Chesnara Regulatory News (CSN)

Chesnara plc

3% interim dividend growth and increase in Economic Value.

During the first half of 2019, we delivered good growth in Economic Value. The closing Economic Value of £645.1m is 3% higher than at the end of 2018, after payment of the 2018 final dividend of £20.2m, despite the negative impact of reduced interest rates and a weakening of the Swedish krona.

·; 3.00% INCREASE IN INTERIM DIVIDEND COMPARED WITH 2018

The results in the period support the continued growth of the dividend to 7.43p per share (2018 interim: 7.21p per share).

·; ECONOMIC VALUE (EcV) OF £645.1M (31 December 2018: £626.1m) Note 3

The movement is stated after recognising £20.2m of dividend payments and a foreign exchange loss of £7.9m during the period.

·; EcV EARNINGS NET OF TAX OF £47.1M (six months ended 30 June 2018: £13.6m)

All divisions have made material positive contributions to the overall Economic Value earnings of £47.1m.

·; EcV NEW BUSINESS CONTRIBUTION OF £3.8M (six months ended 30 June 2018: £5.3m)

New business profits have continued to emerge from Movestic after a slow start to the year with a reduction in transfers in. Scildon's new business operation is showing promise, although there remains work to be done.

·; GROUP CASH GENERATION OF £13.4M (six months ended 30 June 2018: £48.6m)

The 2019 result includes a cash strain of £13.1m from the "symmetric adjustment" impact Note 1. The prior year comparison benefited from £20m of net releases from the with-profits fund.

·; DIVISIONAL CASH GENERATION OF £2.4M (six months ended 30 June 2018: £53.1m) Note 2

The impact of equity growth and interest rate reductions on Own Funds and SCR resulted in cash utilisation in our European divisions, while the UK business continued to deliver solid cash generation.

·; GROUP SOLVENCY RATIO OF 155% (31 December 2018: 158%)  

We are well capitalised at both group and subsidiary level under Solvency II.

·; IFRS PROFIT BEFORE TAX OF £66.6M (six months ended 30 June 2018: £26.5m)

Strong results in Scildon and the UK drive substantial profits for the period, with positive contributions from all operating businesses. Both Scildon and the UK benefited from improved investment market conditions compared to the comparative period, with the group generating economic profits of £43.2m for the first half of 2019.

·; IFRS TOTAL COMPREHENSIVE INCOME OF £51.0M (six months ended 30 June 2018: £14.9m)

This includes a foreign exchange loss of £3.5m (2018: £6.9m loss).

·; SCILDON DEVELOPMENT PROGRAMME BEGINNING TO HAVE A POSITIVE IMPACT

We have made good progress with the development programme, with total acquisition costs 18% lower than the prior year.

John Deane, Chief Executive said:

"I am pleased to report that during the first half of 2019 we delivered good growth in Economic Value. The closing Economic Value of £645.1m is 3% higher than at the end of 2018, after payment of the 2018 final dividend of £20.2m, despite the negative impact of a weakening Swedish krona.

Falls in interest rates, a recovering equity market and the impact, in Sweden and the UK, of the Solvency II symmetric adjustment, created generally adverse conditions for cash generation. However, our strong cash balance at group along with the half year performance supports the increase of our interim dividend.

Operationally the business continues to make progress. In Sweden, funds under management, which are the core source of income for Movestic, have increased by 15% during the first half of the year. At a total group level, despite the closed nature of the UK book, the total funds under management have also increased during the period. The robustness of the total funds is a strong indicator of the sustainability of the Chesnara business and financial model.

The Scildon development programme work is beginning to have a positive impact with total acquisition costs being 18% lower compared to the first half of 2018, with stable new business levels. There is more to do but it is encouraging to see positive signs from the hard work being undertaken.

While Brexit is dominating the news headlines, we do not need to make any immediate changes to the structure of the company irrespective of the possible form of Brexit. Management will remain focused on the performance of the component businesses in our three territories, where their strong solvency provides security for our customers and investors and opportunity to continue the cash generation that supports the Chesnara dividend delivery."

Note 1 Symmetric adjustment: The Solvency II capital requirement calculation includes an adjusting factor that reduces or increases the level of the equity capital required depending on historic market conditions. Following periods of market growth the factor tends to increase the level of capital required and conversely in falling markets the capital requirement becomes less onerous.

Note 2 Cash generation represents the movement in distributable surplus during the period. Distributable surplus is defined as being the excess of Solvency II own funds over and above the group's internal capital management policies, which have been prepared in the context of the solvency capital requirements imposed by our regulators.

Note 3 Economic Value is based on the Solvency II "Own funds" valuation with adjustments for contract boundaries, risk margin and adding back the impact of restrictions placed on the value of certain ring-fenced with-profit funds. We consider the Solvency II rules understate the commercial value of these items. Contract boundary rules require Solvency II Own Funds to assume no future regular premiums on certain contracts and the Solvency II risk margin rules, in our view, overstate the cost of capital.

The board approved this statement on 28 August 2019.

Enquiries

John Deane, Chief Executive, Chesnara plc - 01772 972079

Roddy Watt, FWD Consulting - 0207 623 2368 / 07714 770493

Notes to Editors

Chesnara plc ('Chesnara'), which listed on the London Stock Exchange in May 2004, is the owner of Countrywide Assured plc ('CA plc'), Movestic Livförsäkringar AB ('Movestic') and Chesnara Holdings BV, the intermediate holding company of the 'Waard Group' and Scildon NV ('Scildon').

CA plc 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 20 December 2010 for £63.5m. With effect from 31 December 2011, the business of Save & Prosper was transferred into CA plc. On 28 November 2013 Chesnara acquired Direct Line Life Insurance Company Limited (subsequently renamed Protection Life Company Limited) from Direct Line Group plc for £39.3m. On 31 December 2014 the Protection Life business transferred into CA plc. CA plc 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.

The Waard Group, a Netherlands-based group comprising three closed book insurance companies and a servicing company, was acquired on 19 May 2015 for €69.9m. The Waard Group, comprising Waard Leven N.V., Hollands Welvaren Leven N.V., Waard Schade N.V. and Tadas Verzekeringen B.V. was previously owned by DSB Beheer B.V., a Dutch financial services group. The policy base of the Waard Group is predominantly term life policies, with some unit linked policies and some non-life policies.

Scildon (previously L&G Nederland) is a leading provider in the Dutch market of risk and investment-linked products, sold through brokers to high net worth customers. It also offers a defined contribution group pension platform focussing on Dutch SMEs. The company was acquired in April 2017 from Legal and General.

Further details are available on the Company's website (www.chesnara.co.uk).

HIGHLIGHTS 

IFRS PRE-TAX PROFIT £66.6M SIX MONTHS ENDED 30 JUNE 2018 £26.5M

Movement in the period largely arises within the Scildon business which has large IFRS profits due to asset movements which are not offset by reserve movements.

IFRS TOTAL COMPREHENSIVE INCOME £51.0M SIX MONTHS ENDED 30 JUNE 2018 £14.9M

The result includes a foreign exchange loss of £3.5m for the period (2018: loss of £6.9m).

GROUP SOLVENCY 155% 31 DECEMBER 2018 158%

We are well capitalised at both group and subsidiary level and under Solvency II.

ECONOMIC VALUE £645.1M 31 DECEMBER 2018 £626.1M

Movement in the period is stated after dividend distributions of £20.2m and includes a foreign exchange retranslation loss of £7.9m.

ECONOMIC VALUE EARNINGS £47.1M SIX MONTHS ENDED 30 JUNE 2018 £13.6M

NEW BUSINESS PROFIT £3.8M SIX MONTHS ENDED 30 JUNE 2018 £5.3M

GROUP CASH GENERATION £13.4M SIX MONTHS ENDED 30 JUNE 2018 £48.6M

The 2019 result includes a cash strain of £13.1m from the symmetric adjustment impact Note 1. The prior year comparison benefited from £20m of net releases from the with-profits fund.

DIVISIONAL CASH GENERATION £2.4M SIX MONTHS ENDED 30 JUNE 2018 £53.1M

The impact of equity growth and interest rate reductions on Own Funds and SCR resulted in cash utilisation in our European divisions, while the UK business continued to deliver solid cash generation. In Sweden and the UK, we saw a material negative "symmetric adjustment" impact Note 1 broadly offsetting a corresponding gain in 2018.

Note 1 - Symmetric adjustment: The Solvency II capital requirement calculation includes an adjusting factor that reduces or increases the level of the equity capital required depending on historical market conditions. Following periods of market growth the factor tends to increase the level of capital required and conversely in falling markets the capital requirement becomes less onerous.

INTERIM DIVIDEND INCREASE

Interim dividend increased by 3.00% to 7.43p per share (2018: 7.21p interim and 13.46p final).

EQUITY MARKET GROWTH, FALLING INTEREST RATES, WEAKENING SWEDISH KRONA

Rising equity markets and narrowing bond spreads since the turn of the year have supported significant investment returns and economic earnings. The economic conditions, including further downward pressure on interest rates, have been less beneficial for cash generation. A weakening of the krona against sterling has led to foreign exchange retranslation losses.

GROUP-WIDE IFRS 17 PROGRAMME IS PROGRESSING TO PLAN

Following completion of the impact assessment and implementation plan in 2018, considerable progress has been made on the application of the technical aspects of the standard.

MEASURING OUR PERFORMANCE

HOW WE MEASURE PERFORMANCE WITHIN THIS HALF YEAR REPORT

Throughout this Half Year Report, we use measures to assess and report how well we have performed. The range of measures is broad and includes many measures that are not based on IFRS. The financial analysis of a life and pensions business also needs to recognise the importance of Solvency II figures, the basis of regulatory solvency. In addition, the measures aim to assess performance from the perspective of all stakeholders.

FINANCIAL ANALYSIS OF A LIFE AND PENSION BUSINESS

Whilst the IFRS results form the core of the Half Year Report and hence retain prominence as a key financial performance metric, there is a general acceptance that the IFRS results in isolation do not adequately recognise the wider financial performance of a typical life and pensions business.

In light of the limitations of IFRS reporting, this Half Year Report adopts several Alternative Performance Measures (APMs) to present a more meaningful view of the financial position and performance. The non-IFRS APMs have at their heart the Solvency II valuation known as Own Funds and as such, all major financial APMs are derived from a defined rules-based regime. The diagram below shows the core financial metrics that sit alongside the IFRS results, together with their associated KPIs and interested parties.

FINANCIAL STATEMENT KPIS:

- IFRS profits

- IFRS net assets

ADDITIONAL METRICS:

- Solvency

·; Own funds

·; Solvency capital requirement (SCR)

·; SCR plus management buffer

·; Solvency position (absolute value)

·; Solvency position ratio

- Cash generation

·; Group cash generation

·; Divisional cash generation

- Economic Value

·; Balance sheet

·; Earnings

SOLVENCY

Solvency is a fundamental financial measure which is of paramount importance to investors and policyholders. It represents the relationship between the value of the business as measured on a Solvency II basis and the capital the business is required to hold - the Solvency Capital Requirement (SCR). Solvency can be reported as an absolute surplus value or as a ratio.

Solvency gives policyholders comfort regarding the security of their provider. This is also the case for investors together with giving them a sense of the level of potential surplus available to invest in the business or distribute as dividends (subject to other considerations and approvals).

ECONOMIC VALUE

Economic Value (EcV) is deemed a more meaningful measure of the long-term value of the group and it generally approximates to Embedded Value reporting, which was used before the introduction of SII. In essence, the IFRS balance sheet is not generally deemed to represent a fair commercial value of our business, as it does not fully recognise the impact of future profit expectations of long-term policies.

EcV is derived from Solvency II Own Funds and recognises the impact of future profit expectations from existing business.

CASH GENERATION

Cash generation is used by the group as a measure of assessing how much dividend potential has been generated, subject to ensuring other constraints are managed.

Group cash generation is calculated as the movement in the group's surplus own funds above the group's internally required capital, as determined by applying the group's capital management policy, which has Solvency II rules at its heart.

Divisional cash generation represents the movement in surplus own funds above local capital management policies within the three operating divisions of Chesnara. Divisional cash generation is used as a measure of how much dividend potential a division has generated, subject to ensuring other constraints are managed.

OPERATIONAL AND OTHER PERFORMANCE MEASURES

In addition to the financial performance measures, the Half Year Report includes measures that consider and assess performance all of our key stakeholder groups. The table below summarises the performance measures adopted throughout this report.

I am pleased to report that during the first half of 2019 we delivered good growth in Economic Value. The closing Economic Value of £645.1m is 3% higher than at the end of 2018, after payment of the 2018 final dividend of £20.2m, despite the negative impact of a weakening Swedish krona.

Falls in interest rates, a recovering equity market and the impact, in Sweden and the UK, of the Solvency II symmetric adjustment, created generally adverse conditions for cash generation. However, our strong cash balance at group along with the half year performance supports the increase of our interim dividend.

Operationally the business continues to make progress. In Sweden, funds under management, which are the core source of income for Movestic, have increased by 15% during the first half of the year. At a total group level, despite the closed nature of the UK book, the total funds under management have also increased during the period. The robustness of the total funds is a strong indicator of the sustainability of the Chesnara business and financial model.

The Scildon development programme work is beginning to have a positive impact with total acquisition costs being 18% lower compared to the first half of 2018, with stable new business levels. There is more to do but it is encouraging to see positive signs from the hard work being undertaken.

While Brexit is dominating the news headlines, we do not need to make any immediate changes to the structure of the company irrespective of the possible form of Brexit. Management will remain focused on the performance of the component businesses in our three territories, where their strong solvency provides security for our customers and investors and opportunity to continue the cash generation that supports the Chesnara dividend delivery.

Against a backdrop of continuing political uncertainty, further downward pressure on interest rates and during a period of significant operational development, the Chesnara business model has held up well.

Economic Value has increased with earnings of £47.1m significantly exceeding the payment of the final 2018 dividend and contributing to an £19.0m increase in total Economic Value. From an IFRS results perspective, the profit before tax of £66.6m is significantly up on the comparative result in 2018 of £26.5m. This is predominantly due to the strong Scildon results, which benefited from valuation gains in its bond portfolio as a result of narrowing spreads, not offset by corresponding movements to reserves.

At the heart of Chesnara's proposition as a reliable income stock, the UK book has continued to generate sufficient cash to support the Chesnara dividend. The total group cash results have however been supressed by continued downward pressure on interest rates. In addition, the Solvency II standard formula capital model is more onerous regarding capital requirements for equity exposure during a period of strong equity market recovery. This dynamic, termed the "symmetric adjustment" has increased capital requirements during the period, with a corresponding cash strain of £13.1m, but does not compromise the future cash generation potential of the business. During the final quarter of 2018 when equity markets fell sharply we experienced an almost equal and opposite positive impact from the symmetric adjustment.

Despite the strain from the "symmetric adjustment" we have generated £13.4m of cash during the period (6 months to 30 June 2018: £48.6m). In the absence of the "symmetric adjustment" strain during the second half of the year, we would expect the full year cash outcome to more than cover the annual dividend.

Total new business profits of £3.8m are down compared to the first half of 2018 (£5.3m) although in light of the first signs of improvements from the Scildon change programme, we retain our expectation to replace a meaningful proportion of the value lost from payment of the dividend through writing new business.

As we have previously reported, Scildon remains in transition. In a competitive market, it is pleasing to report that sales volumes remain stable. There has been a modest improvement in the profitability of Scildon's new business, predominately as a result of an 18% reduction in acquisition costs, which is an encouraging initial indication of positive rewards from the change programme.

The resilience of the established business units creates a strong foundation to support the continued improvement programme in Scildon.

All divisions have made material positive contributions to the overall Economic Value earnings of £47.1m. Much of the improvement is driven by an increase in equity and fixed interest investment valuations. It is pleasing to see a good proportion of market driven losses in 2018 being recovered. Movestic has delivered 2% growth despite fully recognising the adverse future impact of regulatory changes regarding policy transfer processes and charges. The total Economic Value movement includes foreign exchange losses of £7.9m.

Cash generated is somewhat muted in the period but is in line with the levels we would expect during a period of strong equity market recovery. In particular, the results include the aforementioned negative impact from the "symmetric adjustment" which reverses out a similar positive impact in 2018. This equity dynamic is most prominent in the Swedish business and hence the Movestic cash utilisation of £8.0m does not compromise the future cash generation potential of the business.

Much of the Scildon cash utilisation of £7.4m is caused by downward pressure on long-term interest rates and a slight shift in mix of the underlying assets, which have led to an increase in the capital requirement. Due to the movement in interest rates, the Scildon cash utilisation includes an £8.3m strain as a result of an increase in lapse capital requirement. This reverses out in the consolidated group capital requirement. During the second half of 2019, proposed changes in Scildon's asset mix are expected to have a positive impact on cash generation.

The UK business has generated £16.2m of cash, which on an annualised basis, excluding the short-term impacts from the equity market growth, continues to more than fund the dividend strategy.

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ACQUISITION ACTIVITY CONTINUES TO TAKE PLACE IN OUR TARGET MARKETS, WITH OPPORTUNITIES CONTINUING TO EMERGE.

We have witnessed an increase in activity in the territories in which Chesnara currently operates and also those where we do not have operations. We believe we have also seen a rise in seller's valuations and prices paid for potential targets. We have continued to measure potential targets against our stringent acquisition assessment, focusing on the price compared to the EcV, the cash generation capability, the strategic fit and the risks within the target. We are committed to maintaining our discipline when assessing potential acquisitions and ensuring that any offer we make is in the interests of all of our stakeholders, with suitable reward for the additional risks taken on. Chesnara has strong support from shareholders and lending institutions to progress our acquisition strategy. We also believe that our operating model has the flexibility to accommodate a wide range of potential target books. We believe our good network of contacts in the adviser community, who understand the Chesnara acquisition model, ensures that we are aware of most viable opportunities in the UK and Western Europe. With this in mind, we are confident that we are well positioned to continue the successful acquisition track record in the future.

Chesnara writes new business in both Sweden and the Netherlands. The ultimate aim is to create sufficient annual profits, either through returns on the existing business, or through writing new business, to replace a significant proportion of the Economic Value lost by way of dividend payments. Movestic continues to deliver within its target volume range although profits of £2.3m for the six months to 30 June 2019 have decreased compared to the first half of 2018 (£4.6m). This is due to a number of factors including a mix shift away from single premium transfers, pressure on fee levels and legislative changes regarding transfer-out charges and processes. The shift from single premium transfers appears to be a temporary issue and during the second quarter the profile recovered to a more expected level. Several other initiatives are due to commence during the second half of the year which are expected to further enhance profitability levels. These include:

- Further roll-out of the ongoing digitalisation programme with the specific objective to enhance the broker experience e.g. extending access to robot advice functionality to brokers;

- New funds and functionality, including the recent launch of funds with protected return features and the plan to launch further products to broaden the customer offering; and

- Structural changes to simplify the corporate structure.

Scildon are not currently generating sufficient new business profits although the profit for the period of £1.5m has improved by 150% from the first 6 months of 2018 with an encouraging 18% reduction in acquisition expenses. There remains much to do but seeing some real rewards from the hard work to date gives cause for optimism that more meaningful new business profits are attainable.

We expect the change programmes in both Sweden and the Netherlands to have an increasingly positive impact through the rest of the year and beyond.

NEW BUSINESS PROFITS HAVE CONTINUED TO EMERGE FROM MOVESTIC IN A CHALLENGING MARKET. SCILDON'S NEW BUSINESS OPERATION IS SHOWING PROMISE, ALTHOUGH THERE REMAINS WORK TO BE DONE.

Solvency

The group continues to show a robust solvency ratio of 155% at 30 June 2019 (31 December 2018: 158%). To continue to manage capital effectively and as a result of the ongoing volatility that has been witnessed in bond spreads over recent periods, we have applied the Volatility Adjustment for the first time within Scildon's results, which has had a modest positive impact. The closing solvency position is stated after recognising the £11.1m cost of the interim dividend, which will be paid in October 2019.

Regulation and governance

IFRS 17

The delivery of the new insurance accounting standard, IFRS 17, continues to be a focus of Chesnara ahead of the implementation of the standard in 2022. Our programme continues to progress well and 2019 has seen a focus across the group on the assessment of the application of the technical aspects of the standard and initial considerations of the operational design. We have previously provided for the cost of delivering the programme within our actuarial expense reserves and these estimates have remained unchanged.

We continue to be of the view that IFRS 17 should not have any significant bearing on the commercial assessment of Chesnara, with our expectation that capital management decision making will continue to be driven by regulatory solvency and Economic Value as opposed to our IFRS results and position.

Regulatory compliance

Compliance with regulation remains a priority for the group. We have continued to maintain a positive and constructive relationship with regulatory bodies across the group.

Governance framework

We continue to place great importance on ensuring our risk and governance system is fit for purpose. Work has continued to progress on ensuring that Scildon's risk and governance monitoring and reporting routines are in line with the wider group's.

AT CHESNARA WE HAVE ALWAYS MANAGED OUR BUSINESS IN A RESPONSIBLE WAY AND HAVE A STRONG SENSE OF ACTING IN A FAIR MANNER, GIVING FULL REGARD TO THE RELATIVE INTERESTS OF ALL STAKEHOLDERS.

Corporate purpose

We assess our corporate purpose by considering the following eight aspects of our business and by looking at the business from the perspective of all stakeholders.

Business model

- Our acquisition strategy is built upon long term commitments to any markets we operate in. Our consolidation model therefore offers a genuine solution to the challenges certain insurance markets face.

The products and services we provide

- We help protect people and their dependants through the provision of life, health and disability cover or by providing savings and pensions, which help customers with their financial needs in the future. We seek to provide customers and their advisers with helpful and reliable support.

Sustainability

- Driven in part by consumer demand, especially in our Dutch and Swedish operations, there is a continued positive shift towards an increased focus of sustainable fund investments.

- The nature of our business is such that in general we have a relatively low carbon footprint.

Shareholder proposition

- Investors, especially in a low interest rate environment do have a genuine need for income and hence our investor proposition, track record and responsible approach provides an investment opportunity for individuals seeking sustainable equity based income.

I AM PLEASED TO REPORT A 3% INCREASE IN THE INTERIM DIVIDEND.

Taxation

- As detailed in our tax strategy, we adopt a responsible and open approach to taxation and, as a consequence, pay the appropriate taxes throughout the group.

Staff

- We provide high quality jobs with competitive remuneration and good working conditions both directly and through outsourced arrangements.

Suppliers and partners

- We seek mutually respectful and sustainable relationships with our suppliers. We believe that supplier relationships only work in the long term if the terms and conditions are mutually beneficial. Our instinct and natural preference is to maintain established long-term supplier relationships where they remain commercially competitive and operationally viable.

Local community

- In the UK our investment and continued commitment to the North West and Preston in particular creates high quality financial services roles outside of London.

- All divisions support local community initiatives to the extent deemed appropriate given our financial responsibilities as a PLC.

OUR VIEW IS THAT CHESNARA FULFILS A POSITIVE CORPORATE PURPOSE.

Outlook and Brexit

I remain optimistic that Chesnara can continue to deliver against its strategic objectives, which in turn fund our well established dividend strategy. The notable increase in Economic Value supports my optimism.

Looking forward, we foresee a sustained period of low interest rates and this will continue to put a degree of downward pressure on our cash generation. That said, even in the current low interest environment we believe the core business results together with the potential to initiate a range of management actions, means our future cash potential supports our dividend strategy for many years. In particular, the UK business remains a robust source of cash, with additional potential to take management actions to enhance the core cash. The nature of the cash utilisation in our overseas divisions together with the potential for future capital reduction actions, particularly in Scildon, means we retain a positive outlook regarding cash contributions in the future.

We now have sufficient scale and presence in both the UK and the Netherlands to continue our focus on acquisition activity in those territories in a disciplined manner. That discipline, means we will not do a deal if the price does not offer the appropriate value to our shareholders. We also remain open minded about new territories but the benefits would need to outweigh the inherent challenge of adding another regulatory environment into our business model. Our balance sheet has further capacity for debt and having completed a debt syndication process last year, we are in a strong position to take advantage of that balance sheet capacity. We have significant levels of surplus capital and recent experience suggests we retain shareholder support for further equity for the right deal. This, together with operational capacity, means we remain well positioned to act should an opportunity arise that meets our stringent price and risk profile criteria.

We remain committed to writing new business in both Sweden and the Netherlands with a view to replacing a meaningful proportion of the dividend strain through our new business operations. This is a material dampener to any run-off strain. Movestic has become an established profitable new business operation and, despite the current pricing pressures in the market, we continue to expect the division to deliver meaningful levels of profit in the future. We recognise that current new business profits from Scildon are not sufficient; however, the sustained volumes and reducing cost base do create a degree of encouragement that more meaningful profits can be delivered in the future.

The structure of the group, with established regulated entities in three European countries, together with the fact we do not trade or share resource across territories, means I remain of the view that whatever the outcome from the Brexit negotiations, we expect it to have little direct impact on our business model. In the event that Brexit has a negative impact on the value of sterling, relative to the euro and Swedish krona, as has been the case since the 30 June 2019, then the value of Chesnara would increase.

In light of the above, I remain confident that Chesnara is well positioned to continue to provide value to policyholders and shareholders.

Peter Mason

Chairman

28 August 2019

OVERVIEW OF STRATEGY

Our strategy focuses on delivering value to policyholders and shareholders. The strategy is delivered through a proven business model underpinned by a robust risk management and governance framework and our established culture & values.

BUSINESS REVIEW n UK

The UK division is principally made up of the insurance company Countrywide Assured plc. The company manages c270,000 policies and is in run-off. Countrywide Assured follows an outsourcer-based operating model, with functions such as customer services, investment management and accounting and actuarial services being outsourced. A central governance team is responsible for managing all outsourced operations.

The UK has continued to progress its objectives in line with plans. The customer strategy implementation plan is nearly complete and the division remains focused on good governance of the business. Management will continue to focus on these areas, coupled with identifying and delivering capital management initiatives and supporting the group in relation to any UK-based acquisitions.

MAXIMISE VALUE FROM EXISTING BUSINESS

CAPITAL AND VALUE MANAGEMENT

BACKGROUND INFORMATION

- As a closed book, the division creates value through managing the following key value drivers: costs; policy attrition; investment return; and reinsurance strategy.

- In general, surplus regulatory capital emerges as the book runs off. The level of required capital is closely linked to the level of risk to which the division is exposed. Management's risk-based decision-making process seeks to continually manage and monitor the balance of making value enhancing decisions whilst maintaining a risk profile in line with the board's risk appetite.

- At the heart of maintaining value is ensuring that the division is governed well from a regulatory and customer perspective.

INITIATIVES AND PROGRESS IN 2019

- The results for the first six months of the year have been driven in large by investment market factors, notably equity price increases coupled with falls in risk-free yields.

- EcV earnings of £25.2m in the period.

- Cash of £16.2m has been generated in the period, continuing to support the dividend strategy of the division.

- IFRS profit of £25.8m has been generated in the period.

- Progress has been made in reviewing the operating model used to deliver the investment management of our unit linked policyholder funds.

FUTURE PRIORITIES

- Conclude the review of the operating model to deliver the investment management of our unit linked policyholder funds.

- Continue to ensure that we are managing the cost base of the business efficiently.

- Focus on wider initiatives to optimise the balance between value growth and surplus capital availability.

KPIs

Underlying growth has continued to be delivered, with rising equity markets being a key driver.

Cash generation of £16.2m has been generated in the period, supporting the ongoing dividend strategy of the division and group.

CUSTOMER OUTCOMES

BACKGROUND INFORMATION

- Treating customers fairly is one of our primary responsibilities. We seek to do this by having effective customer service operations together with competitive fund performance whilst giving full regard to all regulatory matters. This supports our aim to ensure policyholders receive good returns, appropriate communication, and service in line with customer expectations.

INITIATIVES AND PROGRESS IN 2019

- The division's multi-year customer strategy implementation programme is nearing its completion, having delivered further enhanced customer communications in the period, including further improvements to the CA website.

- Our customer tracing process has continued. This seeks to ensure that we have the most up to date contact information for our customers and, where contact had been lost, we can reunite them with their policies.

- Following the completion of the programme, the division expects that it will have enhanced processes and procedures in place that continue to deliver fair customer outcomes and meet our obligations under the FCA's Final Guidance 16/8 regarding long-standing customers.

- We closely monitor regulatory developments to ensure we continue to treat our customers fairly in accordance with our business model and regulatory requirements.

FUTURE PRIORITIES

- Complete the customer strategy implementation programme, and embed into business as usual routines.

- Continue the cycle of reuniting customers with their policies, where we have lost contact.

KPIs

Policyholder fund performance

Our main managed funds continue to generally perform well against their benchmarks although the rolling 12 month return in the S&P managed pension fund is currently below benchmark. This is driven by the disappointing returns in the last quarter of 2018 as a result of its higher relative exposure to equities. The S&P performance over a longer-term period compares favourably to benchmark.

GOVERNANCE

BACKGROUND INFORMATION

- Maintaining effective governance and a constructive relationship with regulators underpins the delivery of the division's strategic plans.

- Having robust governance processes provides management with a platform to deliver the other aspects of the business strategy. As a result, a significant proportion of management's time and attention continues to be focused on ensuring that both the existing governance processes, coupled with future developments, are delivered.

INITIATIVES AND PROGRESS IN 2019

- Progressed the IFRS 17 "Insurance contracts" development programme, focusing on the technical application of the accounting standard, which was revised during the year.

- The division's operational resilience review programme over critical business services has continued. This focuses on ensuring we continue to operate to the high standards that are expected of us even under stressed conditions.

- Positive engagement with all regulators has continued.

FUTURE PRIORITIES

- Continue with the delivery of the IFRS 17 programme, with an increasing focus on the operational aspects of the implementation.

- Progress the division's operational resilience programme.

KPIs

SOLVENCY RATIO: 145%

Solvency remains robust. Surplus generated in the period increases the solvency position from 130% to 145%.

BUSINESS REVIEW n SWEDEN

Movestic is a life and pensions business based in Sweden, and is open to new business. From its Stockholm base, Movestic operates as an innovative brand in the Swedish life insurance market. It offers personalised unit-linked pension and savings solutions through brokers and is well-rated within the broker community.

Movestic has continued to focus on delivering its strategic initiatives, including its front and back office IT streamlining plans. These are anticipated to bring cost efficiencies and improvements in broker and policyholder experience. From a financial perspective Movestic has delivered growth in the period despite the headwinds arising from a very competitive market and the impact of updating processes to ensure compliance with changes in regulations.

MAXIMISE VALUE FROM EXISTING BUSINESS

CAPITAL AND VALUE MANAGEMENT

BACKGROUND INFORMATION

- Movestic creates value predominantly by generating growth in the unit-linked assets under management (AuM), whilst assuring a high quality customer proposition and maintaining an efficient operating model. AuM growth is dependent upon positive client cash flows and positive investment performance. Capital surplus is a factor of both the value and capital requirements and hence surplus can also be optimised by effective management of capital.

INITIATIVES AND PROGRESS IN 2019

- EcV earnings of £13.9m in the period.

- Cash utilisation of £5.8m in the period on constant exchange rates.

- IFRS profit of £6.5m.

- Assets under management have grown by 15% in the period, on constant exchange rates, supported by positive net client cash flows. This has resulted in EcV growth in the period.

- The assumptions for the rate of transfers out were strengthened during the period in light of some process changes that were required to meet new rules regarding customers transferring funds to another provider.

- The level of assumed investment management income has been reduced during the period owing to increased competition.

- The number of policies has reduced compared with the prior year, largely due to the Akademikerförsäkring contract for protection business not being renewed. This was low margin business and has not materially impacted the 2019 results.

- The Swedish krona weakened by 4.4% during the period, resulting in retranslation losses reported in EcV and cash generation.

FUTURE PRIORITIES

- Continue the journey of digitising and automating processes, with a view to improving both efficiency and control.

- Continue to develop more digitised and individualised customer proposition and experience.

- Provide a predictable and sustainable dividend to Chesnara.

- Continue to develop the operating and product proposition plans to reflect the fast changing market environment and consumer servicing preferences.

KPIs (all comparatives have been presented using 2019 exchange rates)

Growth in assets under management

IFRS profit

Underlying value growth

CUSTOMER OUTCOMES

BACKGROUND INFORMATION

- Movestic provides personalised long-term savings, insurance policies and occupational pensions for individuals and business owners. We believe that recurring independent financial advice increases the likelihood of a solid and well-planned financial status, hence we are offering our products and services through advisors, licenced brokers.

INITIATIVES AND PROGRESS IN 2019

- Policyholder average investment return of 11.7% in the year to date (H1 2018: 3.5%).

- Policy transfers process has been updated to ensure full compliance with new regulations.

- A new customer offering has been launched with our new funds, Avancera, which contains protected return features.

- Digital processes with improved functionality, for increased administrative efficiency, have been delivered during the period, including investment allocation tool functionality available for brokers. Further launches are planned throughout 2019.

FUTURE PRIORITIES

- Continue to develop new solutions and tools to support the brokers' value-enhancing customer proposition.

KPIs (all comparatives have been presented using 2019 exchange rates)

Broker assessment rating (out of 5)

POLICYHOLDER AVERAGE INVESTMENT RETURN:

11.7%

GOVERNANCE

BACKGROUND INFORMATION

- Movestic operates to exacting regulatory standards and adopts a robust approach to risk management.

- Maintaining strong governance is a critical platform to delivering the various value-enhancing initiatives planned by the division.

INITIATIVES AND PROGRESS IN 2019

- New claims handling system and digital invoicing software implemented in the period.

- Where necessary, processes have been refined in order to comply with the insurance distribution directive.

- IFRS17 work has continued.

- Projects initiated to simplify corporate structure, which will be beneficial to both governance and future cost base development.

FUTURE PRIORITIES

- Deliver IFRS 17 implementation plans.

KPIs (all comparatives have been presented using 2019 exchange rates)

SOLVENCY RATIO: 161%

Solvency remains strong at 161%. Solvency surplus has reduced by £1.6m in the period.

ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS

PROFITABLE NEW BUSINESS

BACKGROUND INFORMATION

- As an "open" business, Movestic not only adds value from sales but as it gains scale, it will become increasingly cash generative which will fund further growth or contribute towards the group's dividend strategy. Movestic has a clear sales focus and targets a market share of 6% -10% of the advised occupational pension market. This focus ensures we are able to adopt a profitable pricing strategy.

INITIATIVES AND PROGRESS IN 2019

- During Q1 Movestic has continued to operate within its target market share range of between 6% and 10%. Q2 market data is not available at this time.

- New business profits of £2.3m for the period compare to £4.7m for H1 2018. Lower transfers in during the first quarter are a key contributor to this reduction, coupled with pressure on investment management income that have been witnessed in the period.

- Business transferred in has increased in Q2 compared with Q1 of this year.

FUTURE PRIORITIES

- Continue to focus on writing new business within our target range.

- Ongoing digitalisation of processes to improve broker and customer experience.

- Focus on increasing brand awareness.

KPIs (all comparatives have been presented using 2019 exchange rates)

Occupational pension market share %

New business profit

BUSINESS REVIEW n NETHERLANDS

Our Dutch division consists of two separate businesses; Scildon and Waard. Scildon is an open business, writing new policies focusing on three product markets via a broker network. Scildon is a well-established player in the term assurance market, the current market leader in unit-linked savings insurance and is a challenger brand in the Dutch defined contribution pension insurance market. Waard is in run-off, focusing on the efficient administration of its existing book of business.

2019 has seen further dividends received from both of our Dutch businesses and key actions being taken to strengthen the position of the Scildon new business operation whilst maintaining its market share. A small portfolio of policies has been acquired and will be transferred into Waard during the second half of 2019. Financial results have been impacted by market movements through interest and spread movements with a significant IFRS profit and EcV earnings reported but reductions in Scildon solvency and cash generation.

MAXIMISE VALUE FROM EXISTING BUSINESS

CAPITAL AND VALUE MANAGEMENT

BACKGROUND INFORMATION

- Both Waard and Scildon have a common aim to make capital available to the Chesnara group to fund further acquisitions or to contribute to the dividend funding. Whilst their aims are common, the dynamics by which the businesses add value differ:

o Waard is in run-off and has the benefit that the capital requirements reduce in-line with the attrition of the book.

o As an "open business" Scildon's capital position does not benefit from book run-off. It therefore adds value and creates surplus capital through writing new business and by efficient operational management and capital optimisation.

INITIATIVES AND PROGRESS IN 2019

- Acquisition of a small book of policies to be transferred into Waard upon completion of regulatory approvals, expected later in 2019.

- Restructured the Scildon business. The new streamlined structure has a lower cost base and supports product alignment and strategic flexibility.

- Waard and Scildon paid combined dividends of £8.4m to Chesnara in respect of 2018. The businesses ended the period with solvency ratios of 649% and 194% respectively, with Scildon having applied the volatility adjustment in the period.

- Whilst Scildon remains well capitalised, it has gone below its current internal management solvency target of 200%, primarily due to increased SCR in Scildon due to interest rate reductions and increased exposure to corporate bonds.

- Scildon has reported an EcV gain of £6.5m with Waard delivering a profit of £1.6m.

- Cash of £5.7m has been utilised in the period due to the SCR movements noted above.

- IFRS pre-tax profits of £39.6m primarily arising in Scildon due to asset value movements which are not offset by reserve movements.

- Continued work on aligning some functions between the two Dutch businesses to provide operational efficiencies.

FUTURE PRIORITIES

- Active management of capital to facilitate continued dividends from both divisions.

- Continuation of the Scildon improvement plan which will strengthen future cash generation and value growth.

- Review asset mix to optimise capital efficiency.

- Reduce the capital buffer from 100% to 85% from 1 January 2020 and 75% from 1 January 2021 thereafter, in line with the capital management plan that was agreed with the Dutch regulator at the point of acquisition.

- Agreement has been reached with trustees to transfer the Scildon staff pension scheme from a defined benefit to a defined contribution scheme. This will be enacted during the second half of the year.

KPIs (all comparatives have been presented using 2019 exchange rates)

Scildon has delivered underlying growth over the first six months of the year.

Scildon Economic Value

CUSTOMER OUTCOMES

BACKGROUND INFORMATION

- Great importance is placed on providing customers with high quality service and positive outcomes.

- Whilst the ultimate priority is the end customer, in Scildon we also see the brokers who distribute our products as being customers and hence developing processes to best support their needs is a key focus.

INITIATIVES AND PROGRESS IN 2019

- Scildon launched a digitised new business application for its investment product.

- Scildon continues to be rated highly, having received awards in 2018 for "Best occupational pension insurer" and was second for term insurance from the broker organisation (Adfiz).

- The annual performance research for consumers shows high scores.

FUTURE PRIORITIES

- Continuing to enhance and develop existing processes, customer experiences and the underlying infrastructure.

- Engage with brokers to support the development of our processes in conjunction with their requirements.

- Regular customer assessment, with the outcome used to improve service quality.

KPIs (all comparatives have been presented using 2019 exchange rates)

Scildon client satisfaction rating (out of 10)

GOVERNANCE

BACKGROUND

- Waard and Scildon operate in a regulated environment and comply with rules and regulations both from a prudential and from a financial conduct point of view.

INITIATIVES AND PROGRESS IN 2019

- The businesses further strengthened their governance framework during the first half of 2019 through appointments to the Supervisory Boards and implementation of changes in Scildon's management structure and personnel.

- The IFRS 17 project continues for both companies.

FUTURE PRIORITIES

- The focus during the second half of the year is to deliver continuous improvement of the control environment and the governance and risk management framework.

- Continue to deliver IFRS 17 implementation plans.

.

KPIs (all comparatives have been presented using 2019 exchange rates)

SOLVENCY RATIO: SCILDON 194%; WAARD 649%

Solvency is strong in both businesses. Scildon has reported a marginal reduction in surplus of £0.3m and Waard has generated surplus capital of £1.7m.

Scildon

Waard

ENHANCE VALUE THROUGH PROFITABLE NEW BUSINESS

PROFITABLE NEW BUSINESS

BACKGROUND INFORMATION

- Scildon brings a "New business" dimension to the Dutch division. Scildon sell protection, individual savings and group pensions contracts via a broker-led distribution model. The aim is to deliver meaningful value growth from realistic market share. Having realistic aspirations regarding volumes means we are able to adopt a profitable pricing strategy. New business also helps the business maintain scale and hence contributes to unit cost management.

INITIATIVES AND PROGRESS IN 2019

- Scildon generated half year new business profits of £1.5m, compared to £0.6m in 2018. This improvement reflects the initial impact of actions taken and further development remains a key focus of management.

- The number of policies continues to increase and are up by 2.4% compared to 2018 year end.

- Market share for the core protection business is within the 5-10% target range but we have further work to do to strengthen the proposition and reduce costs.

FUTURE PRIORITIES

- Management actions, including a focus on costs and product mix, are ongoing in order to generate a more commercially meaningful level of new business profits.

KPIs (all comparatives have been presented using 2019 exchange rates)

Scildon - term assurance market share %

Scildon - new business profit

Note: 2015 and 2016 are as reported under previous ownership.

BUSINESS REVIEW n ACQUIRE LIFE & PENSIONS BUSINESSES

Well considered and appropriately priced acquisitions maintain the effectiveness of the operating model, create a source of value enhancement and sustain the cash generation potential of the group.

HOW WE DELIVER OUR ACQUISITION STRATEGY

- Identify potential deals through an effective network of advisers and industry associates, utilising both group and divisional management expertise as appropriate.

- We primarily focus on acquisitions in the UK and Netherlands, although will consider other territories should the opportunity arise.

- We assess deals applying well established criteria which consider the impact on cash generation and Economic Value under best estimate and stressed scenarios.

- We work cooperatively with regulators.

- The financial benefits are viewed in the context of the impact the deal will have on the enlarged group's risk profile.

- Transaction risk is minimised through stringent risk-based due diligence procedures and the senior management team's acquisition experience and positive track record.

- We fund deals with a combination of debt, equity or cash depending on the size and cash flows of each opportunity.

HOW WE ASSESS DEALS

Cash generation

- Collectively our future acquisitions must be suitably cash generative to continue to fund the Chesnara dividend strategy.

Value enhancement

- Acquisitions are required to have a positive impact on the Economic Value per share under best estimate and certain more adverse scenarios.

Customer outcomes

- Acquisitions must ensure we protect, or ideally enhance, customer interests.

Risk appetite

- Acquisitions should normally align with the group's documented risk appetite. If a deal is deemed to sit outside our risk appetite the financial returns must be suitably compelling.

RISKS

- There is the risk that if a lack of suitable acquisition opportunities come to market at a realistic valuation, the investment case for Chesnara diminishes over time.

- There is the risk that we make an inappropriate acquisition that adversely impacts the financial strength of the group.

WHAT WE CAN DO ABOUT THIS

- Operating in three territories increases our options thereby reducing the risk that no further value adding deals are done.

- A broader target market also increases the potential for deals that meet our strategic objectives.

- Flexibility over the timing of subsequent capital extractions and dividend flows provide an element of management control over the sterling value of cash inflows.

- Each acquisition is supported by a financial deal assessment model which includes high quality financial analysis. This is reviewed and challenged by management and the board, mitigating the risk of a bad deal being pursued.

ACQUISITION OUTLOOK

- Overall, we have witnessed an increase in activity in the territories in which Chesnara currently operates and also in those territories outside where Chesnara exists. This increase has coincided with, what we perceive to be, a rise in seller's valuations and prices paid for potential targets.

- In light of the rising prices, it is worth reiterating that Chesnara continues to measure potential targets against its stringent acquisition assessment model which takes into account of (a) the price compared to the EcV, (b) the cash generation capability, (c) the strategic fit and (d) the risks within the target. We are committed to maintaining our discipline when assessing potential acquisitions and ensuring that any offer we make is in the interests of all of our stakeholders, with suitable reward for the additional risks taken on.

- The increase in the UK closed book market activity during 2019, is driven largely by strategic developments but also by uncertainty in the economic environment. We expect that these factors will continue to drive further opportunities going forward.

- In the Netherlands, the gradual increase in market activity has continued, with regulatory and strategic developments being the key drivers. Again, we see these themes continuing in the future. Chesnara is well positioned to take advantage of any opportunities.

- We continue to assess opportunities within Western Europe that are outside of our current territories. These opportunities are assessed against our acquisition assessment model, with particular consideration given to understanding the wider consolidation market that may be available and to the regulatory approach that exists in the territory.

- The environment in which European life insurance companies operate continues to increase in complexity. For example, "IFRS 17 Insurance Contracts" was issued in 2017, which is a fundamental overhaul of the way in which insurance contracts are accounted for. We believe this additional complexity will potentially drive further consolidation as institutions seek to remove operational complexity and potentially release capital or generate funds from capital intensive life and pension businesses.

- Chesnara has strong support from shareholder and lending institutions to progress our acquisition strategy. We also believe that our operating model has the flexibility to accommodate a wide range of potential target books. We assess our operating model on a regular basis, in light of expected acquisition trends, to ensure that we are able to provide a model which allows Chesnara to be competitive in the market and to meet the needs of all our stakeholders.

- We regularly assess our financing model to ensure that this aligned with our future cash generation expectations and to ensure that this continues to support our acquisition strategy.

- Our good network of contacts in the adviser community, who understand the Chesnara acquisition model, ensures that we are aware of most viable opportunities in the UK and Western Europe. With this in mind, we are confident that we are well positioned to continue the successful acquisition track record in the future.

CAPITAL MANAGEMENT n  SOLVENCY II

WHAT IS SOLVENCY AND CAPITAL SURPLUS?

- Solvency is a measure of how much the value of the company exceeds the level of capital it is required to hold.

- The value of the company is referred to as its "Own Funds" (OF) and this is measured in accordance with the rules of the newly adopted Solvency II regime.

- The capital requirement is again defined by Solvency II rules and the primary requirement is referred to as the Solvency Capital Requirement (SCR).

- Solvency is expressed as either a ratio: OF/SCR % or as an absolute surplus OF less SCR

SOLVENCY SURPLUS TO CASH GENERATION

Subject to ensuring other constraints are managed, surplus capital is a useful proxy measure for liquid resources available to fund items such as dividends, acquisitions or business investment. As such, Chesnara defines cash generation as the movement in surplus, above management buffers, during the period.

MORE ABOUT OWN FUNDS

WHAT ARE OWN FUNDS?

A valuation which reflects the net assets of the company and includes a value for future profits expected to arise from in-force policies.

The own fund valuation is deemed to represent a commercially meaningful figure with the exception of:

- Contract boundaries: Solvency II rules do not allow for the recognition of future cash flows on certain policies despite a high probability of receipt.

- Risk margin: The Solvency II rules require a "risk margin" liability which is deemed to be above the realistic cost.

- Restricted with profit surpluses: Surpluses in the group's with-profit funds are not recognised in Solvency II Own Funds despite their commercial value.

We define Economic Value (EcV) as being the Own Funds adjusted for the items above. As such our Own Funds and EcV have many common characteristics and tend to be impacted by the same factors.

Transitional measures, introduced as part of the long-term guarantee package when Solvency II was introduced, are available to temporarily increase Own Funds. We are well capitalised at both a group and subsidiary level. We have applied the volatility adjustment in Scildon for the first time in this period, but have not used any other elements of the long-term guarantee package within the rest of the group.

HOW DO OWN FUNDS CHANGE?

Own Funds (and Economic Value) are sensitive to economic conditions. In general, positive equity markets and increasing yields lead to OF growth and vice versa. Other factors that improve Own Funds include writing profitable new business, reducing the expense base and improvements to lapse rates.

MORE ABOUT THE CAPITAL REQUIREMENT

WHAT IS CAPITAL REQUIREMENT?

The solvency capital requirement can be calculated using a "Standard formula" or "internal model". Chesnara adopts the "Standard formula".

The standard formula requires capital to be held against a range of risk categories. The following table shows the categories and their relative weighting for Chesnara:

Note: The table above does not include the impact of diversification and the loss absorbing capacity of deferred tax.

There are three levels of capital requirement:

- Min dividend paying requirement: The board sets a solvency level above the SCR which means a more prudent level is applied when making dividend decisions.

- Solvency capital requirement: Amount of capital required to withstand a 1 in 200 event. The SCR acts as an intervention point for supervisory action including cancellation or the deferral of distributions to investors.

- Min capital requirement: The MCR is between 45% and 25% of the SCR. At this point Chesnara would need to submit a recovery plan which if not effective within three months may result in authorisation being withdrawn.

HOW DOES THE SCR CHANGE?

Given the largest component of Chesnara's SCR is market risk, changes in investment mix or changes in the overall value of our assets has the greatest impact on the SCR. For example, equity assets require more capital than low risk bonds. Also, positive investment growth in general creates an increase in SCR. Book run-off will tend to reduce SCR but this will be partially offset by an increase as a result of new business.

CHESNARA GROUP SOLVENCY METRICS

We are well capitalised at both a group and subsidiary level. We have applied the Volatility Adjustment in Scildon for the first time in this period, but have not used any other elements of the long-term guarantee package within the group.

CHESNARA GROUP

SOLVENCY POSITION

SOLVENCY SURPLUS MOVEMENT

THE COMMENTARY BELOW HIGHLIGHTS KEY POINTS IN THE YEAR TO DATE.

Surplus: The group has £170m of surplus over and above the internal capital management policy, compared to £168m at the end of 2018. The growth in surplus has arisen from an increase in Own Funds, which have risen more than the increase in capital requirements. The solvency position of the group has reduced slightly from 158% to 155%.

Dividends: The closing solvency position is stated after deducting the £11.1m proposed interim dividend (31 December 2018: £20.2m).

Own funds: Own Funds have risen by £35.6m, net of the £11.1m proposed interim dividend. This growth is driven by positive investment returns so far this year for Movestic and CA, particularly following significant gains in equity markets. In addition, £7.9m capital was transferred from the with-profits funds within the UK division. A decrease in spreads has also increased the value of Scildon's bond holdings.

SCR: The SCR has risen by £30.2m, with the overarching feature being an increase in equity risk capital, due to the impact of positive equity returns in the group's unit linked funds.

The numbers that follow present a divisional view of the solvency position which may differ to the position of the individual insurance company(ies) within that division. Note that prior year figures have been restated using 30 June 2019 exchange rates.

UK

SOLVENCY POSITION

Surplus: £26.0m above board's capital management policy.

Dividends: Dividend of £59.0m paid to Chesnara in May 2019.

Own Funds: Increased by £26.5m due to asset returns over the period and with-profits capital surplus transfer totalling £7.9m, partially offset by the impact of the fall in yield curve on the liabilities.

SCR: Increased by £8.7m, driven by market risk rise. Equity risk increased, due to equity market gains, which also has knock-on impacts on currency risk capital. Spread risk also rose with increased duration and risk profile of bond holdings.

SWEDEN

Surplus: £56.0m above board's capital management policy.

Dividends: Dividend of £2.7m was paid to Chesnara in May 2019.

Own Funds: Growth of £20.0m due to investment returns over the period, in particular following gains in equity markets. Partially offset by a strengthening of transfer rate assumptions and a reduction in future fund management income.

SCR: Capital requirements have risen by £22.0m. Equity risk is the main driver due to the equity market gains during the year. Mass lapse risk has also risen as a result of the subsequently increased value of policyholder units at risk.

NETHERLANDS - WAARD

Surplus: £35.0m above board's capital management policy.

Dividends: Dividend of £3.1m was paid to Chesnara in Q1 2019.

.

Own Funds: Growth of £1.9m, due to positive bond and equity returns and revised mortality assumptions.

SCR: Reduced by £0.1m, due to lower counterparty default risk, lower underwriting risk and lower spread risk (through modelling improvements). This was partially offset by an equity risk increase due to market gains.

NETHERLANDS - SCILDON

Surplus: £5.0m below board's capital management policy, but £8m above the new buffer that will apply from 1 January 2020. The company remains very strongly capitalised.

Dividends: Dividend of £5.0m was paid to Chesnara in Q1 2019.

Own Funds: Growth of £6.3m, principally due to increases in bond values. The impact of the yield curve fall was offset by the introduction of the Volatility Adjustment at Q219. This was partially offset by adverse lapse and mortality experience.

SCR: Increased by £6.8m. Spread risk rose due to a change in the corporate bond portfolio. Underwriting risks have increased due to the fall in yield curve.

CAPITAL MANAGEMENT n  SENSITIVITIES

The group's solvency position can be affected by a number of factors over time. As a consequence, the group's EcV and cash generation, both of which are derived from the group's solvency calculations, are also sensitive to these factors.

The table below provides some insight into the immediate and longer term impact of certain sensitivities that the group is exposed to, covering solvency, cash generation and Economic Value. As can be seen, EcV tends to take the 'full force' of adverse conditions whereas cash generation is often protected in the short term and, to an extent, in the longer term due to compensating impacts on our required capital.

Key:

FINANCIAL REVIEW

The key performance indicators are a reflection of how we have performed in delivering our three strategic objectives and our core culture and values. The first half of 2019 has been characterised by the growth in equity markets, principally in the first quarter of the year. This is generally good for IFRS and EcV results, but is more muted on solvency, and hence cash generation, due to the consequential rise in equity risk capital that is required to be held. In addition, a narrowing of spreads has been beneficial to our Dutch business.

Summary of each KPI:

IFRS

PRE-TAX PROFIT: £66.6M (30 JUN 2018: £26.5M)

TOTAL COMPREHENSIVE INCOME: £51.0M (30 JUN 2018: £14.9M)

What is it?

Presentation of the results in accordance with International Financial Reporting Standards (IFRS) aims to recognise the profit arising from the longer-term insurance and investment contracts over the life of the policy.

Why is it important?

IFRS profit is a statutory measure used both internally and by our external stakeholders in assessing the performance of the business. IFRS profit is an indicator of how we are performing against our stated strategic objective of 'maximising value from the existing business' and can also be impacted by one-off gains arising from delivering against our stated objective of 'acquiring life and pensions businesses'. Whilst the IFRS results form the core of reporting and hence retain prominence as a key financial performance metric, there is a general acceptance that the IFRS results in isolation do not adequately recognise the wider financial performance of a typical life and pensions business.

Risks

The IFRS profit can be affected by a number of our principal risks and uncertainties. In particular, volatility in equity markets and bond yields can result in volatility in the IFRS pre-tax profit, and foreign currency fluctuations can affect total comprehensive income. The IFRS results of Scildon are potentially relatively volatile, in part, due to the different approach used by the division for valuing assets and liabilities, as permitted under IFRS 4.

*includes other comprehensive income

- Strong results in Scildon and the UK drive substantial profits for the period, with positive contributions from all operating businesses.

- Both the Scildon and the UK benefited from improved investment market conditions compared to the prior year, with the group generating economic profits of £43.2m for the first half of 2019.

- Significant operating profits of £23.4m have also been delivered.

- Total comprehensive income includes a foreign exchange loss of £3.5m predominantly relating to sterling's appreciation against the Swedish krona.

CASH GENERATION

GROUP CASH GENERATION £13.4M (30 JUN 2018: £48.6M)

DIVISIONAL CASH GENERATION £2.4M (30 JUN 2018: £53.1M)

What is it?

Cash generation is a measure of how much distributable cash has been generated in the period. Cash generation is driven by the change in solvency surplus in the period, taking into account board-approved capital management policies.

Why is it important?

Cash generation is a key measure, because it is the net cash flows to Chesnara from its life and pensions businesses which support Chesnara's dividend-paying capacity and acquisition strategy. Cash generation can be a strong indicator of how we are performing against our stated objective of 'maximising value from the existing business'. However, our cash generation is always managed in the context of our stated value of maintaining strong solvency positions within the regulated entities of the group.

Risks

The ability of the underlying regulated subsidiaries within the group to generate cash is affected by a number of our principal risks and uncertainties. Whilst cash generation is a function of the regulatory surplus, as opposed to the IFRS surplus, they are impacted by similar drivers, and therefore factors such as yields on fixed interest securities and equity and property performance contribute significantly to the level of cash generation within the group.

Divisional cash generation

- Cash generation from the UK supports a muted divisional result, following cash utilisation in Sweden and Scildon.

- Whilst both Movestic and Scildon delivered substantial growth in Own Funds, there were increases in capital requirements for each division, resulting in cash utilisation for the period.

- Waard continued to contribute modest but stable cash generation.

- The result also includes the non-recurring benefit of a £7.9m capital transfer from restricted with profit funds in the UK.

Total cash generation

- Total group cash generation includes the impact of other group activities, primarily the impact of group expenses on own funds and a reduction in capital requirements upon consolidation of divisions.

ECONOMIC VALUE (EcV)

£645.1M (31 DEC 2018: £626.1M)

What is it?

Economic value (EcV) was introduced following the introduction of Solvency II at the start of 2016, with EcV being derived from Solvency II Own Funds. Conceptually, EcV is broadly similar to EEV in that both reflect a market-consistent assessment of the value of existing insurance business, plus adjusted net asset value of the non-insurance business within the group.

Why is it important?

EcV aims to reflect the market-related value of in-force business and net assets of the non-insurance business and hence is an important reference point by which to assess Chesnara's intrinsic value. A life and pensions group may typically be characterised as trading at a discount or premium to its Economic Value. Analysis of EcV provides additional insight into the development of the business over time.

The EcV development of the Chesnara group over time can be a strong indicator of how we have delivered to our strategic objectives, in particular the value created from acquiring life and pensions businesses and enhancing our value through writing profitable new business. It ignores the potential of new business to be written in the future (the franchise value of our Swedish and Dutch businesses) and the value of the company's ability to acquire further businesses.

Risks

The Economic Value of the group is affected by economic factors such as equity and property markets and yields on fixed interest securities. In addition, the EcV position of the group can be materially affected by exchange rate fluctuations. For example a 20.0% weakening of the Swedish krona and euro against sterling would reduce the EcV of the group by 14.5%, based on the composition of the group's EcV at 30 June 2019.

- Economic Value at the end of the June has risen to £645.1m.

- Earnings of £47.1m have been generated in the first half of the year, supported by favourable investment market conditions and economic returns.

- The increase in EcV during the period includes the impact of the payment of the year end 2018 dividend (£20.2m).

- Foreign exchange losses, arising on re-translating of the Dutch and Swedish divisions, have contributed to the overall reduction, primarily representing the strengthening of sterling against the Swedish krona since the start of the year.

ECV EARNINGS NET OF TAX

£47.1M (30 JUN 2018: £13.6M)

What is it?

In recognition of the longer-term nature of the group's insurance and investment contracts, supplementary information is presented that provides information on the Economic Value of our business.

The principal underlying components of the Economic Value result are:

- The expected return from existing business (being the effect of the unwind of the rates used to discount the value in-force);

- Value added by the writing of new business;

- Variations in actual experience from that assumed in the opening valuation;

- The impact of restating assumptions underlying the determination of expected cash flows; and

- The impact of acquisitions.

Why is it important?

By recognising the market-related value of in-force business (in-force value), a different perspective is provided in the performance of the group and on the valuation of the business. Economic Value earnings are an important KPI as they provide a longer-term measure of the value generated during a period. The Economic Value earnings of the group can be a strong indicator of how we have delivered against all three of our core strategic objectives. This includes new business profits generated from writing profitable new business, Economic Value profit emergence from our existing businesses, and the Economic Value impact of acquisitions.

Risks

The EcV earnings of the group can be affected by a number of factors, including those highlighted within our principal risks and uncertainties and sensitivities analysis. In addition to the factors that affect the IFRS pre-tax profit and cash generation of the group, the EcV earnings can be more sensitive to other factors such as the expense base and persistency assumptions. This is primarily due to the fact that assumption changes in EcV affect our long-term view of the future cash flows arising from our books of business.

- EcV earnings of £47.1m have been generated in the first half of the year.

- Economic earnings drive the result following an upturn in market conditions since the start of the year, primarily equity market returns and the narrowing of bond spreads.

- Underlying operating activities were loss making, suffering from the impact of the strengthening of assumptions in Movestic and operating experience in Scildon. The UK and Waard delivered positive operating earnings.

- Material other operating items relate to one-off strengthening of assumptions in Movestic, following changes to the transfer process and upcoming changes to local transfer legislation.

FINANCIAL REVIEW n  IFRS

IFRS PRE-TAX PROFIT

£66.6M (30 JUN 2018: £26.5M)

IFRS TOTAL COMPREHENSIVE INCOME

£51.0M (30 JUN 2018: £14.9M)

Executive summary

The group IFRS results reflect the natural dynamics of the segments of the group, which can be characterised in three major components:

(1) Stable core: At the heart of surplus, and hence cash generation, are the core CA and Waard Group segments. The requirements of these books are to provide a predictable and stable platform for the financial model and dividend strategy. As closed books, the key is to sustain this income source as effectively as possible. The IFRS results below show that the stable core continues to deliver against these requirements.

(2) Variable element: Included within the CA segment is the Save & Prosper book. This can bring an element of short-term earnings volatility to the group, with the results being particularly sensitive to investment market movements due to product guarantees. The IFRS results of Scildon are potentially relatively volatile although this is, in part, due to reserving methodology rather than 'real world' value movements.

(3) Growth operation: The long-term financial models of Movestic and Scildon are based on growth, with levels of new business and premiums from existing business being targeted to more than offset the impact of policy attrition, leading to a general increase in assets under management and, hence, management fee income.

IFRS results

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

FINANCIAL REVIEW n  CASH GENERATION

GROUP CASH GENERATION

£13.4M (30 JUN 2018: £48.6M)

DIVISIONAL CASH GENERATION

£2.4M (30 JUN 2018: £53.1M)

Cash in the business is generated from increases in the group's surplus funds. Surplus funds represent the excess of net assets held over management's internal capital needs, as reflected in the capital management policies across the group. These are based on regulatory capital requirements, with the inclusion of additional "management buffers".

GROUP

- Group cash generation is slightly muted compared to the same period in 2018. Whilst there are a number of moving parts, the main contributing factor is the capital requirement impact of the growth in equity markets during the period. The Solvency II equity risk capital requirement rules include a concept called the symmetric adjustment, which requires proportionally more equity risk capital to be held in rising markets, which subsequently unwinds over time. It is estimated that the symmetric adjustment movement in the period has supressed cash generation by some £13.1m, and mainly impacted the UK and Swedish divisions.

- Other group activities reflect group expenses and the impact of consolidation routines, specifically movements in capital requirements determined at a group level. From a capital requirement perspective, this is driven by movements in required capital at a Chesnara holding company level coupled with consolidation adjustments. At a Chesnara holding company level, additional capital is principally required to be held for the currency risk associated with the Movestic, Scildon and Waard Group surplus assets.

UK

- The UK has delivered a healthy cash contribution to the group in the first half of 2019.

- Own Funds growth was the driver of cash generation for the division, underpinned by investment market gains coupled with the benefit of a £7.9m transfer of surplus form the with-profits funds.

- The improved investment market conditions have also had a negative impact on cash generation, driving an increase in capital requirements, off-setting the positive own funds growth. Key components included increases in equity and currency risk (following equity market gains) and a rise in spread risk (owing to greater corporate bond exposure).

SWEDEN

- Sweden has utilised cash of £8.0m in the first half of the year, with growth in own funds being more than off-set by increasing capital requirements.

- Own Funds have benefitted from growth in assets under management, and hence growth in future fee income, driven by rising equity markets. This growth was partially offset by a strengthening of assumptions relating to transfers and fund rebates. A more prudent outlook on future rebates and fees has been assumed due to the competitive market expectations.

- Conversely, asset growth also demanded a higher level of capital to be held within the business. Equity gains have led to increased exposure to equity risk and currency risk, with the knock-on effect of rising lapse risk, due to higher future returns.

- SEK depreciation against sterling resulted in an exchange loss of £2.2m.

NETHERLANDS - WAARD

- The Waard Group has continued to supply modest but stable cash generation, with positive movements in both Own Funds and capital requirements.

- Positive movements in Own Funds were, in the main, derived from economic sources following investment market improvements, specifically reductions on bond interest and an upward trend in equities.

- This was also supported by favourable mortality experience and subsequent assumption changes.

- Capital requirements have not changed materially in the period, whilst the impact of foreign exchange movements was also marginal.

NETHERLANDS - SCILDON

- Scildon has reported cash utilisation in the period, with the increase in required capital exceeding the growth in Own Funds.

- Economic gains, principally owing to the narrowing of bond spreads in the early stages of the year, were the primary factor behind the increase in Own Funds, offsetting some operating losses.

- The increase in capital requirements was also largely due to economic factors, in particular spread risk capital, driven by rising bond values. The movement also includes an adverse impact of c£8.3m due to increases in lapse risk capital.

- Whilst the lapse strain is reported locally it does reverse out at a consolidated group capital level which is a major part of the positive group capital movement reported above.

FINANCIAL REVIEW n  EcV EARNINGS

EcV EARNINGS

£47.1M (30 JUN 2018: £13.6M)

The group delivered strong EcV earnings in the period, aided by improved economic conditions since the start of the year, offset by some one-off operating losses.

Analysis of the EcV result in the period by earnings source:

Analysis of the EcV result in the year by business segment:

Note 1 - Economic conditions: The EcV result is sensitive to investment market conditions, as reflected by the £85.3m of economic earnings achieved in the period. A significant proportion of these earnings were driven by favourable movement in equities and corporate bonds. Key movements in investment market conditions during the period are as follows:

- The FTSE All share index has increased by 10.4% in the 6 months to 30 Jun 2019 (6m to 30 Jun 2018: decreased by 0.5%; - 12m to 31 Dec 2018: decreased by 13.0%)

- The Swedish OMX all share index has increased by 16.9% in 6 months to 30 Jun 2019 (6m to 30 Jun 2018: increased by 0.9%; 12m to 31 Dec 2018, decreased by 7.7%)

- The Netherland AEX all share index has increased by 15.7% in 6 months to 30 Jun 2019 (6m to 30 Jun 2018: decreased by 0.2%; 12m to 31 Dec 2018, decreased by 11.7%), and

- 10 year UK gilt yields have decreased from 1.32% to 0.91%. in the 6 months to 30 Jun 2019.

Note 2 - Material other operating items: This includes operating items that were individually material and have therefore been separately analysed to aid an understanding of the operating result. There are two components to the number, both of which relate to operations in Movestic. A strengthening of assumed transfer rates (£6.0m) was undertaken to reflect recent changes in the transfer out process and to align with upcoming changes to local legislation. The remaining element relates to a one-off adjustment in transfer fee modelling (£3.5m), also a consequence of the changes to transfer legislation.

Note 3 - UK: The UK delivered earnings of £25.2m in the first half of the year. Solid operating earnings of £2.8m were driven by favourable movements in both mortality experience and fee income. Lower than expected rates of attrition across the books of business, resulted in higher assumed future fee income. Economic profits of £26.4m underpin the result, supported by market conditions. The key component driving the economic result being investment returns achieved, predominantly, on equity holdings within the unit linked funds. A fall in the yield curve had an adverse impact on the result, due to the subsequent strengthening of economic assumptions, partially offsetting the equity driven gains.

Note 4 - Sweden: Movestic reported earnings of £13.9m for the period, with the result underpinned by investment market returns. Economic earnings of £36.8m predominantly arose from growth in equity investments. This was reflected by the closing policyholder average investment return of 11.7% (2018: -6.0%). While operating experiences were favourable, the strengthening of other assumptions resulted in operating losses. The main assumption changes include increased lapse rates resulting from legislative changes regarding procedures for processing transfers, regulatory changes to transfer-out charges and reductions in assumed future performance fees and fund rebates.. New business profits were modest (£2.3m) and reflective of the challenging market, with lower sales volumes of transfers-in during the early stages of the year.

Note 5 - Netherlands: The Dutch division has reported earnings of £8.1m in the period. Scildon contributed earnings of £6.5m following valuation gains in its bond portfolio, offsetting operational losses driven by lapse and mortality experience. Waard delivered earnings of £1.6m, with operating profits benefitting from favourable mortality experience and subsequent assumption changes, whilst economic earnings stemmed from bond performance and equity market returns.

Note 6 - Group: In line with expectations, a small loss has been reported in the group component. This includes costs incurred at group level, dividend payments and the impact of consolidation activities.

FINANCIAL REVIEW n  EcV

EcV position

£645.1M (31 DEC 2018: £626.1M)

The Economic Value of Chesnara represents the present value of future profits of the existing insurance business, plus the adjusted net asset value of the non-insurance business within the group. EcV is an important reference point by which to assess Chesnara's intrinsic value.

Value movement: 1 Jan 2019 to 30 Jun 2019:

EcV earnings: EcV earnings of £47.1m have been reported in the first half of the year.

Dividends: Under EcV, dividends are recognised in the period in which they are paid. Dividends of £20.2m were paid during the period, being the final dividend from 2018.

Foreign exchange: The EcV of the group suffered a foreign exchange loss in the period, largely driven by the strengthening of sterling against the Swedish krona.

EcV by segment at 30 Jun 2019:

The above table shows that the EcV of the group is diversified across its different markets, demonstrating that we are well-balanced and not over-exposed to one particular geographic market.

EcV to Solvency II:

Our reported EcV is based on a Solvency II assessment of the value of the business, but adjusted for certain items where it is deemed that Solvency II does not reflect the commercial value of the business. The above table shows the key differences between EcV and SII, with explanations for each item below.

Risk margin: Solvency II rules require a significant 'risk margin' which is held on the Solvency II balance sheet as a liability, and this is considered to be materially above a realistic cost. We therefore reduce this margin for risk for EcV valuation purposes from being based on a 6% cost of capital to a 3.25% cost of capital.

Contract boundaries: Solvency II rules do not allow for the recognition of future cash flows on certain in-force contracts, despite the high probability of receipt. We therefore make an adjustment to reflect the realistic value of the cash flows under EcV.

Own Funds restrictions: Solvency II rules require a restriction to be placed on the value of certain ring-fenced funds. These restrictions are reversed for EcV valuation purposes as they are deemed to be temporary in nature.

Dividends: The proposed interim dividend of £11.1m is recognised for SII regulatory reporting purposes. It is not recognised within EcV until it is actually paid.

RISK MANAGEMENT

Managing risk is a key part of our business model. We achieve this by understanding the current and emerging risks to the business, mitigating them where appropriate and ensuring they are appropriately monitored and managed at all times.

HOW WE MANAGE RISK

RISK MANAGEMENT SYSTEM

The risk management system supports the identification, assessment, and reporting of risks along with coordinated and economical application of resources to monitor and control the probability and/ or impact of adverse outcomes within the board's risk appetite or to maximise realisation of opportunities.

Strategy: The risk management strategy contains the objectives and principles of risk management, the risk appetite, risk preferences and risk tolerance limits.

Policies: The risk management policies implement the risk management strategy and provide a set of principles (and mandated activities) for control mechanisms that take into account the materiality of risks.

Processes: The risk management processes ensure that risks are identified, measured/ assessed, monitored and reported to support decision making.

Reporting: The risk management reports deliver information on the material risks faced by the business and evidence that principal risks are actively monitored and analysed and managed against risk appetite. 

RISK PROCESSES

Risk management processes are applied at a group, divisional and business unit level and are documented within a set of board approved risk policies, for each category of risk.

Chesnara adopts the "three lines of defence" model across the group taking into account size, nature and complexity, with a single set of risk and governance principles applied consistently across the business.

In all divisions we maintain processes for identifying, evaluating and managing all material risks faced by the group, which are regularly reviewed by the divisional and group Audit & Risk Committees. Our risk assessment processes have regard to the significance of risks, the likelihood of their occurrence and take account of the controls in place to manage them. The processes are designed to manage the risk profile within the board's approved risk appetite.

Group and divisional risk management processes are enhanced by stress and scenario testing, which evaluates the impact on the group of certain adverse events occurring separately or in combination. The results, conclusions and any recommended actions are included within divisional and group ORSA Reports to the relevant boards. There is a strong correlation between these adverse events and the risks identified in 'Principal risks and uncertainties'. The outcome of this testing provides context against which the group can assess whether any changes to its risk appetite or to its management processes are required.

CHESNARA RISK PREFERENCES

The Chesnara board has approved a set of risk preferences which articulate, in simple terms, the desire to increase, maintain, or reduce the level of risk taking for each main category of risk. The risk position of the business is monitored against these preferences using risk tolerance limits, where appropriate, and they are taken into account by the management teams across the group when taking strategic or operational decisions that affect the risk profile.

PRINCIPAL RISKS AND UNCERTAINTIES

The following table outlines the principal risks and uncertainties of the group. It has been drawn together following regular assessment performed by the Audit and Risk Committee of the principal risks facing the group, including those that would threaten its business model, future performance, solvency or liquidity.

The impacts are not quantified in the table. However, by virtue of the risks being defined as principal, the impacts are potentially significant.

GOING CONCERN

The directors have considered the ability of the group to continue on a going concern basis. As such the board has performed an assessment as to whether the group can meet its liabilities as they fall due for a period of at least 12 months from which this half year report has been signed.

In performing this work, the board has considered the current cash position of the group and company, coupled with the group's and company's expected cash generation as highlighted in its most recent business plan, which covers a three year period. The business plan considers the financial projections of the group and its subsidiaries on both a base case and a range of stressed scenarios, covering projected IFRS, EcV and solvency positions. These projections also focus on the cash generation of the life insurance divisions and how these flow up into the Chesnara parent company balance sheet, with these cash flows being used to fund debt repayments, shareholder dividends and the head office function of the parent company.

The information set out above indicates a strong Solvency II position as at 30 June 2019 as measured at both the individual regulated life company levels and at the group level. As well as being well-capitalised the group also has a healthy level of cash reserves to be able to meet its debt obligations as they fall due, and does not rely on the renewal or extension of bank facilities to continue trading. The group's subsidiaries do, however, rely on cash flows from the maturity or sale of fixed interest securities which match certain obligations to policyholders, which brings with it the risk of bond default. In order to manage this risk we ensure that our bond portfolio is actively monitored and well diversified. Other significant counterparty default risk relates to our principal reinsurers. We monitor their financial position and are satisfied that any associated credit default risk is low.

In light of this information, the board has concluded that the group and company has adequate resources to continue in operational existence for at least 12 months from the date of approval of this half year report, and as a result the IFRS Financial Statements have been prepared on a going concern basis.

DIRECTORS' RESPONSIBILITIES STATEMENT

We confirm that to the best of our knowledge:

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

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

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

By order of the Board

Peter Mason John Deane

Chairman Chief Executive Officer

28 August 2019 28 August 2019

INDEPENDENT AUDITOR'S REVIEW REPORT TO THE MEMBERS OF CHESNARA PLC

We have been engaged by the company to review the condensed set of consolidated financial statements in the half-yearly financial report for the six months ended 30 June 2019 which comprises the condensed consolidated statement of comprehensive income, the condensed consolidated balance sheet, the condensed consolidated statement of changes in equity, the condensed consolidated statement of cash flows and related notes 1 to 8. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

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

Directors' responsibilities

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

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

Our responsibility

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

Scope of review

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

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2019 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Deloitte LLP

Statutory Auditor

Edinburgh

United Kingdom

28 August 2019

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME