailed at 6(b) above.

7. Limitations on liability

• 7.1 The Acquisition Agreement contains customary limits on the Seller's liability. The Seller will only be liable in respect of claims under the warranties (other than those relating to tax) for claims which, in aggregate, exceed £500,000.

• 7.2 Save in the case of fraud and fraudulent concealment, the aggregate liability of the Seller in respect of claims under the warranties (other than the warranty as to ownership of the shares in the Save & Prosper Group, the liability in respect of which shall be limited to the Purchase Price), the tax deed and specific indemnities will not exceed, in aggregate, £28.5 million.

• 7.3 The Seller will not be liable for:

• (a) any claim relating to breaches of the warranties (other than in relation to tax matters), unless the Seller has received written notice from the Company setting out the details of the breach on or before 5.00 p.m. on the date being 18 months from Completion;
• (b) any claim in relation to the specific indemnities unless the Seller has received written notice from the Company setting out the details of the breach on or before 5.00 p.m. on the third anniversary of Completion; and
• (c) any claim relating to breaches of the tax warranties or the tax deed, unless the Seller has received written notice from the Company setting out the details of the breach on or before 5.00 p.m. on the date being six years and one month from the last day of the accounting period in which Completion occurs.

PART VI

ADDITIONAL INFORMATION

1. Responsibility

The Directors, as listed below, accept responsibility for the information contained in this document. To the best of the knowledge and belief of the Directors (who have taken all reasonable care to ensure that such is the case) the information contained in this document is in accordance with the facts and does not omit anything likely to affect the import of such information.

2. Company address

The registered office and the principal place of business in the UK of the Company is at Harbour House, Portway Ashton on Ribble, Preston, Lancashire PR2 2PR (telephone number 01772 840 000 or, if dialling from outside the UK, + 44 1772 840 000).

3. Interests of Directors and major Shareholders

3.1 As at 26 November 2010 (being the latest practicable date prior to the posting of this document), the aggregate interests of each of the Directors in the share capital of the Company which have been notified by each Director to the Company pursuant to DTRs 3.1.2R and 3.1.3R or the interests of persons connected with them which would, if the connected person were a Director, be required to be disclosed under DTRs 3.1.2R and 3.1.3R and the existence of which is known to, or could with reasonable diligence be ascertained by, that Director) were as follows. The Company's issued share capital consists of 115,047,662 Ordinary Shares of which 199,011 are held in treasury, thus total voting rights in the Company are 114,848,651:

Director	Number of Ordinary Shares	% of issued voting share capital
Peter Mason	19,768	0.02
Terry Marris	57,708	0.05
Mike Gordon	–	–
Peter Wright	70,000	0.06
Graham Kettleborough	58,100	0.05
Ken Romney	70,476	0.06
Frank Hughes	5,832	0.01

• 3.2 The Board has established frameworks for a Sharesave Plan and approved unapproved discretionary Share Option Plans which may, at the discretion of the Company's remuneration committee, be utilised for granting options to executive Directors and other employees. As at 26 November 2010 (being the latest practicable date prior to the posting of this document), no share options have been granted to Directors.
• 3.3 Save as disclosed in paragraph 3.1 above, the Directors do not have any interest in the share capital of the Company.
• 3.4 Related party transactions of the Company between 1 January 2007 and 26 November 2010 (being the latest practicable date prior to the publication of this document) comprise (a) Directors' compensation; (b) the provision of centralised administration functions to subsidiaries of the Company; and (c) transactions with companies within the Countrywide plc group which were controlled or significantly influenced by Directors, each as further detailed below.

(a) The following amounts represent compensation to the Directors, who are the key management personnel of the Company during the period from 1 January 2007:

	From 1 January 2010 to 26 November 2010 £000		Year ended 31 December
		2009 £000	2008 £000	2007 £000
Short-term employee benefits Post-employment benefits Long-term employment benefits	369 120 –	893 124 485	684 160 209	680 84 325
Total	489	1,502	1,053	1,089

The following amounts were due to Directors in respect of bonuses and incentives during the period from 1 January 2007:

	As at 26 November 2010 £000		As at 31 December
		2009 £000	2008 £000	2007 £000
Annual bonus scheme	–	195	152	176
Long-term incentive plan	–	1,028	1,006	983
Discretionary bonus	150	300	–	–
Total	150	1,523	1,158	1,159

(b) Subsidiaries of the Company were charged the following amounts for central services provided during the period from 1 January 2007:

	From 1 January 2010 to 26 November 2010 £000
		Year ended 31 December
		2009 £000	2008 £000	2007 £000
Transactions with subsidiaries	1,952	2,154	2,017	1,964

(c) The following table shows the value of transactions with companies within the Countrywide plc group which are or were controlled or significantly influenced by Directors during the period from 1 January 2007:

	From 1 January 2010 to 26 November 2010 £000		31 December
		2009 £000	2008 £000	2007 £000
Amounts payable (receivable) Commission payable in respect of arrangement of the Group's insurance
and investment contracts	–	–	227	221
Administration services	–	–	(55)	(80)
Property services	–	–	(39)	(15)
Total	–	–	133	126

3.5 As at 26 November 2010 (being the latest practicable date prior to the publication of this document), the following persons (other than Directors) had notified to the Company interests in three per cent. or more of the issued voting share capital of the Company pursuant to DTR 5.

Name	Number of ordinary shares	% of the issued voting share capital
Ameriprise Financial Inc.	11,210,987	11.05
Henderson Global Investors Ltd	4,566,866	4.37
Legal & General Group PLC	4,130,698	4.06
Standard Life Investments Ltd	3,864,029	3.80

4. Directors' service agreements and letters of appointment

The Company has entered into service contracts with each of the executive Directors, dated 1 March 2004 which took effect from the demerger of the Company from Countrywide Assured group (now Countrywide plc) in May 2004. The executive Directors comprise Graham Kettleborough, Ken Romney and Frank Hughes. In addition to salary, each executive Director is entitled to bonus at the discretion of the remuneration committee. Other benefits include a company car, private health insurance and the right to participate in the Company's stakeholder pension scheme and its share option schemes (although no awards have yet been made under the latter). Retirement is compulsory at 65. The employment is capable of termination, in each case, on 12 months' notice by either party, or a Director may be summarily dismissed for, amongst other things, neglect of duty, non-observance of their service agreement provisions, prejudicial conduct, a criminal conviction (except for minor road traffic offences) or becoming bankrupt. During the course of his employment and afterwards, the Director agrees to keep information relating to the Group confidential. The Directors have also agreed to post-employment non-solicitation clauses of six months duration. The Directors benefit from qualifying third party indemnity provisions.

The Company has entered into letters of appointment with each of the non-executive Directors. The non-executive Directors comprise Peter Mason (chairman and chairman of the nomination committee), Mike Gordon (senior independent director and chairman of the remuneration committee), Terry Marris and Peter Wright (chairman of the audit committee). The non-executive Directors are not eligible for bonuses, pensions or participation in the Company share option schemes. Each letter of appointment is for a term of three years. Peter Mason was re-appointed for a further period of three years from October 2008.

As disclosed in the Company's accounts for the year ended 31 December 2009, any compensation on termination of service contracts will be decided on a case by case basis having regard to the particular circumstances. In 2008, a ex gratia payment of £30,000 was made to Christopher Sporborg (former non-executive chairman) for loss of office. There are no contractual entitlements to benefits on termination of appointments.

The identity of the Directors of the Company will not change on completion of the Acquisition.

5. Material contracts

• 5.1 The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by members of the Group (a) in the two years immediately preceding the date of this document and are, or may be, material to the Group or (b) contain provisions under which any member of the Group has any obligation or entitlement which is material to the Group as at the date of this document.
• (a) The Acquisition Agreement, the principal terms of which are set out in Part V of this document.
• (b) The Placing Agreement.

On 26 November 2010, the Company, Collins Stewart Europe Limited and Panmure Gordon (UK) Limited entered into a placing agreement pursuant to which Collins Stewart Europe Limited and Panmure Gordon (UK) Limited agreed severally as agents of the Company to use their reasonable endeavours to procure placees for the New Ordinary Shares and the Treasury Shares placed pursuant to the Placing (the ''Placing Shares'') at a price to be agreed (the ''Placing Price'') after a bookbuilding process (the ''Bookbuild'') conducted by Collins Stewart Europe Limited and Panmure Gordon (UK) Limited and to subscribe for or acquire (on a several basis) such Placing Shares which were not taken up by placees produced by them. The obligations of Collins Stewart Europe Limited and Panmure Gordon (UK) Limited were conditional upon certain matters being satisfied and the Placing Agreement was terminable on the occurrence of certain specified events. The Company sold the Treasury Shares for cash. The Company agreed to allot the Placing Shares (excluding the Treasury Shares) in consideration of the transfer to the Company by Collins Stewart Europe Limited of certain ordinary shares of no par value in the capital of Amber Lily (Jersey) Limited (''JerseyCo'') and certain redeemable preference shares of no par value in the capital of JerseyCo held by each of Collins Stewart Europe Limited and Panmure Gordon (UK) Limited (the ''Consideration Shares'') pursuant to the Option Agreement and the Subscription and Transfer Agreement described below.

The Company gave warranties and indemnities in favour of Collins Stewart Europe Limited and Panmure Gordon (UK) Limited that are usual for a transaction of this nature. The Company paid Collins Stewart Europe Limited and Panmure Gordon (UK) Limited an aggregate commission of four per cent. of the gross proceeds of the Placing, split in the percentage of 50:50 respectively between them. The Company also agreed to reimburse certain of the costs and expenses incurred by Collins Stewart Europe Limited and Panmure Gordon (UK) Limited in connection with the Placing.

(c) The Option Agreement and Subscription and Transfer Agreement.

On 26 November 2010, the Company, JerseyCo and Collins Stewart Europe Limited entered into an option agreement (the ''Option Agreement'') pursuant to which Collins Stewart Europe Limited and the Company agreed to subscribe for certain ordinary shares of no par value in the capital of JerseyCo, save that, if the Placing did not proceed, a put option would enable Collins Stewart Europe Limited to oblige the Company to acquire its ordinary shares in JerseyCo.

Pursuant to a subscription and transfer agreement (the ''Subscription and Transfer Agreement'') dated 26 November 2010 between the Company, JerseyCo, Collins Stewart Europe Limited and Panmure Gordon (UK) Limited, the banks applied the proceeds of the Placing (less that received in respect of the treasury shares, commission and expenses due under the Placing Agreement) to subscribe for certain redeemable preference shares of no par value in the capital of JerseyCo, and Collins Stewart Europe Limited and Panmure Gordon (UK) Limited agreed to transfer all the redeemable preference shares of JerseyCo held by each of them and Collins Stewart Europe Limited agreed to transfer all the ordinary shares in JerseyCo held by it, in each case in consideration for the allotment by the Company of the Placing Shares (excluding the Treasury Shares) pursuant to the Placing Agreement. Thus, following the Placing becoming unconditional on 1 December 2010, the Company will own the entire issued share capital of JerseyCo whose only assets will be its cash reserves, representing an amount equal to the net proceeds of the Placing in respect of the New Ordinary Shares.

The Company expects to exercise its right of redemption of the redeemable preference shares of JerseyCo no later than 2.00 p.m. on the second business day after Admission and, as a result, receive a sum equal to the net proceeds of the Placing in respect of the New Ordinary Shares from JerseyCo.

(d) The Facility Agreement.

The Loan Facility is a committed £40,000,000 credit facility entered into on 17 November 2010 between Chesnara plc as borrower and The Royal Bank of Scotland plc as mandated lead arranger, original lender and as facility agent. The Loan Facility is a five-year term loan repayable on the date which is the earlier of 60 months from the date of funding or 31 December 2015.

The purpose of the Loan Facility is to fund the Acquisition (and certain fees and expenses relating thereto).

Repayment of the Loan Facility is mandatory in certain circumstances, including, if there is an acceleration following an event of default, a change of control in Chesnara plc or if a lender notifies the facility agent and Chesnara plc that it has become unlawful in any applicable jurisdiction for that lender to perform any of its obligations under the Loan Facility or to fund or maintain its share of the loan.

The representations, warranties, undertakings and events of default contained in the agreement setting out the terms of the Loan Facility are customary for a transaction of this nature.

• 5.2 The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by members of the Save & Prosper Group (a) in the two years immediately preceding the date of this document and are, or may be, material to the Save & Prosper Group or (b) contain provisions under which any member of the Save & Prosper Group has any obligation or entitlement which is material to the Save & Prosper Group as a the date of this document:
• (a) an agreement between Prudential Retirement Income Limited (''Prudential'') and Save & Prosper Pensions Limited dated 19 December 2006 (and effective as from 1 July 2007), pursuant to which Save & Prosper Pensions Limited agreed to exclusively market certain annuity products provided by Prudential to its customers. This agreement expires on 1 July 2012, with the option to extend by mutual agreement between the parties;
• (b) Save & Prosper Insurance Limited granted a subordinated loan of £10 million to Save & Prosper Pensions Limited on 24 December 2002. The current balance of the loan is £5 million, and this is repayable upon Save & Prosper Pensions Limited giving Save & Prosper Insurance Limited five years' notice, having first obtained consent from the FSA. Interest accrues on the loan balance at a rate of 6.5 per cent. and is payable annually on 1 April. Save & Prosper Insurance Limited's rights to repayment of the loan are subordinate to all other creditors, including any policyholders of Save & Prosper Pensions Limited;
• (c) a reinsurance arrangement (consisting of two reinsurance agreements) between JPMorgan Life Limited and Save & Prosper Pensions Limited, whereby each reinsures investment risk of the other. The reinsurer agrees to allocate units in certain funds managed by the reinsurer to the reinsured in return for a premium. The arrangement is capable of termination either immediately or upon five months' notice, depending upon whether the terminating party is the reinsured or the reinsurer (respectively);
• (d) reinsurance arrangements entered into between Swiss Reinsurance Company Limited (''Swiss Re'') and each member of the Save & Prosper Group pursuant to which Swiss Re provides reinsurance in relation to life policies and mortality risk. The arrangement is of an indefinite duration but was discontinued with respect to new business on 10 January 2003;
• (e) a reinsurance agreement between Save & Prosper Insurance Limited and the Phoenix Assurance Company Limited having effect from 17 June 1969, pursuant to which the Phoenix Assurance Company Limited reinsures certain unit-linked endowment policies issued by Save & Prosper Insurance Limited. The agreement is of indefinite duration (but subject to agreement between the parties) and may be discontinued in relation to new business by either party giving the other six months' notice.

6. Working capital of the Enlarged Group

The Company is of the opinion that the Enlarged Group has sufficient working capital for its present requirements, that is, for at least the next 12 months from the date of this document.

7. Litigation

• 7.1 Neither the Company nor any other member of the Group is or has been engaged in any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Company is aware) which may have or have had during the 12 months prior to the date of this document a significant effect on the financial position or profitability of the Group.
• 7.2 No member of the Save & Prosper Group is or has been engaged in any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Company is aware) which may have or have had during the 12 months prior to the date of this document a significant effect on the financial position or profitability of the Save & Prosper Group.

8. Significant change

• 8.1 Other than the Placing which raised proceeds (net of expenses) of £25.4 million, there has been no significant change in the financial or trading position of the Group since 30 June 2010, being the date of the last interim financial statements of the Company.
• 8.2 Other than the payment of dividends totalling £91 million there has been no significant change in the financial or trading position of the Save & Prosper Group since 30 June 2010, being the date to which the financial information of the Save & Prosper Group set out in Part III of this document has been prepared.

9. Consent

• 9.1 Hawkpoint Partners Limited has given and not withdrawn its written consent to the issue of this document with the inclusion in it of references to its name in the form and context in which it appears.
• 9.2 PricewaterhouseCoopers LLP has given and has not withdrawn its written consent to the inclusion in this document of its report included in Part III of this document in the form and context in which it appears.
• 9.3 Deloitte LLP (a member of the Institute of Chartered Accountants in England and Wales), has given and has not withdrawn its written consent to the inclusion in this document of its report included in Part IV of this document in the form and context in which it appears.
• 9.4 The Royal Bank of Scotland plc has given and not withdrawn its written consent to the issue of this document with the inclusion in it of references to its name in the form and context in which it appears.
• 9.5 Panmure Gordon (UK) Limited has given and not withdrawn its written consent to the issue of this document with the inclusion in it of references to its name in the form and context in which it appears.
• 9.6 Collins Stewart Europe Limited has given and not withdrawn its written consent to the issue of this document with the inclusion in it of references to its name in the form and context in which it appears.

10. Documents available for inspection and available information

Copies of the following documents will be available for inspection at the offices of Ashurst LLP, Broadwalk House, 5 Appold Street, London EC2A 2HA and at the registered office of the Company during normal business hours on any weekday (Saturdays, Sundays and public holidays excepted) until the conclusion of the General Meeting:

• (a) the memorandum and articles of association of the Company;

• (b) the report by PricewaterhouseCoopers LLP on the historical financial information on the Save & Prosper Group set out at Part III of this document;

• (c) the report by Deloitte LLP on the pro forma financial information set out at Part IV of this document;

• (d) the published audited consolidated accounts of the Group for the two financial years ended 31 December 2009;
• (e) the Acquisition Agreement; and
• (f) this document.

PART VII

DEFINITIONS

The following definitions apply throughout this document and the accompanying Form of Proxy, unless the context otherwise requires:

''Acquisition''	the proposed acquisition by the Company of the Save & Prosper Group through the proposed acquisition of the entire issued share capital of Save & Prosper Insurance Limited pursuant to the Acquisition Agreement;
''Acquisition Agreement''	the conditional acquisition agreement between the Company and the Seller dated 26 November 2010 relating to the Acquisition, the principal terms of which are set out in Part V of this document;
''Admission''	admission of the New Ordinary Shares to the Official List of the UK Listing Authority and to trading on the main market of the London Stock Exchange;
''Articles''	the articles of association of the Company as amended from time to time;
''CA''	Countrywide Assured plc;
''CALH''	Countrywide Assured Life Holdings Limited and its subsidiary companies;
''Chesnara'' or the ''Company''	Chesnara plc;
''Directors'' or ''Board''	the directors of the Company as at the date of this document whose names are set out in Part VI of this document;
''DTRs''	the FSA's Disclosure Rules and Transparency Rules;
''Enlarged Group''	the Group as enlarged by the acquisition of the Save & Prosper Group;
''Facility Agreement''	the agreement between the Company and The Royal Bank of Scotland plc dated 17 November 2010 relating to the Loan Facility;
''Financial Services Authority'' or ''FSA''	the Financial Services Authority of the UK in its capacity as the competent authority for the purposes of Part VI of FSMA and in the exercise of its functions in respect of admission to the Official List otherwise than in accordance with Part VI of FSMA;
''Form of Proxy''	the form of proxy relating to the General Meeting being sent to Shareholders with this document;
''FSMA''	the Financial Services and Markets Act 2000 of England and Wales, as amended;
''General Meeting''	the general meeting of the Company convened for 16 December 2010 (or any adjournment of it), notice of which is set out at the end of this document;
''Group''	the Company and its existing subsidiary undertakings;
''Guardian''	Guardian Assurance plc;
''Hawkpoint''	Hawkpoint Partners Limited;
''HCL"	HCL Insurance BPO Services Limited;
''IBNR''	incurred but not reported;
''IFRS''	International Financial Reporting Standards;

''Investment Management Agreement''	the investment management agreement to be entered into between Save & Prosper Insurance Limited and JPMorgan Asset Management (UK) Limited pursuant to which JPMorgan Asset Management (UK) Limited will mange certain policyholder and shareholder funds of the Save & Prosper Group;
''JPMorgan Asset Management''	JPMorgan Asset Management (UK) Limited;
''LIBOR''	London Interbank Offered Rate;
''Listing Rules''	the listing rules made by the FSA under Part VI of FSMA (as amended from time to time);
''Loan Facility''	a new five year term facility for £40 million with The Royal Bank of Scotland plc, further details of which are set out in paragraph 5.1(d) of Part VI of this document;
''London Stock Exchange''	London Stock Exchange plc;
''Moderna''	Movestic Livfo¨ rsa¨ kring AB (formerly Moderna Fo¨ rsa¨ kringar Liv AB) and its subsidiary and associated companies;
''New Ordinary Shares''	the 10,458,877 new Ordinary Shares issued pursuant to the Placing;
''Official List''	the Official List of the Financial Services Authority;
''Ordinary Shares''	ordinary shares of five pence each in the capital of the Company;
''Placing''	the placing by Collins Stewart Europe Limited and Panmure Gordon (UK) Limited of the New Ordinary Shares and the Treasury Shares pursuant to the Placing Agreement;
''Placing Agreement''	the placing agreement dated 26 November 2010 between, inter alia, Collins Stewart Europe Limited, Panmure Gordon (UK) Limited and Chesnara relating to the Placing;
''Prospectus Rules''	the rules made by the FSA under Part VII of FSMA in relation to offers of transferable securities to the public and admission of transferable securities to trading on a regulated market (as amended from time to time);
''Resolution''	the resolution set out in the notice of General Meeting set out in this document;
''Save & Prosper Group''	Save & Prosper Insurance Limited and its subsidiary Save & Prosper Pensions Limited;
''Save & Prosper Insurance Limited''	Save & Prosper Insurance Limited, a company incorporated under the laws of England and Wales with company number 0322226;
''Save & Prosper Pensions Limited''	Save & Prosper Pensions Limited, a company incorporated under the laws of England and Wales with company number 0615364;
''Seller''	JPMorgan Asset Management Marketing Limited;
''Shareholder(s)''	holder(s) of Ordinary Shares;
''Treasury Shares''	the 2,897,183 Ordinary Shares (which are ''qualifying shares'' for the purposes of section 724(2) of the Companies Act 2006 and which were held by the Company as treasury shares as at the date of the Placing Agreement) sold pursuant to the Placing; and
''UK'' or ''United Kingdom''	the United Kingdom of Great Britain and Northern Ireland.

CHESNARA PLC

NOTICE OF GENERAL MEETING

NOTICE is hereby given that a General Meeting of Chesnara plc (the ''Company'') will be held at 11.00 a.m. on 16 December 2010 at the offices of Panmure Gordon (UK) Limited, Moorgate Hall, 155 Moorgate, London EC2M 6XB for the purpose of considering and, if thought fit, passing the following resolution which it is intended to propose as an ordinary resolution:

ORDINARY RESOLUTION

THAT the proposed acquisition by the Company of the entire issued share capital of Save & Prosper Insurance Limited be and is hereby approved on the terms and conditions contained in the acquisition agreement dated 26 November 2010 between the Company and JPMorgan Asset Management Marketing Limited and set out in the circular to the Company's shareholders dated 29 November 2010 and with such non-material amendments thereto as the directors of the Company (or any duly constituted committee thereof) may consider appropriate.

By order of the board

Mary Fishwick Secretary

29 November 2010

Registered Office: Harbour House, Portway Ashton on Ribble, Preston, Lancashire PR2 2PR

Registered in England and Wales No: 04947166

Notes:

• 1. Only holders of ordinary shares are entitled to attend and vote at the General Meeting. A member is entitled to appoint another person as his proxy to exercise all or any of his rights to attend, to speak and to vote at the General Meeting. A member may appoint more than one proxy in relation to the meeting, provided that each proxy is appointed to exercise the rights attached to a different share or shares held by him. A proxy need not be a member of the Company.
• 1. A Form of Proxy is enclosed with this notice and instructions for completion are shown on the form. Forms of Proxy need to be deposited with the Company's registrars, Capita Registrars at PXS, 34 Beckenham Road, Beckenham, Kent BR3 4TU, so as to arrive by no later than 11.00 a.m. on 14 December 2010. Completion of a Form of Proxy, or other instrument appointing a proxy or any CREST Proxy Instruction, does not preclude members attending and voting in person at the General Meeting, should they so wish.
• 1. Shareholders may submit their proxy vote electronically via www.capitashareportal.com. From there you can log in to your Capita Shareportal account or register for the Capita share portal if you have not already done so. To register, select Account Registration and enter the company name Chesnara plc. Then enter your surname, Investor code, postcode and email address. Create a password and click 'Register' to proceed. You will be able to vote immediately by selecting 'Proxy Voting' from the menu.
• 1. Alternatively, if you are a member of CREST, you may register the appointment of a proxy by using the CREST electronic proxy appointment service. Further details are contained below.

CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so for the General Meeting and any adjournment(s) thereof by using the procedures, and to the address, described in the CREST Manual (available via www.euroclear.com/CREST) subject to the provisions of the Company's articles of association. CREST personal members or other CREST sponsored members, and those CREST members who have appointed a voting service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf.

In order for a proxy appointment or instruction made using the CREST service to be valid, the appropriate CREST message (a ''CREST Proxy Instruction'') must be properly authenticated in accordance with Euroclear UK and Ireland Limited's (''Euroclear'') specifications and must contain the information required for such instructions, as described in the CREST Manual. The message, regardless of whether it constitutes the appointment of a proxy or an amendment to the instruction given to a previously appointed proxy, must, in order to be valid, be transmitted so as to be received by the issuer's agent (ID RAI0) 11.00 a.m. on 14 December 2010. For this purpose, the time of receipt will be taken to be the time (as determined by the time stamp applied to the message by the CREST Applications Host) from which the issuer's agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. After this time any change of instructions to proxies appointed through CREST should be communicated to the appointee through other means.

CREST members and, where applicable, their CREST sponsors or voting service provider(s) should note that Euroclear does not make available special procedures in CREST for any particular messages. Normal system timings and limitations will therefore apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member or sponsored member or has appointed a voting service provider(s), to procure that his CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting service provider(s) are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST system and timings.

The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001.

• 1. Pursuant to regulation 41 of the Uncertificated Securities Regulations 2001, the Company specifies that in order to have the right to attend and vote at the General Meeting (and also for the purpose of determining how many votes a person entitled to attend and vote may cast), a person must be entered on the register of members of the Company at 6.00 p.m. on 14 December 2010, or, in the event of any adjournment, at 6 p.m. on the date which is two days before the day of the adjourned meeting. Changes to entries on the register of members after this time shall be disregarded in determining the rights of any person to attend or vote at the meeting.
• 1. Any corporation which is a member can appoint one or more corporate representatives who may exercise on its behalf all of its powers as a member provided they do not do so in relation to the same shares.
• 1. Any person to whom this notice is sent who is a person nominated under section 146 of the Companies Act 2006 to enjoy information rights (a ''Nominated Person'') may have a right, under an agreement between him/ her and the member by whom he/she was nominated, to be appointed (or to have someone else appointed) as a proxy for the General Meeting. If a Nominated Person has no such proxy appointment right or does not wish to exercise it, he/she may have a right, under such an agreement, to give instructions to the member as to the exercise of voting rights.

The statement above of the rights of the members in relation to the appointment of proxies does not apply to Nominated Persons. Those rights can only be exercised by shareholders of the Company.

• 1. Any member attending the General Meeting has the right to ask questions. The company must cause to be answered any such question relating to the business being dealt with at the meeting but no such answer need be given if (a) to do so would interfere unduly with the preparation for the meeting or involve the disclosure of confidential information, (b) the answer has already been given on a website in the form of an answer to a question, or (c) it is undesirable in the interests of the company or the good order of the meeting that the question be answered.
• 1. A copy of this notice, and other information required by section 311A of the Companies Act 2006, can be found at www.chesnara.co.uk.
• 1. You may not use any electronic address (within the meaning of section 333(4) of the Companies Act 2006) provided in this Notice of Meeting (or in any related documents including this Circular to shareholders and any proxy form) to communicate with the Company for any purposes other than those expressly stated.
• 1. As at 26 November 2010 (being the last practicable day prior to the publication of this notice), the Company's issued share capital consists of 115,047,662 shares of which 199,011 are held in treasury. Therefore, the total voting rights in the Company as at 26 November 2010 are 114,848,651.