Direct Line Regulatory News (DLG)

Chesnara Plc

8 October 2013

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, DIRECTLY OR INDIRECTLY, IN OR INTO AUSTRALIA, CANADA, JAPAN OR THE UNITED STATES

Proposed acquisition of Direct Line Life by Chesnara

Chesnara Plc ("Chesnara") is pleased to announce that it has entered into an agreement to acquire the entire issued share capital of Direct Line Life Insurance Company Limited ("Direct Line Life"), from Direct Line Insurance Group Plc ("Direct Line Group"), for a total consideration of £39.3 million, payable in cash on completion (the "Acquisition"). The Acquisition will be financed from a combination of existing cash resources and a new bank facility.

Direct Line Life is a UK-based life insurance company and wholly-owned subsidiary of Direct Line Group. It became substantially closed to new business on 5 July 2011 and has been focused since then on managing the existing portfolio in line with the run-off plan agreed at the time with the then FSA. Prior to closure to new business, Direct Line Life predominantly offered non-linked products including mortgage life cover, fixed term life cover (both with and without critical illness cover) and over 50's life cover to UK customers distributed under both its own brand and also in recent years, but before the closure to new business, on a white label basis.

Direct Line Life is being acquired at an effective 74.7 per cent. of Chesnara Directors' estimate of the residual embedded value of £52.6 million as at 30 June 2013, adjusted to reflect a capital extraction of £23.0 million by the seller immediately at completion.

The effect of this capital extraction is that Chesnara will acquire the business with a lower solvency margin than its long term target of 150%, and will therefore immediately on completion inject capital, estimated at £10.4 million. This increased funding requirement is temporary and is expected to be released by way of a Part VII transfer of Direct Line Life into Chesnara's existing UK life book, Countrywide Assured Plc, by the end of 2014.

As part of the Acquisition, Chesnara has agreed a new loan facility with The Royal Bank of Scotland plc of £73.8 million. This is made up of two facilities. The first facility is divided into two tranches. Tranche A of the first facility will be used to refinance some £30 million of Chesnara's existing outstanding bank debt and Tranche B, which is in the amount of £31 million, will be used to finance part of the consideration for the Acquisition. The second facility will be used to provide short term funding of £12.8 million in relation to the capital extraction described above (the second facility will be repaid at the latest by 30 June 2015).

Chesnara has a clear objective to make strategic acquisitions in the life assurance sector and in particular in its core UK life operations. Chesnara is experienced in managing closed UK life books and Direct Line Life will be an attractive complementary addition. The Acquisition is expected to have a positive impact on the embedded value and cash generation ability of Chesnara in the medium term once integrated.

In the financial year ended 31 December 2012, Direct Line Life had an operating profit before tax of £9.4 million, reported a profit for the period after tax of £6.9 million and had gross assets of £177.6 million. Direct Line Life had approximately 150,000 policies in force as at 31 July 2013. The results of Direct Line Life will be presented using Chesnara's accounting policies in the circular to be sent to shareholders (as noted below).

Following completion, Chesnara intends to transfer the administration role to HCL (one of Chesnara's current outsourcing partners). Management intends to focus on realising potential synergies when they might be available, such as combining the underlying life companies of the enlarged group by means of a transfer pursuant to the provisions of Part VII of FSMA 2000.

The Acquisition is subject to approval from the Prudential Regulation Authority ("PRA"). The Acquisition is a Class 1 transaction for Chesnara under the Listing Rules and is conditional on the approval of Chesnara shareholders at a general meeting, notice of which will be included in a circular to be sent to shareholders shortly.

Commenting on the Acquisition, Graham Kettleborough, Chief Executive Officer of Chesnara Plc said:

"We are very pleased to have reached agreement to acquire a complementary UK business which we can integrate with our existing UK life book. Adding this portfolio to our existing book of business brings extra security, from increased size and concentrated governance, to both existing and the newly acquired policyholders. It is of benefit to our shareholders as it fits with our strategy, is accretive to our embedded value and will also help support our dividend paying capacity in the medium term."

For further enquiries, please contact:

Chesnara plc

Graham Kettleborough, CEO

Tel: +44 (0)7799 407519

Newgate Threadneedle Limited

Roddy Watt

Tel: +44 (0)207 653 9855

Canaccord Genuity Limited

Hugh Elwes

David Tyrrell

Tel: + 44 (0)207 665 4500

Notes to editors:

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

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

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

Canaccord Genuity Limited, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority, is acting as financial adviser and sponsor to Chesnara and is acting for no-one else in connection with the Acquisition and will not be responsible to anyone other than Chesnara for providing the protections afforded to clients of Canaccord Genuity Limited nor for providing advice in connection with the Acquisition or any other matter referred to herein.

Certain statements made in this announcement are forward-looking statements. These forward-looking statements are not historical facts but rather are based on Chesnara's current expectations, estimates and projections about its industry, its beliefs and assumptions. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to known and unknown risks, uncertainties and other factors, some of which are beyond Chesnara's control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These factors include, amongst others, the ability to consummate the transaction; the ability of Chesnara to successfully integrate Direct Line Life's operations and employees; the ability to realise anticipated synergies; dependence on key personnel; and financial and insurance risk management. Chesnara cautions shareholders not to place undue reliance on these forward-looking statements, which reflect the view of Chesnara only as of the date of this announcement. The forward-looking statements made in this announcement relate only to events as of the date on which the statements are made. Chesnara will not undertake any obligation to release publicly any revisions or updates to these forward-looking statements to reflect events, circumstances or unanticipated events occurring after the date of this announcement except as required by law or by any appropriate regulatory authority.