Chesnara Regulatory News (CSN)

Chesnara plc

Strength in numbers: Strong cash generation in UK, supported by positive contributions from Sweden and the Netherlands

During the first half of 2018, a period in which equity markets remained broadly unchanged, we continued to generate more than sufficient cash to fund the dividend strategy, though we saw a fall in our Economic Value following the payment of the final 2017 dividend and foreign exchange losses as a result of a weakening of the Swedish krona.

· 3.00% increase in interim dividend compared with 2017

The results in the period support the continued growth of the dividend to 7.21p per share (2017 interim: 7.00p per share).

· Group cash generation of £48.6m (six months ended 30 June 2017: £(2.7)m Note 1)

It is useful to note that both the 2018 figure and the prior year comparison were impacted by particularly material items. The 2018 result benefits from a £26.8m release of surplus previously constrained in the UK with-profits funds. The 2017 comparison includes a £55.3m adverse effect of completing the acquisition of L&G Netherland.

· Divisional cash generation of £53.1m (six months ended 30 June 2017: £54.8m) Note 2

All divisions have made positive contributions, with the exception of Scildon, where operational gains were offset by the impact of losses on Italian bond holdings. The 2018 UK divisional result benefits from a £26.8m release of surplus previously constrained in the with profit fund.

· Group solvency ratio of 157% (31 December 2017: 146%)  

We continue to be well capitalised at both group and subsidiary level.

· Economic Value (EcV) of £700.8m (31 December 2017: £723.1m) Note 3

The movement is stated after recognising £19.6m of dividend payments and a foreign exchange loss of £16.4m during the period.

· EcV earnings net of tax of £13.6m (six months ended 30 June 2017: £105.8m)

The 2017 result includes a non-recurring £65.4m gain arising from the L&G Netherland acquisition.

· EcV new business contribution of £5.3m (six months ended 30 June 2017: £7.1m)

Solid new business profits have emerged from Movestic. Scildon's new business operation is not generating sufficient profit although positive volume trends and the recent launch of a new mortgage term product should begin to address this issue.

· IFRS profit before tax of £26.5m (six months ended 30 June 2017: £51.6m)

The 2017 result includes a £20.7m gain on the acquisition of L&G Netherland. The underlying core operating profit improved to £27.3m (2017 interims: £16.6m). Economic loss of £0.8m compared to a corresponding profit of £14.3m in the first half of 2017.

· IFRS Total Comprehensive Income of £14.9m (six months ended 30 June 2017: £53.8m)

This includes a foreign exchange loss of £6.9m (2017: £7.1m gain). The 2017 result includes the aforementioned £20.7m gain on the acquisition of L&G Netherland.

· Good progress with Scildon development programme

We have made good progress with the post-acquisition development programme.

John Deane, Chief Executive said:

"I am pleased to report that during the first half of 2018, a period in which equity markets remained broadly unchanged, we continued to generate more than sufficient cash to fund the dividend strategy, though we saw a fall in our Economic Value following the payment of the final 2017 dividend and foreign exchange losses as a result of a weakening of the Swedish krona.

The strong 2017 results were most welcome as they reflected the benefits that can arise from successful acquisitions and from positive market conditions, but it is equally important that the business, as in the first half of this year, can generate sufficient cash in the absence of acquisitions and without the assistance of economic tailwinds.

We have made good progress with the Scildon development programme and I am pleased to report a 29% increase in the sales of Term contracts compared to the first half of 2017. There is more to do and time is required but I am encouraged by the improvements during the year."

Note 1 A £48.9m one-off positive impact in respect of equity raised ahead of completion of the acquisition of L&G Netherland, was included in the 2016 result. We highlighted this as a temporary impact in our 2016 accounts. As expected, on completion, the 2017 result included a consequential negative impact of £55.3m. The end to end impact of the acquisition of L&G Netherland resulted in a day 1 surplus cash reduction of £6.4m. Our reported group cash generation of £46.2m for the six months to 30 June 2017 was reported on an adjusted basis. The 2017 comparative has subsequently been re-stated to reflect the reversal of the £48.9m positive equity raise impact and aligns the half-year result with the basis presented in our 2017 Annual Report and Accounts.

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 29 August 2018.

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 Netherland) 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 £26.5M SIX MONTHS ENDED 30 JUNE 2017 £51.6M

The 2017 result includes a £20.7m gain on acquisition of Legal & General Nederland.

IFRS TOTAL COMPREHENSIVE INCOME £14.9M SIX MONTHS ENDED 30 JUNE 2017 £53.8M

The 2018 result includes a foreign exchange loss of £6.9m (2017: gain of £7.1m). The 2017 result includes a £20.7m gain on acquisition of Legal & General Nederland.

GROUP SOLVENCY 157% 31 DECEMBER 2017 146%

We are well capitalised at both group and subsidiary level and under Solvency II have not used any elements of the long term guarantee package, including transitional arrangements.

ECONOMIC VALUE £700.8M 31 DECEMBER 2017 £723.1M

Movement in the period is stated after dividend distributions of £19.6m and includes a foreign exchange loss of £16.4m.

ECONOMIC VALUE EARNINGS £13.6M SIX MONTHS ENDED 30 JUNE 2017 £105.8M

The 2017 result includes a non-recurring £65.4m gain arising on the acquisition of Legal & General Nederland.

NEW BUSINESS PROFIT £5.3M SIX MONTHS ENDED 30 JUNE 2017 £7.1M

GROUP CASH GENERATION £48.6M SIX MONTHS ENDED 30 JUNE 2017 £(2.7)M*

The cash generation figures can be impacted by one-off items. The 2018 result benefits from a £26.8m release of surplus previously constrained in the UK with-profit fund. The 2017 comparison includes a £55.3m adverse effect of completing the acquisition of Legal & General Nederland.

* restated - see "Cash generation" section below for further detail.

DIVISIONAL CASH GENERATION £53.1M SIX MONTHS ENDED 30 JUNE 2017 £54.8M

The 2018 group cash result benefits from a £26.8m release of previously constrained surplus within the UK with-profit fund.

INTERIM DIVIDEND INCREASE

Interim dividend increased by 3.00% to 7.21p per share (2017: 7.00p interim and 13.07p final).

LIMITED EQUITY GROWTH AND WEAKENING SWEDISH KRONA

A more subdued equity market performance in the period compared with the same period in 2017. Falling Italian bond values have adversely impacted Scildon investment performance. Swedish krona has weakened against Sterling by 6% since the start of the year.

GROUP-WIDE IFRS 17 PROGRAMME IS PROGRESSING TO PLAN

The 'impact assessment' phase of the group and divisional IFRS 17 programme is in progress and will complete in Q3. The multi-year design and implementation phase will begin later in 2018.

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 list 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 to be 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 a measure of how much distributable surplus has been generated in the period, which supports the ability of the group to pay its dividends. It is driven by the change in solvency surplus, taking into account board-approved capital management policies.

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 2018, a period in which equity markets remained broadly unchanged, we continued to generate more than sufficient cash to fund the dividend strategy, though we saw a fall in our Economic Value following the payment of the final 2017 dividend and foreign exchange losses as a result of a weakening of the Swedish krona.

The strong 2017 results were most welcome as they reflected the benefits that can arise from successful acquisitions and from positive market conditions, but it is equally important that the business, as in the first half of this year, can generate sufficient cash in the absence of acquisitions and without the assistance of economic tailwinds.

We have made good progress with the Scildon development programme and I am pleased to report a 29% increase in the sales of term contracts compared to the first half of 2017. There is more to do and time is required but I am encouraged by the improvements during the year.

Against a backdrop of continuing political uncertainty, economic volatility and during a period of significant operational development, the Chesnara business model has held up well.

At the heart of Chesnara's position as a reliable income stock, the UK book has continued to generate sufficient cash to fund the Chesnara dividend and the recent trend of Movestic making meaningful positive cash contributions continues. Movestic's new business profits have remained within their target range.

As we have previously reported, Scildon remains in transition and this is reflected in its short term financial results. The successful launch of a new mortgage term assurance product was too late during the period to have a meaningful impact on the results. Although a slight increase in new business volumes was reassuring, the fact that the new business operation only made modest profits serves to highlight the importance of successfully implementing the Scildon improvement initiatives.

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

The headline results for the first half of 2018 generally suffer by comparison to the first half of 2017. The 2017 results were unusually strong due to a combination of non-recurring items (including the completion of the acquisition of Legal & General Nederland) and highly beneficial economic conditions. However, total cash generated exceeds the cost of the full annual 2017 dividend.

In addition to funding an attractive dividend strategy, we have a long-term objective to at least protect the post dividend Economic Value of the group. This means that over time we aim to create value at least to the level of the annual dividend. Due to the sensitivity of the Economic Value to key investment market variables, it can be particularly difficult to meet this Economic Value protection objective in periods where conditions are adverse. Also, the dividend outflow strain is concentrated to the first half of the year. Economic Value profits during the period were insufficient to cover the payment of the final 2017 dividend, largely due to the adverse impact of a Swedish Krona weakening against Sterling. This does not give rise to any particular undue concern, with management's focus primarily being on managing the core operating results of the group.

When assessed in terms of levels of cash generated in the period we have, with the exception of Scildon, delivered broadly in line with expectations. £16.1m of cash emerged from the UK division during the period which, together with £26.8m of previously constrained surplus released from the with-profits fund, resulted in total cash significantly in excess of recent dividend payments. Movestic has increased its level of surplus resulting in a further £7.3m of cash generation. Scildon has reported negative cash generation of £2.3m. This is primarily due to the impact of valuation pressures on its fixed interest investments. The result in the period does not in itself impact our view regarding the future cash generation of the business.

Value growth in the period has been more muted. EcV earnings of £13.6m have been delivered, which includes a loss of £6.5m arising in Scildon due to the aforementioned investment value movements. Foreign exchange losses of £16.4m have also emerged in the period, largely as a result of a weakening of Swedish krona. These factors, coupled with the payment of the year end dividend of £19.6m have resulted in a reduction in EcV since the start of the year of 3%.

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

During the period we finalised arrangements to form a broader debt syndicate and this, together with increases in solvency surplus, means we are in a strong position to fund future acquisitions where they meet our assessment criteria.

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 the proportion of Economic Value lost by way of dividend payments. Movestic continues to deliver within its target profit range with a profit for the six months to 30 June 2018 of £4.7m. This represents a slight reduction compared to 2017 mainly due to adopting a more prudent assessment of the profitability of increments to existing policies. Profits from new contracts remain broadly consistent with 2017.

Scildon are not currently generating sufficient new business profits. This is very much in line with our expectation at this stage and the need to drive profitability improvements over the coming years was factored into our acquisition price and has been clearly reported to shareholders. The expected cost of the improvement programme has been fully provided for.

I will take this opportunity to provide a little more detail about Scildon's recent performance and importantly the status of transition plans. Whilst new business volumes have actually increased slightly compared to the same period of 2017, the associated modest new business result has yet to reflect the expected positive impact of the improvement programme. Scildon successfully launched a new mortgage term assurance product towards the back end of the half year period.

SOLID NEW BUSINESS PROFITS HAVE EMERGED FROM MOVESTIC IN A CHALLENGING MARKET. SCILDON'S NEW BUSINESS OPERATION IS NOT GENERATING SUFFICIENT PROFIT AND THE FOCUS OVER THE COMING YEARS IS TO ADDRESS THIS ISSUE.

The successful launch of a new mortgage term assurance product is a first positive step on our Scildon improvement plan.

Solvency

The group continues to show a robust solvency position, with a solvency ratio of 157% at 30 June 2018 (31 December 2017: 146%). A large contributing factor to this increase is a £26.8m release of capital from the UK's with profit funds, which positively benefitted own funds in the period. The closing solvency position is stated after recognising the £10.8m cost of the interim dividend, which will be paid in October 2018.

Regulation and governance

IFRS 17

I have previously commented on the scale of the task, to both Chesnara and the wider industry, associated with delivering the new insurance accounting standard, IFRS 17. Our programme has progressed well in the period, with our immediate focus being on delivering an impact assessment. This deals with an initial early view on the technical application of the standard to the group and its associated financial and operational impacts. This initial work is expected to conclude during Q3 this year, and then transition to the implementation phase. 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. During the period we have delivered our GDPR readiness programmes, with the new rules coming into force on 25 May 2018.

The investigation into how Countrywide Assured disclosed exit fees to customers, initially announced on 3 March 2016, is ongoing. We have provided the FCA with all information requested. Discussions continue and given the narrow scope of the investigation we retain our opinion that the outcome from the investigation will not have a material impact on the company.

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 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 ability to generate cash in less economically beneficial conditions, as has been the case during the first half of 2018, further supports my optimism.

In particular, the UK business remains a robust source of cash, with additional potential to take management actions to enhance the core cash if required. Movestic now has the scale to continue contributing to the cash position. Scildon has significant surplus capital and despite the negative cash emerging during the period, is also expected to be cash generative on an ongoing basis.

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. 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, we are in a strong position to take advantage of the 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.

Movestic has become an established profitable new business operation. We recognise that current new business profits from Scildon are not sufficient. However, the fact that we have recorded a modest profit calculated on a suitably stringent basis of assessment, together with the expected positive impact of the newly launched mortgage term protection contract does create an improved platform upon which we aim to deliver further profit growth over the coming years.

The structure of the group, with established regulated entities in several 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 light of the above I remain confident that Chesnara is well positioned to continue to provide value to policyholders and shareholders.

Peter Mason

Chairman

29 August 2018

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 | UK

The UK division manages c287,000 policies and is in run-off. The division 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 continues to be delivered and the division remains focused on good governance of the business. The results for the period show strong cash generation and underlying Economic Value growth. 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 2018

- EcV earnings of £8.4m in the period.

- Cash of £42.9m has been generated. This includes an exceptional cash generation of £26.8m arising from releasing trapped capital from the division's two ring-fenced with profit funds. Full consideration was given to the protection of the company's with-profit customers prior to this capital release, which was approved by the Financial Conduct Authority.

- IFRS profit of £27.6m. This includes the positive impact of £8.6m arising from a refinement to the way policyholder tax obligations are reserved for.

- The results have benefitted from improvements in the look-through of our asset holdings, resulting in a reduction in required capital in the period.

FUTURE PRIORITIES

- Continue to focus on initiatives to optimise the balance between value growth and surplus capital availability.

KPIs

Continued underlying growth in economic value after removing the impact of dividends

Cash generation of £42.9m, which includes a one-off surplus transfer from WP funds, continues to support the group's dividend strategy.

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 2018

- The division's customer strategy implementation programme has progressed well and is on track. The programme focuses on developing our business as usual processes to ensure they remain up to date with the expectations of policyholders and regulators. Specific activity has included developing enhanced policyholder communications, such as pension annual statements, ready for implementation later this year. The refreshed communications have drawn from a combination of customer research and expert guidance.

- A refreshed Countrywide Assured website was launched during the period. A second phase update is expected later this year.

- Our Vulnerable Customer Strategy has been implemented, providing additional support and reasonable adjustments to policy and processes in order to ensure fair customer outcomes.

- As part of our customer engagement programme we have been progressing our 'goneaways' programme to help re-connect with our customers.

- Our main managed funds have out-performed benchmarks.

FUTURE PRIORITIES

- Implement and deliver updated customer communications.

- Deliver identified improvements to customer claims processes.

- Continue with customer 'goneaways' work.

- Implement the second phase of the CA website development, enhancing both engagement with customers and also their access to information.

KPIs

Policyholder fund performance

Our main managed funds continue to out-perform their 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 2018

- The General Data Protection Regulation (GDPR) project was completed prior to the rules coming into force on 25 May 2018.

- The division's IFRS 17 project is underway, with the initial impact assessment expected to conclude in Q3.

- The FCA's investigation into the level of disclosure of exit charges to customers, which was announced in March 2016, remains open. Full ongoing support has been provided to the FCA. We have completed nine separate information requests to date and understand that the FCA is reviewing these. We believe that our disclosures to customers were consistent with that of the industry and met the regulatory requirements for the period covered by the investigation.

FUTURE PRIORITIES

- Ensure we continue to stay on top of the regulatory change agenda. For example, there remains ongoing regulatory focus on the pensions and retirement income sectors, and the team is monitoring developments to ensure that we respond to any future consultation papers and/or policy statements as appropriate. The new Senior Managers & Certification Regime, designed to strengthen individual accountability in insurance, will apply to the business from December 2018.

- Delivery of the IFRS 17 programme will continue and will require significant resource.

KPIs

SOLVENCY RATIO: 168%

Solvency remains robust. The surplus generated in the period increases the solvency position from 130% to 168%.

BUSINESS REVIEW | SWEDEN

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

Movestic has delivered a positive set of results across key financial metrics. Its new business operation continues to add value to the group and assets under management growth continues to support the division in achieving its ambitions on scale. The division will continue to focus on it's IT streamlining plans, which are anticipated to bring cost efficiencies and improvements in broker and policyholder experience.

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) and by optimising the income that the assets generate, whilst assuring a high quality customer proposition. 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 2018

- EcV earnings of £10.6m in the period.

- Cash of £10.6m has been generated, on constant exchange rates (£7.3m post foreign exchange retranslation).

- IFRS profit of £4.7m.

- Assets under management have grown by 6.7% in the period, on constant exchange rates.

- The transfer market remains intense. Policy transfers in and out being higher than expected with transfers in 20% higher than transfers out.

- The division has embarked on an operational 'right-sizing' programme, designed to improve efficiencies within the business and hence combat the impact of price pressure. This has progressed according to plan and is expected to deliver future expense savings which are not as yet recognised in the financial results.

- The Swedish Krona has weakened by 6.2% during the period, resulting in retranslation losses being reported in EcV and cash generation. During 2017 the Swedish Krona strengthened by 0.6%.

- While equity markets closed in line with the start of the year, they have been relatively volatile during the period.

FUTURE PRIORITIES

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

- Continue with the re-launch of risk and health business, including a new claims system being launched later in the year.

KPIs (all comparatives have been presented using 2018 exchange rates)

Growth in assets under management

IFRS profit

Underlying value growth

CUSTOMER OUTCOMES

BACKGROUND INFORMATION

- Movestic places great importance on providing quality service to both customers and brokers, with simple, clear unit linked products, supported by an attractive and broad investment fund range. The aim of Movestic is to offer policyholders a range of the best funds and management services on the market.

INITIATIVES AND PROGRESS IN 2018

- Policyholder average investment return of 3.5% in the year to date (H1 2017: 4.8%), ahead of the market average return of 2.6%.

- Fees have been lowered in Movestic's funds from 1 May to strengthen its customer proposition.

- The division introduced three new funds during the period, thus improving the choice available to its customers.

FUTURE PRIORITIES

- Introduce a new fund switching process, expected to be delivered during the second half of the year.

KPIs (all comparatives have been presented using 2018 exchange rates)

Broker assessment rating (out of 5)

POLICYHOLDER AVERAGE INVESTMENT RETURN:

3.5%

(SWEDISH STOCK MARKET 2.6%)

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 2018

- The General Data Protection Regulation (GDPR) project was completed prior to the rules coming into force on 25 May 2018.

- Significant progress has been made on ensuring that the business is ready for the Insurance Distribution Directive, which applies from 1 October 2018.

- The IFRS 17 project has progressed well, with the initial impact assessment study expected to be completed during Q3.

FUTURE PRIORITIES

- Deliver on plans to outsource IT operations with a view to increasing efficiency.

- Deliver compliance with the new Insurance Distribution Directive (IDD). The IDD seeks to strengthen consumer protection and transparency within the distribution of insurance-based products.

- Deliver IFRS 17 implementation plans.

KPIs (all comparatives have been presented using 2018 exchange rates)

SOLVENCY RATIO: 160%

Solvency remains strong at 160%. Solvency surplus of £10.8m has been generated 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 10 -15% of the advised occupational pension market. This focus ensures we are able to adopt a profitable pricing strategy.

INITIATIVES AND PROGRESS IN 2018

- Movestic continues to operate within its target market share range of between 10% and 15%.

- Volumes of new contracts sold have decreased compared with the same period in 2017, although gross margin rates have improved.

- Overall new business profits have reduced compared with the prior year. This is largely as a result of lower regular premium increments being received compared with the same period in 2017.

FUTURE PRIORITIES

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

- Ongoing digitalisation of processes to improve broker experience.

- Focus on increasing brand awareness.

KPIs (all comparatives have been presented using 2018 exchange rates)

Occupational pension market share %

New business profit

BUSINESS REVIEW | NETHERLANDS

Our Dutch division consists of two separate businesses; Scildon and Waard. Scildon, acquired in 2017, 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 manages c108,000 policies and is in run-off, focusing on the efficient administration of its existing book of business.

2018 has seen positives for the Dutch division, including dividends payments to Chesnara from both Scildon and Waard. The integration of Scildon into the group has continued in line with its improvement plan, with key steps taken including key organisational changes and the launch of its new mortgage term product. Due to timing, the steps have had minimal impact on the results thus far and in line with our expectations on acquisition, there remains further work to do. Economic conditions in 2018 have impacted results; however, these results do not have any bearing on the ongoing view of the cash and profit potential from the Scildon business.

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 over time 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 2018

- Waard and Scildon paid dividends to Chesnara, in respect of 2017, of £12.9m and £21.7m and ended the period with healthy solvency ratios of 602% and 228%.

- Scildon has reported an EcV loss of £6.5m with Waard delivering a profit of £1.8m. The loss in Scildon is driven by adverse asset valuation movements from widening credit spreads on Italian government bonds.

- Cash generation of £2.9m, with £5.2m from Waard due to SCR reductions, offset by a cash loss of £2.3m from Scildon due to adverse market movements.

- IFRS loss of £1.1m largely caused by a £2.8m loss in Scildon due to asset value movements.

- Developed a focused plan for Scildon to drive the improvements in new business development, cost management and organisational structure.

- Aligned some functions between the two Dutch businesses to provide operational efficiencies.

FUTURE PRIORITIES

- Continue dividends from both divisions to support the group dividend.

- Continuation of the Scildon improvement plan which will strengthen future cash generation and value growth. The two year plans include:

o Process and value for money improvements, such as increased levels of "straight through" processing;

o Continuation of existing IT infrastructure developments to facilitate efficient processes;

o Continual assessment of the business model to ensure an optimal balance between returns generated versus solvency capital requirements.

KPIs (all comparatives have been presented using 2018 exchange rates)

Scildon has a track record of delivering value growth enabling dividend distribution to the parent company and paid its first dividend to Chesnara plc in April 2018.

Scildon value growth

CUSTOMER OUTCOMES

BACKGROUND INFORMATION

- Updated the Scildon service desk to enhance the 'customer journey' for IFAs and consumers.

- 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 2018

- Scildon received awards for "Best occupational pension insurer" and "Best annuity insurer" for 2017, according to the broker organisation (Adfiz).

- The annual performance research for consumers shows high scores.

- Scildon updated the group pension offering to maximise value transfers and premium levels.

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 2018 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 2018

- Scildon has aligned its governance and risk management framework to Chesnara practices.

- The business strengthened the governance framework during the first half of 2018 through changes in structure and personnel.

- The IFRS 17 project is underway for both companies, with the initial impact assessment expected to conclude in Q3.

- Implemented GDPR in both companies.

FUTURE PRIORITIES

- The focus during the second half of the year and into 2019 is to further embed the governance and risk management framework.

KPIs (all comparatives have been presented using 2018 exchange rates)

SOLVENCY RATIO: SCILDON 228%; WAARD 602%

Solvency is strong in both businesses. Scildon has reported a reduction in surplus of £3.8m, largely due to increasing spreads reducing asset values. Waard has generated surplus capital of £3.7m.

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 2018

- Scildon generated new business profits of £0.6m. This is in line with expectations and was factored into our acquisition pricing but it is not currently generating sufficient new business profits and this is therefore a focus of our two year improvement plans.

- As part of those plans, Scildon successfully launched a new mortgage term product towards the end of the period. The product has been well received by the market.

- Market share for the core protection business is at the top end of the 5-10% target range but we have further work to do to

strengthen the proposition and reduce costs.

- Scildon updated the group pension offering to maximise value transfers and premium levels.

FUTURE PRIORITIES

- Management actions are planned as part of the two year improvement plans to generate a more commercially meaningful level of new business profit.

- An objective of the improvement programme is to deliver cost reductions whilst strengthening the proposition and maintaining market share.

KPIs (all comparatives have been presented using 2018 exchange rates)

Scildon - term assurance market share %

Scildon - new business profit

BUSINESS REVIEW | acquire life and pension 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.

- Our acquisition strategy includes both UK and non-UK markets.

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

- In the UK, we have seen a continued gradual increase in closed book market activity which, in our view, is driven in part at a global level by regulatory developments and, at a company level, strategic developments. We expect these drivers to continue to be relevant going forward.

- Regarding the Netherlands, we have also seen a gradual increase in market activity which we are well positioned to take advantage of, given our scale and presence. Again, regulatory and strategic developments are the drivers, and we expect these themes to continue into the future.

- We continue to assess opportunities within Western Europe that are outside of Chesnara's current territories. All opportunities and territories considered are assessed on the basis that these do not compromise the well-established Chesnara's acquisition assessment model, as well as ensuring that these fit within Chesnara's governance framework and that they are able to support Chesnara's strategy and business model. There has been a reasonable level of market activity in Western Europe.

- 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 is a well-established life and pensions consolidator with a proven track record. Our financial foundations are strong, we have an established and stringent acquisition assessment model, and we continue to have strong support from shareholders and lending institutions to progress our acquisition strategy. We believe our operating model has the flexibility to accommodate a wide range of potential target books. Our good network of contacts in the adviser community, who understand the Chesnara acquisition model, ensures 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.

- In April 2018 we converted our existing debt arrangement with RBS into a syndicated facility. This will provide access to higher levels of debt financing from a wider panel of lenders, which in turn will enable us to fulfill our appetite of financing future deals up to the maximum levels of gearing set out in our debt and leverage policy, without being restricted by the lending capacity of one individual institution. This facility enables Chesnara to access an increased level of funds efficiently, which in turn supports our acquisition strategy.

CAPITAL MANAGEMENT - 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. Chesnara does not take advantage of such measures.

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 chart 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, AND WE HAVE NOT USED ANY ELEMENTS OF THE LONG TERM GUARANTEE PACKAGE.

CHESNARA GROUP

SOLVENCY POSITION

SOLVENCY SURPLUS MOVEMENT

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

Surplus: The solvency position of the group has improved considerably from 146% to 157%. The group now has £189m of surplus over and above the internal capital management policy, compared to £151m at the end of 2017. The growth in surplus has arisen from a growth in Own Funds, coupled with a reduction in capital requirements.

Dividends: The closing solvency position is stated after deducting the £10.8m proposed interim dividend (31 December 2017: £19.6m).

Own funds: Own Funds have increased by £23.6m, before the impact of the interim dividend. A large contributor to this growth is a £26.8m capital extraction from the with-profit funds within the UK division. Additional Own Funds growth has been curbed by rising spreads which affected Scildon and the depreciating Swedish krona, which has caused a reduction in the Sterling value of the Swedish business.

SCR: The SCR has fallen by £22.7m so far this year. The key movements underlying this are reductions in equity risk, spread risk, currency risk and lapse risk.

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 2018 exchange rates.

UK

SOLVENCY POSITION

Surplus: £56m above board's capital management policy.

Dividends: Dividend of £32.0m paid to Chesnara in May 2018.

Own Funds: Positive growth of £29.2m, driven largely by extraction of £26.8m capital from WP funds.

SCR: Reduced by £11.4m. Market risk has fallen due to improved quality of asset data and slightly reduced exposure to equities and corporate bonds, whilst insurance risk capital has reduced in line with book run off.

SWEDEN

Surplus: £56m above board's capital management policy.

Dividends: Dividend of £2.7m was paid to Chesnara in May 2018.

Own Funds: Growth has been positive due to moderate investment growth and new business profits.

SCR: Capital requirements have risen due to growth in assets under management.

NETHERLANDS - WAARD

Surplus: £33m above board's capital management policy.

Dividends: Dividend of £12.9m was paid to Chesnara in March 2018.

Own Funds: Positive growth of £1.9m, driven by a change in assumptions, most notably a reduction in assumed mortality rates.

SCR: Reduced by £1.7m, due to reduced underwriting risk following change in demographic assumptions, and reduced equity exposure to fund payment of dividend to Chesnara.

NETHERLANDS - SCILDON

Surplus: £23m above board's capital management policy.

Dividends: Dividend of £21.7m was paid to Chesnara in April 2018.

Own Funds: Reduction of £5.4m, principally due to rising spreads, although favourable interest rate movements have offset some of this.

SCR: Decreased by £1.4m. Spread risk has fallen due to a fall in corporate bond values (caused by rising spreads) and lapse risk has fallen due to rising interest rates, however currency risk has risen due to an increase in foreign currency exposure in look-through data.

CAPITAL MANAGEMENT - 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 a certain extent, in the longer term due to compensating impacts on our required capital.

Key:

INSIGHT*

20% Sterling appreciation:  A material Sterling appreciation reduces the value of surplus in our overseas divisions, and hence has an immediate day 1 impact on group cash generation. It also reduces the value of projected Own Funds growth in our overseas divisions and also reduces the value of overseas investments in CA.

Equity sensitivities: The impact of an equity fall causes the Own Funds to fall and the SCR also falls as the value of the funds exposed to risk is lower. Since the two movements largely offset each other, the net impact on surplus is small. In an equity rise, the Own Funds and SCR both rise and, again, the impact on balance sheet surplus is small. The impacts are not symmetrical due to the use of management actions and differences in the application of tax depending on the direction of the stress. The EcV impacts are more intuitive as they are more directly linked to the Own Funds impact. The impact on future growth builds on the immediate impact as future returns are directly impacted by the rise/fall in fund values.

1 % interest rate rise: An interest rate rise is generally positive across the group. CA, Movestic and Scildon all contribute significantly towards the total group cash generation impact.

50bps credit spread rise: A credit spread rise has a notable adverse impact on day 1 cash surplus and future cash generation in Scildon, largely as a result of the extent of corporate bond holdings that form part of the asset portfolios backing non-linked insurance liabilities. The impact on the other divisions is far less severe.

25bps swap rate fall: This sensitivity measures the impact of a fall in the swap discount curve with no change in the value of assets. The result is that liability values increase in isolation. The most material impacts are on CA and Scildon due to the size of the non-linked book.

10% mass lapse: For this sensitivity, there is only a small immediate impact on surplus as any the reduction in Own Funds is negated by a reduction in the SCR. However, with fewer policies on the books there is less potential for future profits. The division most affected is Movestic, largely because as a unit-linked business the loss in future AMCs following a mass lapse hits Own Funds by more than the associated reduction in SCR.

10% expense rise + 1% inflation rise: The expense sensitivity hits the solvency position immediately as the increase in future expenses and inflation is capitalised into the balance sheet.

*BASIS OF PREPARATION ON REPORTING:

Although it is not a precise exercise, the general aim is that the sensitivities modelled are deemed to be broadly similar (with the exception that the 10% equity movements are naturally more likely to arise) in terms of likelihood. Whilst the sensitivities provide a useful guide, in practice, how our results react to changing conditions is complex and the exact level of impact can vary due to the interactions of events and starting position.

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 2018 has seen solid results across all metrics, despite pressure from a weakening Swedish Krona, volatile equity markets and a widening of spreads on fixed income assets held by our Dutch business.

Summary of each KPI:

IFRS

PRE-TAX PROFIT: £26.5M (30 JUN 2017: £51.6M)

TOTAL COMPREHENSIVE INCOME: £14.9M (30 JUN 2017: £53.8M)

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 pre-tax performance in the UK drives results.

- IFRS pre-tax profit of £26.5m is lower than in the same period in prior year, owing to profit on acquisition in 2017 and economic losses suffered in Scildon.

- Operating profits of £27.3m are the foundation of the result, demonstrating the strength and stability of the underlying business, offsetting the small economic loss, driven by markets conditions.

- Total comprehensive income includes a foreign exchange loss of £6.9m (2017: £7.1m gain) predominantly relating to sterling's appreciation against the Swedish Krona.

CASH GENERATION

GROUP CASH GENERATION £48.6M (30 JUN 2017: £(2.7)M)

DIVISIONAL CASH GENERATION £53.1M (30 JUN 2017: £54.8M)

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

- Significant cash generation from the UK, with positive contributions from Movestic and Waard. Volatility in European market conditions resulted in an economic loss in Scildon, more than offsetting the division's operational gains.

- The result includes the non-recurring benefit of a £26.8m capital extraction 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 changes to capital requirements upon consolidation of divisions.

- Total cash generation in 2017 included the negative impact of the completion of the LGN acquisition (£55.3m).

- Excluding the aforementioned non-recurring items, the underlying group cash generation is £21.8m compared to £52.6m.

ECONOMIC VALUE (EcV)

£700.8M (31 DEC 2017: £723.1M)

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 6.8%, based on the composition of the group's EcV at 30 June 2018.

- Economic value at the end of the June of £700.8m.

- Underlying earnings of £13.6m have been generated in the first half year.

- The movement in EcV since the start of the year includes the impact of the payment of the year end 2017 dividend.

- 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

£13.6M (30 JUN 2017: £108.5M includes £65.4 gain on acquisition)

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 £13.6m have been generated in the first half of the year.

- Underlying operating earnings have continued to emerge across all divisions.

- Economic earnings are more muted than the same period in 2017 (£36.6m) largely as a result of comparably lower growth in equity markets.

- EcV earnings in the prior period benefitted from a one off gain of £65.4m arising as a result of the completion of the acquisition of Scildon.

IFRS

IFRS PRE-TAX PROFIT

£26.5M (30 JUN 2017: £51.6M)

IFRS TOTAL COMPREHENSIVE INCOME

£14.9M (30 JUN 2017: £53.8M)

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:

Note 1: The CA segment has reported strong results for the half-year, in excess of those for the same period in 2017. Positive economic conditions contributed £8.0m to the result, of which £4.6m related to a reduction in the cost of guarantees within the S&P book. This was mainly driven by favourable valuation interest rate movements in the period. Operating profits at £19.6m were also strong in the period, reflecting the positive impact arising from a change to annuitant mortality rate assumptions and a one-off gain resulting from the refinement of a reserving approach in respect of tax charges arising on unrealised gains.

Note 2: Movestic continues to contribute positively to the overall group IFRS result despite a reduction in profits when compared to the same period in 2017. Lower fund performance fees and a fall in the profits generated by its associate, Modernac, were the main drivers.

Note 3: The Waard Group result is in line with expectations, with profits emerging in line with the run-off book profile.

Note 4: Although Scildon has delivered a strong operating profit, the division has posted an overall loss due to adverse market movements. This arises from the fact that Scildon measures the majority of its insurance contract liabilities using historical rates of interest, as is customary in the Netherlands. This can lead to increased volatility in IFRS profits by virtue of the assets that back the liabilities being reported and measured on a fair value basis. In addition, new business volumes have been below expectations, resulting in weaker than expected new business contribution.

Note 5: The Chesnara result represents holding company expenses. It includes a foreign exchange gain in the period of £0.6m, compared to a loss of £2.6m in the prior year, in respect of the euro denominated loan taken out to part-fund the Scildon acquisition.

Note 6: Consolidation adjustments relate to items such as the amortisation of intangible assets. These are higher than previous periods, due to the impact of the Scildon acquisition.

Note 7: Sterling strengthened against both the euro and Swedish krona in the period, reversing most of the exchange gains in 2017.

Note 8: The operating result demonstrates the strength and stability of the underlying business, driving the generation of profit. Product based income and favourable movements in operating experience in the UK, were offset slightly by the marginal strengthening of expense reserves to support future developments. Strong premium growth and higher fund rebates, offset by unfavourable claims experience in the period supported the Movestic operating result. Whilst the Waard operating results were in line with expectation, the Scildon operating result was better than expected.

Note 9: Economic profit represents the components of the earnings that are directly driven by movements in economic variables, e.g. the impact of yield movements on the cost of guarantees reserves. During 2018, the economic result is mainly driven by the impact on Scildon of widening credit spreads, whereas 2017 benefitted from positive equity market growth which has not been witnessed in the same period in 2018.

CASH GENERATION

GROUP CASH GENERATION

£48.6M (30 JUN 2017: £(2.7)M)

DIVISIONAL CASH GENERATION

£53.1M (30 JUN 2017: £54.8M)

Strong cash generation in the UK has driven a total divisional cash result of £48.6m in the period, with supporting contributions from the overseas territories. Cash in the business is generated from increases in the group's surplus funds. Surplus funds represent the excess of 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

- Sufficient group cash has been generated in the year to date to cover the cost of last year's dividend.

- 2017 group cash generation included the impact of the completion of the Legal & General Nederland (Scildon) acquisition. In line with expectations, this was a £55.3m negative impact on cash generation.

- 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 continued to deliver significant cash generation.

- Own Funds growth is the main driver of cash generation in the UK. The result includes the benefit of a £26.8m release of restricted surplus form the with-profit funds.

- At 30 June 2018 a further £6.6m of surplus capital exists within the with profit funds that has not been recognised in the results.

- Investment return and yield curve movements in Q2 have also contributed to increase in Own Funds.

- There has also been a reduction in required capital, with reduced equity risk and spread risk, following the capital extraction.

SWEDEN

- Sweden generated £7.3m of cash in the first half of the year, due to growth in Own Funds.

- Own Funds have benefitted from growth in assets under management, particularly in equity markets and unit linked contracts where positive returns have driven higher SEK fund values.

- Conversely, growth in assets also had the consequential impact of having to hold a higher level of capital within the business

- SEK depreciation against sterling saw an exchange loss of £3.3m.

NETHERLANDS - WAARD

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

- Positive movement in Own Funds was driven primarily by reductions in assumed mortality and lapse rates.

- Falls in counterparty default risk and market risk underpins the reduction in the capital requirement.

NETHERLANDS - SCILDON

- Scildon has reported a loss in the period, largely due to a reduction in Own Funds.

- Positive operating performance has been offset by economic losses in the second quarter of the year, owing to volatility in European markets.

- Capital requirements moved favourably in the period, with the market conditions driving a reduction in spread risk.

A £48.9m one-off positive impact in respect of equity raised ahead of completion of the acquisition of Legal and General Nederland, was included in the 2016 result. We highlighted this as a temporary impact in our 2016 accounts. As expected, on completion, the 2017 result included a consequential negative impact of £55.3m. The end to end impact of the acquisition of LGN resulted in a day 1 surplus cash reduction of £6.4m. Our reported group cash generation of £46.2m for the six months to 30 June 2017 was reported on an adjusted basis. The 2017 comparative has subsequently been re-stated to reflect the reversal of the £48.9m positive equity raise impact and aligns the half-year result with the basis presented in our 2017 Annual Report and Accounts.

EcV EARNINGS

£13.6M (30 JUN 2017: £105.8M includes £65.4m gain on acquisition)

The group's EcV earnings in the period are largely driven by operating profits. Economic earnings have contributed less than in the prior period as a consequence of more muted equity market performance.

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. Key investment market conditions in the period are as follows:

- The FTSE All share index has decreased by 0.5% (6 months to 30 June 2017: increased by 3.3%);

- The Swedish OMX all share index has increased by 0.9% (6 months to 30 June 2017: increased by 7.2%); and

- 10 year UK gilt yields have increased from 1.26% at the start of the year to 1.39% (2017: 1.28% at the start and end of the period).

Note 2 - 2017 Exceptional operating items: The Movestic result included an £11.4m impact relating to changes in future charge assumptions if, as expected, commercial pressures were to drive fee changes in the future. Also included was a £7.8m provision to cover the future Scildon development programme.

Note 3 - Gain on acquisition of LGN: The acquisition of LGN in April 2017 resulted in a 'day 1' gain of £65.4m, representing the difference between the purchase price of £137.6m and the EcV of LGN at the point of acquisition of £203.0m.

Note 4 - UK: The UK delivered pre-tax earnings of £10.9m in the first half of the year. Solid operating earnings of £2.8m were driven by favourable movements in both mortality and lapse assumptions. This was supported by lower than expected rates of attrition across the books of business, resulting in higher assumed future fee income. Economic profits of £7.7m underpin the result, supported by market conditions. Key items driving the economic result include investment return movements and subsequent impact on future reserves; returns driven by the higher unit prices versus static guarantees on claims and fee income; and the impact of the rise in yield curve.

Note 5 - Sweden: The Swedish division has continued to deliver stable EcV growth into 2018. New business profits of £4.6m were the consequence of a combination of increased sales volumes (both transfers and single premiums) in Q2, and a higher margin rates throughout the period. This was partially offset by adverse movement in future fund management fee and fund rebate assumptions, resulting in a total operating earnings of £1.0m. An economic profit of £10.7m was reported, driven by equity market performance in the second quarter and strong returns on the unit linked investment portfolio. The weakening of the Swedish krona during the period also contributed, with foreign currency investments having higher SEK fund values.

Note 6 - Netherlands: The Dutch division has reported a pre-tax loss of £5.8m in the period. Waard delivered earnings of £2.4m, largely due to the impact of a reduction in assumed mortality and lapse rates. This was offset by a pre-tax loss of £8.2m in Scildon. Underlying operating earnings of £4.5m were offset by economic performance. Volatility in European market conditions saw significant adverse movement in spreads, driving the economic loss.

Note 7 - Group: In line with expectations, a loss has been reported in the group component. This includes costs incurred at group level, dividend payments and the impact of consolidation activities.

Note 8 - Tax: The business is reporting a tax expense of £1.8m in the year. This is driven by a combination of current tax on the profit in the period and movements in deferred tax relating to group level activities.

EcV position

£700.8M (31 DEC 2017: £723.1M)

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 2018 to 30 Jun 2018:

EcV earnings: EcV earnings of £13.6m 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 £19.6m were paid during the period, being the final dividend from 2017.

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 2018:

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 difference 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.

Ring-fenced fund 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 £10.8m 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 and the controls in place to mitigate or manage their impact. 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. Although this is a matter of judgement, the risks described in the table have been ordered based on probabilities and impacts, putting the risk with the biggest potential impact first.

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 under the capital management section indicates a strong Solvency II position as at 30 June 2018 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

29 August 2018 29 August 2018

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 2018 which comprises the condensed consolidated statement of comprehensive income, the condensed consolidated balance sheet, the condensed consolidated statement of cash flows, the condensed consolidated statement of changes in equity 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 and 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) 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 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 2018 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

29 August 2018

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONDENSED CONSOLIDATED BALANCE SHEET