Chesnara Regulatory News (CSN)

Chesnara plc

Good results in the period complemented by positive impact of Waard Group acquisition

Chesnara today reported results for the six months ended 30 June 2015. The Group remains committed to delivering competitive returns to both its shareholders and policyholders, and continues to focus on:

· maximising value from the in-force life and pensions book.

· value enhancement through writing profitable new business in Sweden.

· making further life and pensions acquisitions where they meet stringent assessment criteria.

· IFRS profit before tax of £30.4m (six months ended 30 June 2014: £27.4m). Includes a gain of £16.2m recognised on the acquisition of the Waard Group.

· Net cash generation of £56.7m (six months ended 30 June 2014: £15.6m). The net cash result includes £15.3m from the operating activities of the business, this is primarily from the UK business although Movestic has made an inaugural positive contribution. In addition, the total cash result includes the one-off benefit of £39.9m arising from the Waard Group acquisition.

· 3.0% increase in interim dividend compared with 2014. Recommended interim dividend of 6.61p per share (2014: 6.42p per share). This increase represents the eleventh successive rise in interim dividends.

· EEV of £441.2m (31 December 2014: £417.2m). Growth of 10.6% driven by the combined impact of earnings of £44.9m plus a model adjustment of £5.9m, less dividend payments of £15.1m and foreign exchange losses of £11.7m on the Movestic business.

· EEV earnings net of tax of £44.9m (six months ended 30 June 2014: £47.3m).  EEV earnings in the period supported by a £21.6m gain on acquisition of the Waard Group, and continued value emergence from the in-force books in the UK and Sweden.

· Movestic EEV new business contribution of £2.4m (six months ended 30 June 2014: £5.8m). Decrease driven by a challenging unit linked market where competitors are continuing to offer traditional plans with high guaranteed returns against a backdrop of the low interest rate environment. We retain our focus on profitable unit-linked business.

· Group solvency ratio of 271% (31 December 2014: 284%).  After taking account of the interim dividend and the increased solvency requirements following the acquisition of the Waard Group, strong Group solvency has been retained. Subsidiary solvency ratios remain strong and above internal targets, with CA plc at 211% (31 December 2014: 176%); Movestic Liv at 408% (31 December 2014: 376%) and Waard Leven at 766%.

· Group wide Solvency II "dry-run". A Group-wide "dry-run" of the Solvency II position of its insurance subsidiaries has been delivered. The results reaffirm the view that Solvency II is not expected to impact adversely the overall solvency position of the Group. In applying Solvency II across the Group the "standard formula" has been used in calculating the Solvency Capital Requirements of each subsidiary and the "dry-run" has been performed without applying any transitional measures.

New business

· Movestic continues to write targeted profitable new business. Profitable new business continues to be written, although challenging market conditions have resulted in a 10.4% reduction in volumes when compared with the same period in 2014 as we retain our focus on profitable unit-linked business.

Acquisitions

· Completion of Waard Group acquisition. The Waard Group transaction received regulatory approval in the period and was completed on 19 May 2015.

· New acquisition opportunities.  Value enhancing acquisition opportunities in the UK and Western Europe, principally in the £50m - £200m range, continue to be sought and examined.

Culture and values

· Group's regulatory compliance record remains robust.

John Deane, Chief Executive said:

'Chesnara has continued to focus on delivering against its very clear strategic direction: delivering value from the in-force book, writing profitable new business in Sweden and making strategic acquisitions in the Life and Pensions sector. The first six months of 2015 have seen the completion of the Waard Group acquisition, good value emergence from the in-force books across the Group, a Group-wide Solvency II "dry-run" and the first stage completion of the development of Group-wide governance maps. The good financial performance has been delivered in a period where UK investment market conditions have been relatively flat, Swedish equity markets have grown and Swedish base rates entered negative territory. Both the Swedish Krona and the Euro have depreciated further against Sterling.

In light of the operational achievements and good financial results in the period, the Board is pleased to recommend an interim dividend of 6.61p per share, an interim dividend increase of 3.0% over 2014.'

The Board approved this statement on 27 August 2015.

Enquiries

John Deane, Chief Executive, Chesnara plc - 01772 972079

Roddy Watt, Newgate Threadneedle - 0207 653 9855 / 07714 770 493

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'), Protection Life Company Limited ('PL'), Movestic Livförsäkringar AB ('Movestic') and Chesnara Holdings BV, the intermediate holding company of the 'Waard Group'.

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 £63.5 million. 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 PL 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. Further details are available on the Company's website (www.chesnara.co.uk).

OVERVIEW

2015 HIGHLIGHTS - SIX MONTHS ENDED 30 JUNE 2015

(UNAUDITED)

£30.4M IFRS PRE-TAX PROFIT

IFRS pre-tax profit for six months to 30 June 2015 of £30.4m (six months to 30 June 2014: £27.4m). This is stated after a gain on acquisition of £16.2m and a foreign currency exchange loss of £3.5m.

£56.7M NET CASH GENERATION

Net cash generated for six months to 30 June 2015 of £56.7m (six months to 30 June 2014: £15.6m). This is stated after a one-off benefit of £39.9m arising on the acquisition of the Waard Group.

£441.2M EEV INCREASE OF £24.0M TO £441.2M

£24.0m increase in EEV from £417.2m at 31 December 2014 to £441.2m at 30 June 2015, stated after dividend distributions of £15.1m.

£44.9M* EEV EARNINGS AFTER TAX

EEV earnings net of tax of £44.9m* for six months to 30 June 2015 (six months to 30 June 2014: £47.3m). This is stated after a gain on acquisition of £21.6m and a foreign currency exchange loss of £3.5m.

*this excludes positive modelling adjustments of £5.9m.

£2.4M MOVESTIC EEV NEW BUSINESS CONTRIBUTION

Movestic has generated a new business contribution of £2.4m in the six months to 30 June 2015 (six months to 30 June 2014: £5.8m).

271% GROUP SOLVENCY

Strong Insurance Group Directive solvency cover of 271% (31 December 2014: 284%).

DELIVERY OF GROUP WIDE SOLVENCY II "DRY-RUN"

As planned we have delivered our first full Group-wide "dry-run" of the Solvency II position of the Group's insurance subsidiaries. The results reaffirm our previous view that we do not expect Solvency II to impact adversely our overall solvency position. In applying Solvency II across the Group:

- We are using the "standard formula" in calculating our Solvency Capital Requirements; and

- The "dry-run" has been performed without applying any transitional measures.

3.0% INTERIM DIVIDEND INCREASE

Proposed interim dividend increase by 3.0% to 6.61p per share.

COMPLETION OF WAARD GROUP ACQUISITION

The Waard Group acquisition, announced in December 2014, received regulatory approval in the period and was completed on 19 May 2015.

DEVELOPMENT OF CORPORATE GOVERNANCE MAPS TO BE IMPLEMENTED ACROSS THE GROUP

Solvency II and the PRA's Senior Insurance Managers Regime recognise that central to good governance is the appropriate and transparent allocation of oversight and management responsibilities. This is captured by the Chesnara Governance Maps for the Group and each of its divisions. These maps will be completed in the second half of 2015.

Notes

1. Throughout the Chairman's Statement, Business Review and Financial Review sections, all results quoted at a business segment level exclude the impact of consolidation adjustments. These consolidation adjustments are analysed by business segment in the Financial Review.

2. Net cash generation in the period is defined as the net amount of the following items:

i. Gross cash generation, defined as:

a. the change in the excess of actual regulatory capital resources over target capital resources in respect of the CA, S&P, Movestic and Waard Group operating segments;

b. less any capital contributions made by the Group to its operating segments;

c. less cash utilised by Parent Company operations.

ii. Plus the cash impact of one-off management actions coupled with movements in the restrictions of policyholder funds to shareholder funds.

As such, the cash generation KPI defined above do not align to the Cash Flow Statement as included in the IFRS Financial Statements.

"I am pleased to report a further period of positive financial performance. In particular, the Group has generated cash during the period at levels that support our dividend strategy and the embedded value of the Group has continued to increase.

We have made significant progress on governance matters which has laid down the foundations for the ongoing development of the Group.

We have also invested significant effort in ensuring that we are prepared for Solvency II. Our ongoing focus on Solvency II gives me confidence regarding the implementation of this programme of change. In addition, initial "dry-run" results, which do not use transitional measures, reaffirm our previous view that we do not expect Solvency II to impact adversely our overall solvency position.

We completed the acquisition of the Waard Group during the period and developed a revised acquisition process which underpins Chesnara's successful acquisition strategy."

I start my Chairman's statement by reviewing how Chesnara has delivered against its three core strategic objectives and how it has done so remaining true to its well established culture and values of treating customers fairly and adopting a robust approach to regulatory compliance.

Maximise value from the in-force book

The Life and Pensions industry is going through a period of change with the preparation for Solvency II which will take effect from 1 January 2016 and with a number of regulatory developments including the FCA Legacy Review and changes which offer increased Pension Freedoms. Against this backdrop I report:

- The closed books continue to generate financial returns in line with expectations and at levels sufficient to support the Chesnara dividend strategy.

- Solvency II readiness - preparations are developing well and we remain firmly on course to meet all deadlines and requirements.

- Solvency II impact - provisional "dry-run" results from across the Chesnara Group reaffirm the previously stated view that the implementation of Solvency II is not expected to have any adverse impact on the solvency and cash generating potential of the Group.

- FCA Legacy Review: There has been no formal conclusion on the FCA legacy review during the period and the statement I made in the 2014 Report & accounts that "Our early assessment of the potential impact of these two issues was that Chesnara would not be materially affected" remains unchanged. However, the fact is that until the FCA concludes on the scope of the legacy review a degree of uncertainty of impact remains and management will manage the risk through the general governance and risk management framework.

- Pensions Freedoms and a subsequent HM Treasury review on exit charges (as set out above): In July 2015 HM Treasury opened a consultation on "Pension transfers and early exit charges", which focuses on fees and charges that policyholders might incur when leaving their scheme early. The consultation focuses on the reasonableness of such charges and at this stage the outcome is not known. As a result of this consultation being open there remains uncertainty as to its impact. Management will manage this through its usual risk management processes.

Investment market conditions have been modestly positive during the first six months of 2015. Equities in the UK have been broadly flat whilst there has been a slight increase in bond yields. These conditions together with continued good operational performance have resulted in continued value growth and cash emergence from the UK in force books. In Sweden, interest rates have continued to fall to a uniquely low position whereas the local equity markets have increased by 6.5% over the six month period. The financial results in Sweden are in fact more dominated by equity performance than interest rates. As such, despite the low bond yields, the effect of investment conditions, together with improvements to fund performance rebates, have resulted in a marked increase in profits emerging from the Swedish in-force book. Whilst the UK books will continue to be the primary source for the funding of the dividend strategy, it is positive to see the strong development of the profitability and cash generation potential from the Movestic business.

The embedded value of Movestic has increased during the first six months of the year. However, this increase has been dampened by the depreciation of the Swedish Krona against Sterling, which has closed 7.5% lower than at the start of the period.

Gross cash generated from business as usual operations:

Six months to 30 June 2015: £15.3m*

Six months to June 2014: £16.0m *figure excludes any cash generated by the Waard acquisition

The Waard Group was acquired with significant cash reserves and a strong regulatory surplus which will, in the fullness of time, be distributed or used to fund future acquisitions. On an ongoing basis the Waard Group is expected to generate only modest levels of cash. That said, I am pleased to report that the profits emerging from the Waard closed book during the first half of 2015 are in line with expectations.

During the six months to 30 June 2015 the value of both the Euro and the Swedish Krona fell against Sterling. This results in a reduction in the sterling embedded values of our Swedish and Dutch subsidiaries of c£11.7m and c£7.1m respectively. There is no direct cash impact in that none of the exchange rate value movement has been crystallised. We did however purchase Euros in December 2014, following the fund raising, to match the acquisition price of the Waard Group and a £3.5m exchange loss on that balance has had a direct non-reversing adverse impact on cash generation in the period.

Enhance value through new business

New business profits in Movestic have fallen when compared with the same period in 2014 and, whilst they have remained positive, they are deemed to be just below the bottom end of our target range. That said, there has been down-turn in new business volumes compared to recent periods. This is due to the attractiveness of traditional saving contracts in Sweden which offer beneficial guaranteed returns given the low interest rate environment. Movestic will not deviate from its focus on unit-linked business, nor will it chase new business volumes at the expense of compromising profit margins. Our view is that the market for the guaranteed return contracts is not sustainable in the long term. In the meantime we will therefore accept a temporary dip in new business profit expectations and instead focus on other more effective ways to enhance embedded value such as the renegotiation of fund management performance rebates.

Movestic new business contribution in for the six months to 30 June 2015:

£2.4m

Six months to June 2014: £5.8m

Acquiring life and pensions businesses

During December 2014 we announced our intention to acquire the Waard Group in the Netherlands. The move into a third geographical market received strong investor support. The positive equity raising process was consistent with the level of potential we see in the acquisition in its own right but also the strategic opportunity arising from entering a new territory in which closed book consolidation has yet to reach levels historically seen in the UK. I am pleased to report the successful completion of the acquisition during May 2015.

The acquisition has generated significant cash distribution potential together with an increase to the Group's Embedded Value. Perhaps as importantly our market intelligence suggests significant market consolidation potential in the Netherlands and we are pleased to be in a position to apply our acquisition and consolidation expertise, together with Waard Group management's local knowledge, in the Dutch market.

Chesnara culture and values

Delivery of our objectives is underpinned by our well established culture and values which are based on an ethos of responsible management. Whilst there are elements of the Solvency II regime that undoubtedly result in specific changes (e.g. Pillar 3 reporting requirements and revised Pillar 1 standard formula rules), I believe the principles at the heart of the Solvency II development align very closely to Chesnara's own ethos of responsible management. Therefore, whilst the implementation of Solvency II will require an inevitable degree of process change, I do not expect the advent of Solvency II to change the fundamental culture and values we apply when governing the Chesnara Group. Good governance always benefits from a sensible level of formality and documentation and to this end during his first six months as CEO, John Deane and his team have invested significant effort in defining Governance Maps at both Group and Divisional levels. The Maps have been through Board review and they will be implemented as part of our Solvency II programme. Chesnara has always made decisions giving full consideration to the risks associated with those decisions, and to further embed a sound risk-based culture we have appointed a Chief Risk Officer who will join us in September. More information about the Group's culture and values is included within the Management Report as set out below.

Investment proposition

The strong performance referred to above has resulted in continued strong returns to shareholders. The results to date in 2015 would adequately fund the established dividend strategy.

Outlook

The acquisition of the Waard Group creates a three territory business model. This gives Chesnara wider reach, optionality and flexibility thereby improving the outlook for the continuation of our successful acquisition strategy. In addition to the benefits of a wider target market, my confidence in our acquisition strategy is underpinned by three key factors:

i) Strong financial foundations

We have the financial strength to fund future acquisitions. In particular we are modestly geared, have healthy solvency margins and have own cash available. We also continue to receive strong support from shareholders and lending institutions.

ii) Good regulatory track record

We continue our good regulatory track record in the UK and Sweden and have built a good relationship with regulators in the Netherlands. Strong regulatory focus will mean regulators see Chesnara as a responsible buyer who will ensure the interests of policyholders are protected.

iii) Expertise and experience

Our recent track record demonstrates that the management team has the required drive and capabilities to deliver all aspects of successful acquisitions. The management team of the Waard Group will further enhance this capability into the Dutch market. We demonstrate diligent assessment of the risks and benefits of any opportunity, we have the commercial experience to price effectively for risk and importantly we have the technical and operational expertise to integrate acquired businesses into the Chesnara Group, thereby ensuring risks are managed and the benefits emerge as required.

In addition to my positive assessment of the acquisition strategy, the robustness of the UK in-force business and the continued growth in the Movestic embedded value both contribute to my overall conclusion that the Chesnara Group is well positioned to continue to provide value to our shareholders and policyholders.

Peter Mason

Chairman

27 August 2015

MANAGEMENT REPORT

BUSINESS REVIEW

Introduction

The Business Review is structured to report on how we have performed against each of our three stated strategic objectives and our culture and values. Where relevant the review reports separately for our UK, Swedish and Dutch operations. The review focuses on:

- How we have performed generally

- Key developments or challenges

- Key performance indicators

- Risks associated with each objective

Our strategic objectives, culture and values are reassessed on an annual basis as part of the Group business planning process. Their continued relevance gives consideration to recent performance, emerging risks and future opportunity. They are assessed giving full regard to both internal and external influences e.g. changes to regulatory requirements.

The three core strategic objectives, which are underpinned by the Group's culture and values, are consistent with what was reported in the 2014 Annual Report & Accounts. No significant change in focus is expected during the latter half of 2015.

The governance framework seeks to ensure that controls and procedures are in place to protect all stakeholders. The control environment has remained effective and robust throughout the period. Further details of the operation of the governance framework, and its future development, are included in Section C - Corporate Governance, of the 2014 Annual Report & Accounts.

Maximise value from the in-force book | UK

"The UK books continue to generate cash in line with expectations. Despite relatively flat investment market conditions the level of cash generated is sufficient to fund the Chesnara dividend strategy."

Highlights

- £18.9m of gross cash generation.

- Funds under management resilient to book run off.

- Positive EEV development.

- Increase in pension policy attrition in Q2 following "Pension Freedom" changes has not materially impacted the total attrition profile nor materially impacted funds under management.

Review of the six months ended 30 June 2015

Operational performance has been strong across the three key areas of focus for the in-force book, namely; management of the assets; regulatory compliance; and ensuring we continue to provide a high quality service to policyholders in terms of administration service levels and investment management.

Our administration and asset management outsource partners have all performed well during the period and generally exceeded service level arrangements and relevant benchmarks. Towards the end of last year we transferred a portion of our actuarial services to Towers Watson. To date the transfer, although complex, has worked well, although processes and routines are expected to continue to evolve throughout the remainder of the year. We remain of the view that as a specialist actuarial service consultancy, Towers Watson are better placed to support the business in responding to any changes imposed by business development and regulatory change.

With the exception of the CWA Balanced Managed Pension fund, all our primary managed funds have outperformed benchmarks during 2015.

£18.9m (Six months to 30 June 2014: £19.0m) of gross cash

generated from business as usual operations

Gross cash generation during the period has remained solid, assisted only marginally by the modestly favourable investment market conditions.

During the period management has closely monitored regulatory developments (as set out below). We are fully supportive of these reviews and will take appropriate actions to ensure we will comply with any recommendations. Also, our risk management framework requires us to take a view of the potential impact of the changes. Given the lack of clarity of certain aspects at this point, there remains an inevitable level of uncertainty of impact. That said, our current assessment remains that any adverse impact on the profitability of the business will be suitably manageable so as not to fundamentally impact the cash generating capacity of the UK business. We do however expect "Pensions Freedoms" to increase the level of pension policies lapsing ahead of state pension age and the embedded value results during the six months to 30 June 2015 incorporate an estimated adjustment to recognise the impact of this.

"During the period a primary focus has been on Solvency II. An initial "dry-run" of the Solvency II balance sheet and standard formula capital requirements has been performed. The results of the "dry-run" continue to support our expectation that the transition to Solvency II will not adversely impact the solvency position and hence cash generating capacity of the UK business."

Unit-linked funds under management

The levels of unit-linked funds under management continue to support the on-going level of profitability of the UK business, as fund-related charges are an important component of profit.

The movement in the value of unit-linked funds under management is a function of:

i) performance of the funds across UK equities, international equities, property and fixed interest securities;

ii) received and invested premiums; and

iii) policies closed, due to surrender, transfer or claim.

Good performance by our administration and investment management business partners has contributed positively to all three of the above factors although generally flat equity market performance has contributed to a small reduction in funds under management during the six months to 30 June 2015.

Unit-linked funds under management of £2.2bn

(31 December 2014: £2.3bn)

Risks associated with the strategic objective

S&P has a proportion of its product base that provides guaranteed returns. The provision required to cover the cost of these guarantees increases if equities or bond yields decline.

Increased lapses on cash generative products are also a risk to the delivery of this strategic objective. We manage this risk through:

- Close monitoring of persistency levels.

- Active investment management to aim to deliver competitive policyholder investment returns.

- Outsourcer service levels that ensure strong customer service standards.

- Customer retention processes.

Regulatory developments are not in themselves a risk to the value emergence from the UK book and indeed Chesnara recognises the long term benefits of robust governance. Regulatory change can impact the cash potential if it directly impacts the cash flows from the products or increases the likelihood of increased book attrition. Strong and effective regulatory compliance can also have an impact on the cost base.

Unit-linked funds under management

Fund performance (annual return)

Annual policy attrition rate, based on policy count

Maximise value from the in-force book | SWEDEN

"Continued growth in funds under management together with a general improvement in fees and rebates levels from those funds has resulted in a significant increase in value emerging from the in-force book."

Highlights

- Continued growth in funds under management; increase of 10.5% during 2015.

- £3.3m of cash generation in the period.

- Positive EEV development.

- Stable policy attrition levels.

- Competitive fund performance.

- The transfer-in to transfer-out ratio has deteriorated such that it has reverted to being in a net outflow position albeit the level is significantly improved from levels reported in 2012 and 2013.

- Krona depreciation against Sterling in the period reduces reported results.

Review of the six months ended 30 June 2015

During 2015 continued IFA support, good service and support and strong investment performance led to significant growth in funds under management. New sales volumes together with regular premiums and investment growth significantly outweigh the impact of any policy attrition. The focus to ensure that we continue to provide a high quality service to IFAs and policyholders in terms of administration service levels and investment return continues and independent market surveys show continuing positive ratings. This has resulted in the further growth in the Pensions and Savings business on all key measures including funds under management, embedded value, profitability and policy numbers.

The Life & Health book of business remains stable and the portfolio continues to deliver high quality in terms of claims development with a gross loss ratio of 60.9% for the six months to 30 June 2015 (2014: 56.5%).

The scale of the Pension and Savings in-force book in Sweden is such that profits emerging from it are relatively modest in comparison to UK equivalents. As such, the challenge is to continue to increase the value of the funds under management from which we earn income in the form of management charges and fund rebates. The following illustrates the factors that directly influence the growth of the in-force book:

- NEW BUSINESS

- POLICY ATTRITION

- FUND PERFORMANCE

- PREMIUM INCOME

The general performance on all four factors has been positive resulting in strong fund growth, as illustrated by the table below:

The combined impact of the growth in funds under management together with a continued improvement in the fees and rebates earned from those funds, has resulted in a marked increase in the profit and cash emerging from the Movestic book (see financial review, as set out below.). Whilst relatively modest in comparison to cash emergence from the UK book, the Movestic business has generated a meaningful level of cash during the first half of 2015 of £3.3m. Such cash levels reduce the likelihood of Movestic requiring future Chesnara capital support.

Each growth factor has been considered in more detail below:

New business

The review of the new business operation is covered in the "Enhance value from new business" objective review below.

Policy attrition

Policy attrition levels during 2015 have been relatively stable. The most significant measure is the level of pension transfers. The levels experienced are deemed to be an inherent feature of the broader dynamics of the IFA market, rather than being a direct reflection of any Movestic specific issues. In light of this, the embedded value assumes no material improvement in persistency levels in the future. Management continually seeks to improve service levels, with a view to impacting positively the longer term persistency levels. Any positive impact will only be recognised if improvements are seen in actual attrition rates.

Despite absolute transfer-out levels remaining broadly consistent over recent years, the ratio of transferred-in business to transferred-out had improved significantly from 2012 to 2014. During 2015 this trend has reversed, with transfers out exceeding transfers in. The ratio remains much improved from the position in 2012 and the net outflow level is not overly damaging to the ongoing growth of the Movestic book. That said, returning the transfer balance to a net positive position remains a key management objective and strategic plans are being developed to target the transfer market.

Policy attrition trend analysis

Policy attrition 2015 vs. 2014

Fund performance

One of Movestic's key differentiators is its approach to selecting the funds available to investors. Rather than adopt mainstream funds which, in Sweden, are those predominantly managed by subsidiaries of banks which also have life assurance subsidiaries, we select a limited number of funds from a wide range of independent fund managers.

The funds selected are, in general, actively managed funds with a value approach. The performance of all funds is closely monitored and regular contact is made with managers to ensure that the underlying reason for fund performance, whether positive or negative, is fully understood. Funds that do not perform favourably compared with the relevant index are wholly replaced if there are no acceptable strategies for improvement. Where applicable we continue to add further funds to fill perceived gaps in the range.

Activity during Q1 and Q2 2015 included the replacement of an Eastern European Equity fund and the launch of a "new white-labelled" Movestic Global fund, managed by the US manager Massachusetts Financial Services. Movestic has also introduced five Premium funds, which are funds that are exclusive for clients with higher capital or premiums.

The relative fund performance measure (fig. 3) focuses on the number of funds under or over performing their relevant indices. It does not recognise the level of over or under performance nor does it reflect the relative size of each fund. An alternative and well established fund performance measure, produced by a respected industry magazine, compares the value of savers' average fund holdings. This measure best reflects the investment performance from a policyholder perspective. According to that measure, Movestic's fund range performed competitively, based on the most recent survey produced during 2014, when compared with our peer group, which maintains our strong market position.

Premium income

The reduction in premium income is predominantly due to a decline in new business levels. The recurring regular premiums have increased marginally period on period for the Pensions and Savings business which is a key factor to achieving sustained growth. Regular premiums for the Life and Health business have remained broadly flat year on year.

Total premium income (SEKm)

Risks associated with the strategic objective

There remains a risk from high levels of lapses. It is evident that there is inherent risk in the Swedish market where customer awareness of the ability to transfer their pension is a feature with increasing influence as a consequence of ongoing public discussion. The Movestic product proposition already offers significantly more portability for transferring pensions than the general market. As such, although higher transfer rates would create challenges, an increased right to transfer would be beneficial to customers and to Movestic in terms of its market position with other more traditional competitors.

Profit emerging from the in-force book is dependent upon the size of the funds under management. Adverse investment market conditions would therefore adversely impact this strategic objective.

Regulatory change can potentially impact the cash flows arising from the in-force book. For example, there remains ongoing debate in Sweden regarding possible changes to up-front fees and rebate commissions.

From a Group perspective we are exposed to foreign currency fluctuations which impacts the Sterling value emerging from the Swedish operations.

Maximise value from the in-force book | nETHERLANDS

"The newly acquired Waard Group adds a new, albeit small, source of in-force book value. Whilst the Waard Group acquisition was primarily based upon the value of existing net worth rather than future cash generation expectations, it remains important that cash emerges in line with the cash flow projections."

Highlights

- £1.6m of IFRS pre-tax profit has emerged during the six months to 30 June 2015 Note 1.

- The total recurring profit of £3.2m on an annualised basis is in line with expectations within the deal valuation assessment and subject to book run-off provides a useful estimate of future in force book profit expectations.

- The EEV of the acquired Waard business is £73.3m at 30 June 2015, of which only £10.9m relates to futures profit cash flows.

Note 1 - Only the proportion of this total profit relating to the post acquisition period (19 May 2015 to 30 June 2015) will consolidate into the Chesnara Group income statement.

Summary of the in-force book acquired

The Waard Group book consists of c84,000 policies, the majority of which are term assurance contracts, with the balance relating to unemployment and disability cover and unit-linked savings contracts.

In addition to the insured contracts, the Waard Group is, through the Tadas subsidiary, responsible for the administration of c91,000 policies for third party insurers.

There are three key areas of focus for the in-force book, namely: management of the assets, regulatory compliance and ensuring we continue to provide a high quality service to policyholders in terms of administration service levels.

The business is administered and governed by an established and high quality team. Operational performance has remained strong throughout the acquisition process. The business operates to high governance standards and there is a sound relationship with the Dutch regulator.

Since the acquisition completed on 19 May 2015, the Waard Group business has been integrated into Chesnara governance processes including the financial reporting routines.

Profits emerge primarily as a result of positive mortality experience on the term assurance contracts. The third party administration contributes only modest additional profit.

"The Waard Group book relates primarily to simple term assurance contracts, backed by relatively low yield but non-volatile assets. As such, whilst the future cash generation expectations are modest they are deemed to be relatively robust and insensitive to economic conditions."

Risks associated with the strategic objective

The primary risk to the profit and cash emergence is that mortality experience increases significantly and exceeds the assumed rates.

Increased lapses on cash generative products are also a risk to the delivery of this strategic objective. We manage this risk through:

- Close monitoring of persistency levels.

- Service levels that ensure strong customer service standards.

There is also a risk that expenditure levels exceed those assumed in reserves and provisions. Expense assumptions are deemed to be realistic and the cost base is well controlled, predictable and within direct management influence.

Regulatory developments are not in themselves a risk to the value emergence and indeed management recognises the long term benefits of robust governance. Regulatory change can impact the cash potential if it directly impacts the cash flows from the products or increases the likelihood of increased book attrition. Product specific compensation arrangements would also have an adverse value, although the thorough due diligence process pre-acquisition highlighted no specific issues other than those relating to the unit linked savings contracts for which Chesnara is fully indemnified.

enhance value through new business | sWEDEN

"New business profit of £2.4m shows a marked decline compared to the first half of 2014 due to a 10.4% reduction in new business volumes."

Highlights

- 10.4% reduction in new business volumes compared with the first half of 2014.

- Average profit margins have held up in increasingly competitive market conditions.

- The unit-linked market remains challenging compared to alternative traditional contract which offer significant guarantees.

Review of six months ended 30 June 2015

Following a period of consistent growth in new business, Movestic sales have fallen back during the first half of 2015. The general market shift from unit-linked products to more traditional products offering guaranteed returns that became evident towards the end of 2014 has continued into 2015. Whilst Movestic management expected that in the short term the preference for the benefits of more traditional contracts would put an inevitable strain on Movestic's sales, the impact has been more marked due in part to the continued reduction in interest rates in Sweden. Movestic management remains of the view that unit-linked investments will become increasingly attractive over time as the sustainability of the returns being offered on traditional contracts becomes unviable. This view is supported by evidence of guarantee reductions and efforts by the traditional providers to encourage internal policy transfers to unit-linked contracts.

Movestic continues to focus on profitability and sustainability and as such has not been drawn into chasing volumes through unsustainable pricing changes. The medium term objective will be to recover sales and profitability to the 2014 levels rather than having an inappropriate expectation of volume growth beyond a sensible natural level for the size of the business and the market competition. This is very much in accordance with the Chesnara Group strategy regarding writing new business. That is, new business in Sweden is a useful source of embedded value growth but not the sole source and as such during the difficult market conditions, modest positive new business contribution is an acceptable outcome and greater embedded value returns can be gained from a focus on the in force book.

New business premium income

Previous quarterly trend analysis showed a more marked reduction in the second half of 2014 than the seasonality profiles would explain, due to the aforementioned competition from traditional products with guarantees. As such there was a realistic expectation that the recent new business growth would begin to plateau during 2015. That said, despite our realistic expectations, the decline in 2015 remains disappointing. Movestic has recently strengthened the sales team and has focused plans including the targeting of transfer business. Therefore whilst the full year result is unlikely to recover to meet the 2014 level, we are optimistic that the second half of 2015 will improve and be more comparable to the second half of 2014

Trend analysis of new business premium income (£m)

Market share

The market share of our specific target market, namely the company paid unit linked market was 9.8% during the first half of 2015. This has dipped towards the bottom end of our internal benchmark expectation range for a company of Movestic's scale in relation to the scale of the market competition.

The downturn over the second half of 2014 and into the first half of 2015 is not reflective of any systematic concerns or deficiencies in the product offering. In addition, we believe the 2015 market shares figures are adversely distorted by the impact of competitor figures including internal transfers.

Management has focused plans which aim to recover market shares back to our target range

Trend analysis of Movestic's share of new business

Development of innovative product concepts and margin enhancement

A differentiating feature of Movestic is the carefully selected fund range which over time has proven to perform very well compared to similar offerings. The work to further develop and improve the fund range is continually given highest priority. During Q1 and Q2 2015 the work with "white-labelled" Movestic funds has continued and intensified. The benefits of the new "white-labelled" funds, enabled through the set-up of a new Movestic SICAV (fund structure) in 2014, in addition to being well matched to policyholder requirements, is that Movestic receives a higher proportion of the product value chain thereby improving new business margins. Two new Movestic funds will be launched during the early autumn, and four to five new Movestic funds are planned to be launched later in the year or in the beginning of 2016.

Risks associated with the strategic objective

Economic conditions in Sweden have been mixed during 2015. The Swedish OMX all-share index has increased by 6.5% during the year to date whilst interest rates have continued to decline during the period, moving to negative territory. As a result, there remains a general sense of uncertainty that has led to some consumers preferring more traditional investment products to equity-based unit-linked investments. Whilst recent improvements in confidence and good equity market performance has ensured the unit-linked market has remained attractive to many investors, there is a risk that returns being offered on traditional products will adversely impact the relative attractiveness of Movestic's unit-linked proposition. We continue to believe that as equity market confidence continues to recover and that as the traditional investment offerings become less sustainable for providers, there will be a gradual shift back towards unit-linked investments. New business volumes remain sensitive to market preferences and continued IFA support. New business volumes are also sensitive to the quality of service provided to IFAs and the end customer. Movestic continues to score highly in internal and external service level assessments.

New business remains relatively concentrated towards several large IFAs. This is inevitable to some extent but the fact that Movestic has extended the breadth of IFA support in the period has reduced this concentration risk. Whilst Movestic has further broadened its coverage of the broker market, the fact remains that a large proportion of new business comes from two large brokers thereby creating a level of concentration risk. In light of this risk, Movestic takes comfort from the fact they are assessed very favourably on an internal product provider assessment scorecard maintained by one of the major brokers. The second large broker has a proven strong level of support for the Movestic proposition as demonstrated by its continued support of Movestic during and subsequent to the servicing difficulties experienced historically.

The competitive market puts pressure on new sales margins and even though Movestic's margins have held up well, these external pressures have led to management focusing on achieving better terms in the fund operation.

acquire life and pensions businesses

"We completed the acquisition of the Waard Group during May 2015 and therefore the results for the six months to 30 June 2015 incorporate the impact of the acquisition. The embedded value has increased by £21.6m and the net cash generation has increased by £39.9m as a direct consequence of the acquisition. Over and above the direct and immediate financial benefits the acquisition creates opportunity to progress further value adding deals in the Dutch market."

Highlights

- Completion of the acquisition of the Waard Group in the Netherlands for €69.9m.

- £21.6m increase in Group Embedded Value.

- £39.9m of additional cash distribution potential created.

- Entry to a third market assessed as having significant further market consolidation potential.

Review six months to 30 June 2015

There has been a general lull in closed block market activity in the UK driven in part by uncertainty resulting from Solvency II and regulatory developments. Despite the short term hiatus we believe the factors which will drive market consolidation persist, namely larger financial organisations wishing to re-focus on core activities and the desire to release capital or generate funds from potentially capital intensive Life and Pension businesses. In the short term we have increased our focus on Western Europe, in particular investigating opportunities in the Dutch market following the acquisition of the Waard Group.

Acquisition of the Waard group

On 19 May 2015 we completed the acquisition of the Waard Group in the Netherlands for €69.9m. To finance the deal we raised £34.5m of equity through a well supported share placing exercise. The acquisition creates a great opportunity to enter a new market within which consolidation is in its early stages. The deal was originally assessed positively on all four elements of our assessment scorecard. The table below illustrates how these actual benefits arose on acquisition:

Acquisition process and approach

Chesnara is an established Life and Pensions consolidator with a proven track record. This, together with a good network of contacts in the adviser community, who understand the Chesnara acquisition model and are mindful of our track record and good reputation with our regulators, ensures we are aware of most viable opportunities in the UK and Western Europe. To support our proven market presence, we have recently implemented a revised acquisition process framework in order to ensure we continue to identify and assess all potential value adding deals across our widening geographical markets. Importantly we have rolled the acquisition process out into the Dutch management team, who have begun to implement the process in the Dutch market. This ensures we get the benefits of local market knowledge complemented by closed book consolidation experience and expertise provided by the Chesnara management team.

We assess the financial impact of potential acquisition opportunities by estimating the impact on three financial measures namely; the cash flow of the Group, the incremental embedded value and the internal rate of return. The financial measures are assessed under best estimate and stress scenarios.

The measures are considered by the Board, in the context of other non-financial measures including the level of risk and the degree of strategic fit and opportunity.

Risks associated with this strategic objective

The risk of not effectively delivering this objective is two-fold. Firstly, there is the risk that Chesnara makes no further acquisitions and secondly there is the risk that we make an inappropriate acquisition that adversely impacts the financial strength of the Group.

The acquisition of the Waard Group opens a new territory and hence increases our options thereby reducing the risk that no further value adding deals are done. Also, the broader target market will also reduce the risk of inappropriate opportunities being progressed on the grounds that better optionality will enable us to identify better fit deals at a more competitive price. As our acquisition strategy focuses more on non-UK markets we become increasingly exposed to currency risk. Flexibility over the timing of subsequent capital extractions and dividend flows provide an element of management control over the Sterling value of cash inflows. We accept the short-term fluctuations in the reporting of embedded value that can arise.

During recent years we have enhanced our financial deal assessment modelling capabilities which improves the quality of financial information available to the Board. This strongly mitigates the risk of inappropriate opportunities being pursued. In addition, the increased financial strength of the Group means that any perceived risk that pressure to do a deal could result in a departure from the stringent assessment criteria will have reduced.

Acquisition outlook

Despite some short term challenges in the UK due to the uncertainty created by Solvency II and regulatory review programmes, we remain confident that all the commercial and economic drivers for consolidation remain positive and hence the market will become more active in due course. In the meantime, the acquisition of the Waard Group will provide significant potential in the Dutch market. We are well positioned to take advantage of any value adding opportunities that may arise. Our financial foundations are strong and we continue to have strong support from shareholders and lending institutions to progress our acquisition strategy. In addition our operating model which consists of well established outsource arrangements plus efficient, modern in house solutions, means we have the flexibility to accommodate a wide range of potential target books. With all the above in mind, we are confident that we are well positioned to continue the successful acquisition track record in the future.

CHESNARA CULTURE AND VALUES

General business conduct

The principles of the Group's general business conduct are illustrated below:

Good business conduct is in many ways a matter of behavioural or cultural practice and principles. Chesnara has always maintained high standards with regards to ensuring the business is managed on a risk-based, fair and responsible basis. To further reinforce and embed this culture of responsibility revised Governance procedures and processes ("Governance Map") have been developed which are due for implementation during the latter half 2015. The Governance Map will ensure Chesnara's cultural values and good business conduct are effectively applied across the recently enlarged Group. It will also create consistency of approach and transparency of policy, both of which are fundamental requirements of the Solvency II regime.

Maintain adequate financial resources

A critical element of good business conduct in a regulated financial services business is the need to maintain adequate financial resources which in turn is managed by governing our solvency position. In recognition of this, as part of the day to day conduct of our business we regularly monitor the solvency position of the Group. This demonstrates our commitment to maintaining a strong, but not excessive, solvency position. This brings a number of benefits, including supporting:

- one of our key financial management objectives of safeguarding policyholder interests.

- delivering to the dividend expectations of our shareholders.

- potential acquisition opportunities.

- our ability to absorb volatility created by external economic conditions.

Highlights

- The Group shows it continues to be well capitalised, with Group solvency being 271% at 30 June 2015 (284% at 31 December 2014).

- The Waard Group acquisition has had a slightly dilutive effect on the Group solvency position, as expected.

- As expected the Waard Group companies are well capitalised and this will support the orderly transfer of cash to Chesnara over a three year period.

Regulatory capital:

Group Solvency (IGD)

- The Board approved target is for Group capital resources to be at least equal to 100% of the capital required by the Insurance Group Directive (IGD).

- The IGD ratio at 30 June 2015 is 271% (31 December 2014: 284%)

- This represents a surplus of £139.3m (31 December 2014: £146.0m)

- IGD is stated after foreseeable dividends of £8.4m, this being the interim dividend to be paid on 15 October 2015 (31 December 2014: £15.1m, being the final dividend that was paid on 22 May 2015).

- The movement in IGD since 31 December 2014 is a function of the following key items:

- Acquisition of the Waard Group:  This has resulted in the equity proceeds from the capital raised in December 2014, coupled with Chesnara cash resources, being utilised to fund the acquisition. As expected, the IGD has consequently reduced due to the inclusion of the Waard Group's capital requirements in the IGD calculation.

- The Group regulatory surplus in the period.  The Group Regulatory surplus in the first half of 2015 amounted to £6.7m, before foreign exchange retranslation differences.

- Foreign exchange losses on retranslation. The Group Regulatory Resources have reduced by £3.0m in the period as a result of the weakening of the Swedish Krona.

- The interim dividend: The Group Regulatory surplus reduces as a result of the proposed interim dividend of £8.4m.

Solo Solvency

CA Plc

- CA plc is the primary operating subsidiary within the UK.

- The Board approved target for CA plc is to hold capital resources that are at least equal to 162.5% of Long Term Insurance Capital Requirement (LTICR) plus 100% of the Resilience Capital Requirement (RCR).

- CA plc is reporting a solvency ratio of 211% at 30 June 2015 (31 December 2014: 176%), representing a surplus of £66.1m (31 December 2014: £50.3m) over the regulatory capital requirement. The movement since 31 December 2014 is as a result of the following factors:

- Regulatory earnings in the period:  The regulatory surplus emerging from CA plc amounts to £9.5m. This is broadly in line with the IFRS post-tax surplus of £15.0m, as reported as set out below. The key difference arises from the way in which products with guarantees are accounted for between an IFRS and Solvency I basis.

- Reduction in capital requirement: The capital requirement of CA plc is estimated to have reduced by £6.2m in the period.

PL Ltd

PL Ltd also sits within the UK division. This company being managed such that its capital resources equal its capital resources requirement. This is following the transfer of its long term business into CA plc on 31 December 2014. Subsequent to 30 June 2015 PL Ltd was deauthorised. This will release £3.5m of capital that was required to be held at 30 June 2015 due to it still being a regulated company at that date.

Movestic Liv

- Movestic Liv is the principal operation subsidiary in Sweden.

- The Board approved target for Movestic Liv is to hold capital resources that are at least 150% of its capital resources requirement.

- Movestic Liv has a solvency ratio of 408% at 30 June 2015 (31 December 2014: 376%), representing a surplus of £22.2m (31 December 2014: £21.0m) over the regulatory capital requirement. The movement since 31 December 2014 is as a result of the following factors:

- Regulatory earnings in the period:  The regulatory surplus emerging from Movestic Liv amounts to SEK 37.5m. In GBP terms the overall capital resources of Movestic Liv have only marginally increased due to the weakening of Krona in the period.

- Reduction in capital requirement: The capital requirement of Movestic Liv is estimated to have increased in the period as a result of the general growth in the business.

The Waard Group

- The Board approved target for the regulated insurance companies within the Waard Group is for each company to hold capital resources that are at least equal to 200% of the regulatory imposed capital resources requirement.

- Waard Leven is the largest company within the Waard Group, and owns Hollands Welvaren.

- As reported prior to the acquisition, the Waard Group is well capitalised, with Waard Leven reporting a solvency ratio of 766% at 30 June 2015, compared with 752% at 31 December 2014.

- Whilst the solvency ratio has improved, the solvency margin of Waard Leven in GBP terms, has reduced from £29.7m at the start of the year to £26.5m at 30 June 2015 due to a depreciation of the Euro against GBP in this period.

When stated in Euro, Waard Leven has generated a regulatory surplus of €1.8m since the start of the year.

Treatment of customers

UK

Treating customers fairly

We have embedded the principle that we aim to treat all customers fairly within all our people, processes and procedures. This aim has been shared with and adopted by, all our outsourcing partners. The principle goes beyond the way we answer telephone calls and deal with the regular service that we provide to our customers. It is also considered when we deal with complaints from our customers or where we identify an error within our systems that affects customer outcomes.

Complaints

The general low level of complaints received has continued although we continue to receive a number of complaints from complaint management companies in respect of endowment policies surrendered or lapsed many years ago. The Financial Ombudsman Service continues to agree with our decision on the majority of complaints referred to them for adjudication.

Policyholder investment funds

The CA plc Investment Committee provides oversight of policyholder funds through regular meetings with the investment managers. With them we continue to review the funds to ensure the underlying investment mix is the most appropriate for policyholders. A critical factor that has a bearing on the customer experience is the level of investment return on their assets. Whilst unit linked customers are naturally directly exposed to the volatility of investment markets outside of Chesnara's direct influence, it is important that we ensure the investment performance of our policyholder funds is competitive against market benchmarks. In light of this we are pleased to confirm that our main managed funds have all out-performed their benchmarks during the 12 months ended 30 June 2015, with the exception of the CWA Balanced Managed Pension fund, which slightly underperformed against benchmark during this 12 month period.

Sweden

An external survey measuring the brokers' and broker assistants' view of Movestic was conducted during the first half of 2015 and the results confirm the conclusions from 2014. With regards to the treatment of customers, Movestic's complaints function receives very few customer complaints and cases brought to the Public Complaints Board are very rare.

Netherlands

The Dutch operations implemented a new complaints registration system, in accordance with regulatory requirements. This resulted in a more accurate registration and more efficient processing of complaints. The number of complaints remains low. The operations run a Court approved "Customer Compensation Schema", introduced and predominantly paid by the Trustees of the former shareholder, which proceeds as expected.

Treatment of employees

We recognise that management and staff are at the heart of Chesnara's success. Our continued flexible and supportive approach has contributed to another period of low staff turnover throughout the Group.

The Movestic approach is characterised by the focus on team efforts. The work environment provides a motivating ground for developing the business to meet future challenges.

Regarding the recent acquisition of the Waard Group, this has been through a period of significant uncertainty over recent years following the bankruptcy of its parent company. Throughout this period the staff and management have remained focussed, professional and loyal. The Waard Group is moving offices in early September, which will contribute to maintaining good employee satisfaction.

Treatment of investors

As a listed company, clearly one of our core responsibilities is to continue to provide a competitive return to our shareholders. We are aware that for many of our shareholders continuity of our historically strong dividend performance is a core requirement. In light of this we are pleased that the financial performance of the Group during the first half of 2015 enables us to increase our interim dividend by 3.0% compared with 2014.

In addition to providing financial returns to our investors we also recognise the importance of engaging with our investors in an effective way so as to ensure they are appropriately informed about the performance of the company. To this end, we produce external reports that aim to be as open and informative as is reasonable. We also ensure we are available to meet with investors and hold ad hoc presentations as appropriate.

Relationship with regulators

UK

As ever in this highly regulated industry there have been a number of new and ongoing initiatives that have led to various levels of attention and challenge. The commentary below sets out a list of the key activities during the period.

Senior Insurance Managers Regime

As part of the changes required to meet the requirements of Solvency II, the PRA and FCA are making changes to how they regulate the people who effectively run an insurance company. This change will require changes to governance arrangements for the company and with individuals taking more personal responsibility. The Company is currently making good progress in its preparations for these changes.

Legacy review UK

During 2014 CA plc participated in a review by the FCA that looked at legacy investment linked business. This review has looked at a number of areas including company governance, customer correspondence and policyholder charges. A report on the findings of this review was expected in the second quarter of 2015, but is now expected during the third quarter.

Independent Governance Committees (IGCs) on pensions

The new governance requirements for Workplace Personal Pension schemes and Occupational Pension schemes has now been introduced. The company has appointed Pitmans Trustees Limited as its external Governance Advisory Arrangement to oversee the Workplace Personal Pensions and report on their value for money. The Trustee arrangements for the occupational schemes are being updated and they will also report on value for money.

Pension changes

The company has updated its processes to comply with the pension changes introduced in April 2015. The company saw an initial increase in pension enquiries which has now returned to normal levels. Following the changes, the company has experienced an increase in the number of policyholders electing to take their benefits as a lump sum at retirement.

Pension transfers and early exit charges

In July 2015 HM Treasury issued a consultation on "Pension transfers and early exit charges". In this paper the Government has stated that it wants to ensure that individuals can access the new flexibilities for pensions "easily, and at reasonable cost". This consultation includes consideration of any fees and charges that policyholders might incur when leaving their scheme early, and views are being sought on three options which may be recommended if there is clear evidence of excessive early exit fees and charges.

PRA visit

As part of its regular monitoring of CA plc the PRA carried out its annual Periodic Summary Meeting. This meeting helps it understand the business and identify its monitoring requirements over the year.

Sweden

Movestic has a good relationship with the regulator and has an active dialogue with them on business as usual matters in conjunction with interactions on any specific regulatory affairs. During the first half of 2015 a key focus of the Swedish FSA has been concerning industry preparations around SII.

Netherlands

During the past few years, the Waard companies maintained intensive contact with the regulators, DNB (Dutch Central Bank) and AFM (Financial Market Authority). The relationship with the regulators is good. No significant issues were reported or are outstanding.

Matters emphasised in the first half of 2015 include the post-acquisition governance structure, further implementation of Solvency II, ORSA and the regulator's survey of unit-linked portfolios.

financial review

The key performance indicators illustrate how effectively we have performed against our three strategic objectives. The strong net cash generation of £56.7m, together with the significant Embedded Value earnings in the period, is a function of delivering against both our "Maximising value from the in-force book" and "Acquire Life and Pensions Businesses" objectives. In addition to this, within the embedded value earnings there is £2.6m of new business profits which, despite being at a more modest level than previously, reflects our continued commitment to "Enhancing value through new business".

IFRS PRE-TAX PROFIT £30.4M Six months ended 30 June 2014: £27.4M

What is it?

The presentation of the results in accordance with International Financial Reporting Standards (IFRS) aims to smooth the recognition of profit arising from written business over the life of insurance and investment contracts.

Why is it important?

IFRS pre-tax profit is an indicator of the value that has been generated within the long-term insurance funds of the divisions within the Group, and is a key measure used both internally and by our external stakeholders in assessing the performance of the business. IFRS pre-tax profit is an indicator of how we are performing against our stated strategic objective of "maximising value from the in-force book".

Risks

The IFRS pre-tax profit can be affected by a number of our principal risks and uncertainties as set out below. In particular, volatility in equity markets and bond yields can result in volatility in the IFRS pre-tax profit.

Highlights

- A day one gain of £16.2m has been recognised on the acquisition of the Waard Group in the Netherlands, representing the difference between the purchase price and the net assets acquired.

- Linked to the Waard Group acquisition, the Group segment includes a £3.5m foreign exchange translation loss arising from holding Euros to fund the acquisition.

- Waard Group profit contribution to the half year results is immaterial given proximity of the acquisition to 30 June 2015.

- The CA result is less than the same period in 2014 largely due to 2014 including some one off items, such as the positive impact of the revised HCL contract and a reserve reduction driven by a change in practice associated with certain products that can accrue bonus units.

NET CASH GENERATION £56.7M Six months ended 30 June 2014: £15.6M

What is it?

Net cash generation is a measure of how much distributable cash the subsidiaries have generated in the period. The dominating aspect of cash generation is the change in amounts freely transferable from the operating businesses, taking into account target statutory solvency requirements which are determined by the Boards of the respective businesses. It follows that cash generation is not only influenced by the level of surplus arising but also by the level of target solvency capital.

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 supports 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 in-force book". 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 as set out below. Whilst cash generation is a function of the regulatory surplus, as opposed to the IFRS surplus, they are closely aligned, 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. In addition to this, regulatory change, such as the introduction of Solvency II, can also materially affect the levels of cash generated by our regulated subsidiaries, both positively or adversely.

Highlights Six months ended 30 June

- Gross cash generation across the Group continues to support our current attractive dividend strategy.

- Net cash generation in 2015 is dominated by the cash surpluses arising from the acquisition of the Waard Group, which can be used to both support our future dividends and potential acquisitions in the Netherlands.

EEV EARNINGS NET OF TAX £44.9M* Six months ended 30 June 2014: £47.3M

*excluding the positive impact of modelling adjustments of £5.9m

What is it?

In recognition of the longer-term nature of the Group's insurance and investment contracts, supplementary information is presented in accordance with European Embedded Value 'EEV' principles.

The principal underlying components of the EEV 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.

Why is it important?

By recognising the net present value of expected future cash flows arising from the contracts (in-force value), a different perspective is provided in the performance of the Group and on the valuation of the business. EEV earnings are an important KPI as they provide a longer-term measure of the value generated during a period. The EEV earnings of the Group can be a strong indicator of how we have delivered to our strategic objectives, in particular the new business profits generated from "enhancing our value through new business in selected markets", coupled with "maximising our value from the in-force book".

Risks

The EEV earnings of the Group can be affected by a number of factors, including those highlighted within our principal risks and uncertainties as set out below. In addition to the factors that affect the IFRS pre-tax profit and cash generation of the Group, the EEV 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 EEV affect our long-term view of the future cash flows arising from our books of business.

Highlights

- Strong EEV earnings in the period supported by:

- £21.6m gain on acquisition of the Waard Group, offset by the Euro holding foreign exchange loss of £3.5m.

- Continued emergence of economic profits

- Operating profits that are in line with the same period in 2014, after adjustment for the large positive one off items reported in 2014.

- New business profits from Movestic continue to be delivered, albeit at lower levels than 2014 due to a challenging market which has witnessed aggressive pricing strategies from competitors.

EEV £441.2M 31 December 2014: £417.2M

What is it?

The European Embedded Value (EEV) of a life insurance company is the present value of future profits, plus adjusted net asset value. It is a construct from the field of actuarial science which allows insurance companies to be valued.

Why is it important?

As the EEV takes into account expected future earnings streams on a discounted basis, EEV 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 embedded value. Analysis of EEV, distinguishing value in-force by segment and by product type, provides additional insight into the development of the business over time. The EEV 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 new business in selected markets. It ignores the potential of new business to be written in the future (the franchise value of our Swedish business) and the value of the Company's ability to acquire further businesses.

Risks

The Embedded Value of the Group is affected by economic factors such as equity and property markets and yields on fixed interest securities. In addition to this, whilst the other KPIs (which are all "performance measures") remain relatively insensitive to exchange rate movements (largely due to the proportion of IFRS pre-tax profit generated by Movestic compared with the other UK businesses) the EEV of the Group can also be materially affected by exchange rate fluctuations. For example a 10.0% weakening of exchange rates between Swedish Krona / Euro and Sterling would reduce the EEV of the Group by 3.0% and 1.5% respectively, based on the composition of the Group's EEV at 30 June 2015.

Highlights

*Stated before gain on acquisition of the Waard Group

- Growth in EEV of £24.0m during the period.

- Post-tax EEV earnings have contributed £23.3m, excluding the acquisition profit of the Waard Group.

- Profit of £21.6m arising on acquisition of the Waard Group enhances EEV in the period.

- Foreign exchange losses arising on retranslation of the Movestic business have continued, driven by a further weakening of the Swedish Krona.

- Dividends paid of £15.1m in the period, being the settlement of the year end 2014 final dividend, reduces the closing Embedded Value.

IFRS PRE-TAX PROFIT £30.4M SIX MONTHS ENDED 30 JUNE 2014: £27.4M

Executive summary

The IFRS results by business segment reflect the natural dynamics of each line of business. In summary the current financial model has three major components which can be characterised as: the "stable core", the "variable element", and the "growth operation". The results and financial dynamics of each segment are analysed further as follows:

Stable core

At the heart of the surplus, and hence cash generation, are the CA and recently added 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 during the year to date continue to support this objective, with an IFRS pre-tax surplus of £13.9m for CA (six months to 30 June 2014: £24.2m). The recently acquired Waard Group has not contributed materially to the IFRS pre-tax profit as a result of being acquired on 19 May 2015.

Further detail of the results of the CA and Waard Group segments can be found below.

Variable element

The S&P component generally brings an element of earnings volatility to the Group, with the results being particularly sensitive to investment market movements, which can lead to large movements in the reserves that are held for products that contain guaranteed returns. Despite this potential variability, the results for the first half of 2015 are comparable with the same period of 2014, with product deductions remaining stable.

Further detail of the results of the S&P segment can be found as set out below.

Growth operation

The long-term financial model of Movestic is based on growth, with levels of new business and transfers 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. The first half of 2015 has seen this growth continue, with funds under management having increased by 10.5% (on constant exchange rates) since the start of the year.

This growth has contributed to an IFRS profit of £3.4m being reported during the first half 2015, £1.3m higher than in the same period in 2014. Whilst it is reassuring to see this level of growth, the results for the first half of 2015 have benefitted from some large fee-rebates, amounting to £1.0m, which, by their nature, are more variable.

The Sterling value of Movestic's results continue to be suppressed by the ongoing weakening in the Swedish Krona against Sterling, which has seen a 7.5% fall during the first half of 2015.

Further detail of the results of the Movestic segment can be found on as set out below..

IFRS results

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

Note 1 - The CA segment has reported solid results for the first half of 2015, albeit reduced when compared with the same period in 2014 due to a number of one off items in 2014 not repeating in the year to date. The result is underpinned by product deductions, particularly in relation to mortality surpluses. Further detail are included below.

Note 2 - The S&P segment has reported a pre-tax profit in the first half of 2015 that is broadly in line with the same period in 2014. The result includes a small surplus arising from products with guaranteed returns. The full year result in 2014 amounted to a loss, driven by the significant reduction in bond yields during the latter half of 2014. Further details are included below.

Note 3 - The Movestic result has improved when compared with the same period in 2014. This is primarily driven by fees emerging from the increased levels of assets under management, coupled with some large rebates that were received in the period. Further details are included below.

Note 4 - The post acquisition IFRS profit of the Waard Group is immaterial due to the close proximity of the acquisition to 30 June 2015.

Note 5 - The Chesnara segment contains the corporate governance costs of the Group. The segment has reported a large increase in costs compared with the same period in 2014, the majority of which (£3.5m) represents a foreign currency translation loss arising on holding Euros prior to the completion of the Waard Group acquisition. Some additional one-off expenses have been incurred in the first half of 2015, such as the cost of additional resources required for final Solvency II preparations, deal costs associated with the Waard Group acquisition and loss of office payments associated with the resignation of the previous CEO.

Note 6 - The IFRS pre-tax profits include a day one profit arising on the acquisition of the Waard Group, being the excess of the fair value of the net assets acquired over the purchase consideration. Further detail behind this can be found on note 5 of the IFRS Financial Statements as set out below.

The IFRS results by business segment are analysed in more detail below:

CA

CA now includes the results of the PL segment, which was previously reported separately. The segment has reported a profit of £13.9m for the first six months of 2015 (six months to 30 June 2014: £24.2m). This reduction in profit before tax is largely driven by non-recurring items affecting the 2014 result that have not been repeated during 2015, further detail of which has been provided below. The underlying drivers of earnings in the CA segment have continued to hold up well, with product deductions actually improving when compared with 2014, largely driven by strong mortality surpluses in year to date.

The table below bridges the IFRS profit for the first half of 2015 compared with the same period in 2014, and illustrates that, save for the non-recurring items referred to in notes 3 and 4, the results are broadly in line.

The key components of the IFRS result for the year are as follows:

Note 1 - Product-based charges of £16.4m for the period have increased by £2.9m when compared with the same period in 2014. The key drivers of this are two-fold; the mortality surplus has increased by £2.3m when compared with the same period in 2014, driven by positive mortality experience, coupled with an increase in tax deductions from policyholder funds, driven by slightly better equity performance in the funds compared with the same period in 2014.

Note 2 - Profits arising from gains and interest on retained surplus have reduced by £2.6m when compared with the same period in 2014. This is primarily driven by the impact of a small decrease in bond values as a result of an increase in bond yields in the first half of the year. The converse dynamic existed in the same period in 2014.

Note 3 - The CA surplus in the first half of 2014 included a £4.2m positive effect of modelling the new HCL contract. No such item has been reported in the 2015 profit.

Note 4 - During the first half of 2014 the CA result benefitted from a £3.4m one-off item relating to the reserving impact of a change in practice associated with policies that can accrue bonus units in certain circumstances. No such item is being reported in the 2015 year to date results. The balance in 2015 relates to a number of small items, including the small impact of changes in actuarial reserves in the period.

S&P

The S&P segment has posted a pre-tax profit of £7.5m for the year to date, which is broadly in line with the same period in 2014. Whilst the total results are broadly similar period on period, the constituent parts continue to show some variability. Further analysis has been provided in the tables below.

S&P posted a pre-tax IFRS profit of £7.5m for period, the key components of the result being analysed as follows:

Note 1 - Sustained levels of product-based deductions have been delivered as the book runs-off. These are supported by assets under management, which have remained broadly constant throughout 2014 and into the first half of 2015, closing at £1,069m. Product deductions exceed administration expenses by £3.6m for the year to 30 June 2015 (six months ended 30 June 2014: £3.6m).

Note 2 - The income on with-profits shareholder funds is a function of investment market performance. The 2015 result to date has seen the impact of increased bond yields driving down the value of the shareholder holdings in such bonds. During the first half of 2014 the opposite dynamic applied.

Note 3 - The reserves held for products that contain options and guarantees has reduced since the start of the year, resulting in a gain of £3.8m in the period. Whilst this is broadly in line with the same period in the prior year, the drivers of this surplus are different. In particular, the first half of 2015 has witnessed the positive impact of increasing Government bond yields, compared with a reduction in 2014. In addition to this, the movement in the Cost of Guarantee reserve during 2015 includes a one-off charge of £2.1m that reflects the impact of updated annuity rates for deferred annuity policies.

Note 4 - As reported in the 2014 Interim Financial Statements, during the first half of 2014 a £4.2m strain arose as a result of the effect of modelling the revised HCL contract. This dynamic did not exist in the six months to 30 June 2015.

Movestic

The IFRS pre-tax results of Movestic for the six months amounted to £3.4m, showing an increase of £1.3m when compared with the same period in 2014. This reported increase is despite a weakening of the Swedish Krona, with average exchange rates in the first half of 2015 being some 15% weaker than the same period in 2014.

The table below analyses the constituent parts of the pre-tax IFRS profit:

Note 1 - The Pensions and Savings segment has grown significantly when compared with the same period in 2014 and is reporting a profit that is higher than the full year result in 2014. This growth is driven predominantly by the ongoing growth in funds under management, which generates fee income from policyholders and also performance related rebates from investment managers. Funds under Management (FuM), which have increased from £1.68bn (SEK 21.94bn) at 31 December 2014 to £1.86bn (SEK 24.25bn) at 30 June 2015, have grown due to investment returns in the period (the OMX 30 increased by c5% in the year to date), and premiums from existing and new policies, which amounted to SEK 1.78bn in the period). In addition to the general growth in FuM, profitability improvements have also arisen due to the SICAV, which was set up during 2014 and has continued to deliver the expected improvements in margins. Whilst the period has experienced some positive fee rebates, these are, by their nature, more variable.

Note 2 - The Life and Health business has delivered a small profit of £0.1m in the first half of 2015, compared with £0.5m in the same period in 2014. The Life and Health business typically provides a small contribution to the Group and the portfolio of policies has remained stable period on period. The key driver for the reduction in profitability is due to the reduction in interest rates in Sweden during the first half of 2015, which resulted in the longer tail liabilities in this business unit being discounted less than in previous periods.

Note 3 - The "other" component includes; the results of Movestic's associated company, Modernac; investment income; the results of Movestic's investment management business and fair value adjustments on the financial reinsurance that Movestic uses to fund the writing of new Pensions & Savings business. These results have reduced slightly when compared with the same period in 2014, due to a small reduction in profits arising from Modernac and a slight profit reduction of c£0.2m emerging from Movestic Kapitalforvältning.

The Waard Group

The Waard Group was acquired on 19 May 2015. As a result of the close proximity of the acquisition date to the period end, the amount of post acquisition IFRS surplus generated by this segment is not material.

Consolidation adjustments

The adjustments arising on consolidation are analysed below:

Note 4 - The amortisation of the AVIF for the Waard Group only relates to the six week period post acquisition.

NET CASH GENERATION £56.7M SIX MONTHS ENDED 30 JUNE 2014: £15.6M

"The Group's cash flows are generated principally from the interest earned on capital, the release of excess capital as the life funds run down, policyholder charges and management fees earned on assets under management."

Highlights

- A significant amount of net cash, amounting to £39.9m, has emerged from the acquisition of the Waard Group, driven by the strong levels of regulatory surplus in this group.

- Gross cash generation in the UK run-off business of £18.9m in the period is in line with the same period in 2014.

- We are reporting modest levels of cash generation (£3.3m) for Movestic for the first time (see note 3) since its acquisition in 2009.

- The increase in cash utilised by Chesnara in the period compared with the same period in 2014 is largely due to a one-off foreign exchange loss of £3.5m in the period, directly associated with the acquisition of the Waard Group.

The Group's closed life funds provide predictable fund maturity and liability profiles, creating stable long-term cash flows for distribution to shareholders and for repayment of outstanding debt. Cash flow generation will ultimately naturally decline over time as the UK and Dutch closed books run-off.

Although investment returns are less predictable, a significant portion of the investment risk is borne by policyholders. However, the S&P segment continues to bring the potential of short-term variability. This arises from the impact of investment market movements and the cost to shareholders of guarantees within the S&P with-profits funds. Although the short-term measure of this cost follows the fortunes of investment markets, we manage the risk taking a longer-term perspective.

Given the recent growth in Movestic it is now generating modest levels of cash, having been cash neutral for a while, and prior to this requiring periodic cash support from Chesnara.

The Waard Group has delivered a one off large cash generation item due to its strong levels of solvency. It is expected to generate modest levels of cash in the future as the closed books in this group run off and surpluses emerge.

The following table identifies the source of internal gross and net cash generation within the Group, representing the net change in funds available to service debt (interest and loan principal repayment) and equity (dividends):

Items affecting the net cash available for distribution:

Note 1 - The CA segment has generated cash of £11.8m in the period, which is less than the £18.9m in the same period in 2014. This is principally due to a reduction in the surplus arising, driven by the same key items that affect the IFRS profit, as analysed on below. As expected, our capital requirements continue to run off as our book runs off, which further supports the ability to distribute cash out of the segment.

Note 2 - The S&P segment has reported cash generation of £7.1m. This is driven primarily through a reduction in the target required capital in the period, as result of a reduction in the estimated regulatory capital requirement since the start of the year. The regulatory surplus in the period has been slightly negative, and is lower than the reported IFRS surplus due to the difference in accounting requirements for those products that contain options and guarantees.

Note 3 - Movestic's scale has now reached a level such that it is now generating cash, which amounted to £3.3m in the period.

Note 4 - The Waard Group has generated immaterial levels of post-acquisition cash in the period due to the proximity of the acquisition to the end of the period. The acquisition of the Waard Group has delivered a significant one off cash generation item, amounting to £39.9m, driven by the strong levels of regulatory surplus in this group.

Note 5 - The Chesnara segment has reported an increase in cash utilisation compared with the same period in 2014, the majority of which (£3.5m) represents a foreign currency translation loss arising on holding Euros prior to the completion of the Waard Group acquisition, coupled with some additional one-off expenses, such as the cost of additional resources required for final Solvency II preparations, deal costs associated with the Waard Group acquisition and loss of office payments associated with the resignation of the previous CEO.

Note 6 - The net cash generation KPI is a useful indicator of the dividend paying capacity of the Group's regulated subsidiaries. This is monitored closely by Management as cash generated by the Group's regulated subsidiaries is used by the Chesnara Parent Company for corporate transactions such as the servicing of debt, payments of dividends and the funding of future acquisitions. It should be noted that this KPI is quite distinct from the Group's Cash Flow Statement as included in the Group's IFRS Financial Statements, which is intended to reflect the movement in cash held by Chesnara and its subsidiaries but does not reflect that most of the subsidiary cash balances are held in regulated insurance funds and are therefore not available for use by the Parent Company.

Note 7 - There have been no further synergistic effects arising from the Part VII transfer of the Protection Life business into CA plc in the period. Subsequent to the end of the period notification was received that Protection Life has been deauthorised. This will give rise to the balance of the synergistic impact of the Part VII, amounting to £3.5m. This will be reported in the full year 2015 cash generation.

EEV EARNINGS £44.9M* SIX MONTHS ENDED 30 JUNE 2014: £47.3M

*excluding the positive impact of modelling adjustments of £5.9m

Summary

The first half of 2015 has seen a positive EEV result being reported for the Group, amounting to £44.9m (six months to 30 June 2014: £47.3m). The results are driven by three key areas:

- Solid operating profit of £15.2m (six months to 30 June 2014: £37.2m). Whilst the profit shows a reduction when compared with the same period in 2014, the 2014 result was dominated by operating assumption changes in the CA segment, primarily due to the £17.3m one off surplus arising from a change around how the assumptions for future bonus units that are allocated to policyholders are determined. After taking account of this the operating profits are more aligned, as would be expected.

- Positive investment market results of £15.9m (six months to 30 June 2014: £21.2m). Investment markets in the UK have been relatively flat, resulting in a modest result for this territory. Swedish investment markets have performed more positively, and despite a further reduction in the risk free rate in the period, taking Sweden into negative territory, this is more than off-set by relatively strong equity markets, which have increased by 6.5% in the period.

- Gain of £21.6m arising on the acquisition of the Waard Group. As expected, and in line with previous estimates, the acquisition of the Waard Group has yielded a day-one gain, representing the excess of the EEV acquired over the purchase consideration.

The results of the Waard Group are immaterial in the period, due to the proximity of the acquisition to the period end.

The following tables analyse the Group EEV earnings after-tax by source and by business segment:

Economic experience and assumption changes

The EEV results are sensitive to investment market conditions. Economic experience and assumption changes contributed a profit of £15.9m in the first half of 2015 compared with a profit of £21.2m in the same period in 2014. Key economic condition highlights are as follows:

- The FTSE All Share has increased by 1.1% during the first half of 2015, compared with a small reduction of 0.3% in the same period in 2014.

- The Swedish OMX All Share has increased by 6.5% during the period, compared with a 6.0% increase in the same period last year.

- 10 year UK gilt yields have increased by 0.3% in the year to date, compared with a decrease of 0.2% in the same period in 2014.

These conditions have led to investment market surpluses emerging in the period, albeit at relatively modest levels compared with prior periods.

The following table analyses the impact of investment market conditions by segment:

The CA and S&P segments have both reported modest economic experience and assumption changes in the period, driven by the relatively flat investment markets in the period, as described above.

Movestic is sensitive to movements in equity markets, largely due to its core income stream being dependent upon management charges generated from policyholders. These management charges are based on the level of funds under management, which are primarily equity invested. Equity growth in Sweden of c6.5%, coupled with an increase in longer-duration Government bond yields in the period having led to this positive contribution in the period.

New business contribution

The new business contribution relates primarily to the Movestic Pensions and Savings business. Movestic also writes Life and Health policies, but due to its more short-term nature the Life and Health business is reported as uncovered business and hence does not contribute to the new business result. Movestic has contributed £2.4m (six months to 30 June 2014: £5.8m) of new business profits in the period, representing a significant reduction when compared with the same period in 2014. This reduction is due to a combination of a reduction in the overall volume of products being sold, coupled with a reduction in margins on those products sold as a result of a change in the sales mix. The lower volumes have arisen from the ongoing challenges in selling new contracts, with competitors continuing to offer high guaranteed returns to policyholders, something that we perceive is unsustainable in light of the low interest rate environment in Sweden.

Experience variances

The CA and S&P segments have both reported positive experience variances of £4.1m and £1.8m respectively in the period, which are both broadly in line with the same period in 2015. For both of these books the experience is made up of a number of small items, with both including the positive impact of favourable lapse experience in the period.

Movestic has reported an experience loss of £3.0m in the period. This is predominantly driven by an expense overrun of c£0.7m, a reduction driven by the impact of policyholders changing their investment allocations (c£1.0m) and an adverse impact of c£1.0m driven by the 100% paid up rate for private pension policies, following legislation change in Sweden resulting in there no longer being a tax benefit of investing in private pensions.

Operating assumption changes

For the CA segment there were no significant operating assumption changes in the period. This compares with a significant surplus arising from operating assumption changes in the same period in 2014, primarily due to a one off positive item of £17.3m arising from a change around how the assumptions for future bonus units that are allocated to policyholders are determined.

S&P has reported a strain of £1.0m in the period arising from operating assumption changes. This is primarily due to a slight strengthening in lapse assumptions due to the recent "Pension Freedoms" rules.

During the period Movestic has reported profits of £5.4m arising from operating assumption changes. There are two key drivers of this. Firstly, the impact of a change in assumptions on fee rebates arising, based on recent fee rebate experience, has resulted in an EEV profit of c£9.0m in the period. This assumption change is based on a combination of fee rebates emerging from the new SICAV structure coupled with renegotiated terms with some key fund managers. Off-setting this is the impact of strengthening lapse assumptions for certain broker-generated blocks of business coupled with an increase in expense assumptions to capture some expected future IT development costs.

Gain on acquisition of the Waard Group

The EEV result in the period has benefitted from a gain of £21.6m arising from the purchase of the Waard Group. This represents the excess of the Embedded Value of the Waard Group at the point of acquisition over the consideration paid.

Uncovered business and other group activities

The Chesnara segment of the uncovered business relates to Chesnara parent company costs, such as corporate governance and business development, that are not attributable to the covered business. The increase in costs when compared with the same period in 2014 largely relates to a one-off foreign exchange loss of £3.5m arising from holding Euros prior to purchasing the Waard Group. In addition to this, some additional corporate costs have been incurred in the period. These include costs associated with the Waard Group purchase, some loss of office costs arising in relation to the resignation of the previous CEO and some additional resource costs to support the readiness for Solvency II.

Movestic has reported a small uncovered business loss of £0.6m, compared with a profit of £2.1m in the same period in 2014. This reduction is driven by a reduction in profits of £1.1m in Movestic's associate, Modernac, coupled with a reduction of £0.4m arising in the Life and Health segment, which is not modelled for EEV purposes.

EEV £441.2M 31 DECEMBER 2014: £417.2M

* stated before exceptional items

Summary

The EEV of the Chesnara Group represents the present value of the estimated future profits of the Group plus an adjusted net asset value. Movements between different periods are a function of the following components:

- Net of tax profit arising in the period, pre exceptional items;

- Exceptional items, such as:

- the impact of raising new equity;

- the surpluses arising on acquisitions; and

- modelling adjustments;

- Foreign exchange movements arising from retranslating the EEV of overseas subsidiaries into Sterling; and

- Dividends that are paid in the period.

More detail behind each of these components for the six months to 30 June 2015 has been provided below. Tables for comparative periods have been provided to provide additional context.

Net of tax profit

The EEV profit arising during the period has been analysed in more detail within the preceding section.

Exceptional surplus on acquisition

The purchase of the Waard Group on 19 May 2015 resulted in a day one increment to EEV of £21.6m. This represents the excess of the Embedded Value of the Waard Group over the purchase price.

Equity raised for acquisition

During December 2014 equity of £34.6m was raised to finance the acquisition of the Waard Group. To mitigate the downside risk of a strengthening Euro the capital raised was converted to Euros at the time of the capital raise.

Effect of modelling adjustments

Six months to 30 June 2015

During the six months to 30 June 2015 an adjustment of £5.9m has been reported relating to a tax error in the EEV model which resulted in the tax charge in the EEV model being overstated at 31 December 2014. This has been corrected in the period.

Six months to 31 December 2014 and six months to 30 June 2014

There were no modelling adjustments during these periods.

Foreign exchange reserve movements

The £11.7m foreign exchange reserve movement during the first half of 2015 has arisen as a result of a further weakening of the Swedish Krona against Sterling by 7.5% since the end of 2014. This further adds to the weakening in the Swedish Krona that was witnessed during 2014, albeit at a lower rate than was experienced in the prior year.

Dividends paid

Dividends of £15.1m were paid during the first half of 2015, being the final dividend from 2014.

Analysis of EEV

The information below provides some further analysis of the EEV of the Group, both in terms of the split between different operating segments and also the split between the adjusted shareholder net worth and the value of the in-force (VIF) business. The adjusted shareholder net worth represents the IFRS net worth of the Group, but adjusted for items that are measured differently under EEV measurement rules and the VIF represents Management's best estimate of the present value of the future profits that will arise out of each book of business.

EEV - Value in force (VIF) and adjusted shareholder net worth (SNW) (£m)

Analysis of VIF at 30 June 2015

Analysis of EEV at 30 June 2015 - £441.2m

Highlights

- There is a good balance in EEV across the core business segments, with the UK businesses representing the majority (51%) of the total EEV. The value in-force component is dominated by the Swedish business which represents 57% of the total Group VIF.

- The Group EEV includes the addition in the period of Waard Group, representing £73.3m of EEV.

- There is a significant level of product diversification within the VIF. When adjusted to recognise the impact of the S&P cost of guarantees which are predominantly pension contract related, 62.1% of the total product level value in-force relates to pension contracts, 26.1% to protection business and 9.8% to endowments.

- "Other Group Activities" of £9.0m represents the Chesnara holding company balance sheet, stated after the elimination of the carrying value of investments in Group companies.

Analysis of VIF by policy type

The tables below set out the value of in-force business by major product line at each period end. Analysis of the composition of the VIF by business and major product category provides a useful insight into the commercial dynamics underpinning the value of the Group.

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