Ecclesiastl.8fe Regulatory News (ELLA)

2016 INTERIM RESULTS

Ecclesiastical Insurance Office plc 23 August 2016

Performance in line with expectations despite market volatility and adverse weather events

Highlights

· Gross written premiums in line with expected performance at £151.8m (H1 2015: £153.9m)

· Product innovation continues with the launch of well-received Property Owners, Art & Private Client and Cyber insurance policies and refreshed Education policy in the pipeline

· Underwriting profit of £5.1m giving a COR of 94.8%, well in line with long term targets but reflecting the impact of post-Brexit reductions in discount rates on long-tail claims reserves, UK flash floods and Canadian wildfires

· Profit before tax of £15.2m (H1 2015: £35.3m), in line with expectations and anticipated return to more normal claims experience compared to exceptionally benign H1 2015

· Investment returns marginally ahead of prior year at £22.2m (H1 2015: £21.6m) despite post-Brexit UK equity losses which have now more than reversed since the end of June

· Further external endorsement of Group's position as a trusted specialist business, including Better Society's Insurance Company of the Year award and top ranking in UK's Fairer Finance league table for home insurance

· £5m will be granted to charity in September, reflecting the strong half year results. Group also delivered its 2014 goal of giving £50m to charitable causes, well ahead of three year target.

Mark Hews, Group Chief Executive Officer of Ecclesiastical commented:

"I am pleased that we have continued to deliver a strong financial performance in this first half and are building on this with new property owners, art and private client, cyber and education insurance products. We achieved this despite a challenging commercial environment, volatile markets and exposure to the costliest insured natural disaster in Canadian history. Our underwriting profit of £5.1m included very positive results from the UK and Ireland and investment returns are marginally ahead of the previous year. These results reflect the ongoing transformation in the performance of our business as we apply stronger underwriting disciplines and manage our exposure to risk tightly.

"We are on track to deliver another good underwriting performance in 2016 and have the capital strength to weather the continuing market volatility that we anticipate. Our regulatory capital position remains very strong under the new Solvency II regime.

"Our focus is on achieving steady profitable growth, strong financial performance and improved organisational efficiency. We will do this by demonstrating that we are the most knowledgeable and trusted provider in our chosen markets and developing products based on a deep understanding of customers' needs. This specialist knowledge is embedded in two well-received products we launched recently.

"As a company with the goal of being the most ethical and trusted business in our chosen markets, I am also delighted that this year we achieved the challenging target of giving £50 million to good causes in less than three years and announced an even more challenging goal, which is to give a further £100 million by the end of 2020".

Management Report - Key Financial Performance Data

* Investment return includes the return on assets held to match the liabilities of our life insurance business and the corresponding increase in those liabilities is not shown in the table. Profits from other business units and corporate costs are also excluded. A full breakdown of profit before tax is shown in note 3 - Segment information

Chief Executive's Statement

In our 2015 annual report and accounts, we outlined the continued transformation in the performance of our business. As we set out in that report, our focus continues to be on making the right strategic choices to create long-term growth which is both sustainable and underpinned by the application of high ethical standards to everything we do. In the first half of 2016 we continued to apply strong underwriting and risk management disciplines across the Group.

Thanks to this approach, we have continued to deliver strong financial performance in the first half of the year despite the challenging commercial environment, significant weather and loss events and the impact of the UK Brexit decision, which saw discount rates and UK equity markets fall sharply during the final days of June.

Gross written premiums remained steady at £151.8m (H1 2015: £153.9m) in line with our strategic refocusing on profitability over volume and we report a profit before tax of £15.2m overall at the half year (H1 2015: £35.3m). This is close to our expectations, which anticipated continued pressures on investment returns and the return to a more normal claims experience compared to the first half of last year, when we benefited from exceptionally benign weather conditions.

Our underwriting profit is £5.1m (H1 2015: £14.3m) giving a COR of 94.8% (H1 2015: 85.8%), in line with our long-term COR target of 95%. This on-target underwriting performance has been achieved despite weather events and large losses, which were considerably worse than the first half of 2015. In particular, the Fort McMurray wildfires in Canada and UK flash floods in June had a significant effect on the result of our property business. 

We have seen favourable development of prior year claims, with releases of £18.0m in the first half of 2016 partly offset by the effect of the reduction in UK discount rate on long-tail risks (£8.2m) with total net prior reserve estimates falling £9.8m over the six months to June (H1 2015: £7.0m). 

Our investment return was marginally ahead of last year at £22.2m (H1 2015: £21.6m), against a backdrop of market volatility both at the start of the year and in the days after the Brexit vote. This result included post-Brexit losses on equities which have more than reversed in the weeks since the reporting date, and our investment returns are currently ahead of both our expectations and the 2015 half year.

As our results continue to demonstrate, performance of the business, especially the general insurance business, is much improved as a result of management actions taken over the past three years to reverse a period of underwriting losses.

These management actions have included embedding stronger underwriting discipline, a renewed focus on seeking profitable and stable growth, targeting headroom in our specialist segments, expanding our underwriting strength and embedding a new risk management culture. Our success is reflected in a more stable financial performance that is more in line with our expectations.

We achieved our goal of giving £50m to charity over three years in March, many months ahead of schedule, and have recently announced an even more ambitious target of donating a further £100m to good causes by the end of 2020. Our half year results mean we are able to pay a further grant to our charitable owner, Allchurches Trust, and the Board has approved a charitable grant of £5m which will be paid in September.

Strategic Update

Over the past three years we have become a more profitable, better-skilled and more focused business. Excellent progress has been made from both financial and strategic perspectives. We have successfully delivered a Group-wide change programme, our strategic intent being to stabilise the business, strengthen key disciplines and embed a new risk management culture.

Our focus is on achieving steady profitable growth, strong financial performance and improved organisational efficiency. By demonstrating that we are the most knowledgeable and trusted player in our chosen markets and developing products based on a deep understanding of customers' needs, we plan to capitalise on the headroom in those markets.

We will invest in systems to enhance our agility and efficiency, ensuring we can continue to offer real value for money and deliver on our promises to our customers. We will also continue to invest in our people, to strengthen and deepen our expertise.

General Insurance

Insurance market conditions remain competitive. Soft market prices are continuing, while low interest rates and an absence of significant natural catastrophes are increasing the competitive pressures in many areas, particularly commercial property insurance in all our territories.

There is also an abundance of reinsurance capacity, which in part is driven by capital market structures that allow a wider range of investors access to insurable risks. We continue to see market premium rates fall as insurers compete to win new business.

We expect continued pressure on returns from investment markets, and expect low interest rates to continue in the medium term which in turn will lower the returns insurers can make on their financial investments.

This drives clear decisions for us on price over volume and we have continued to prioritise profit over gross written premium (GWP) growth for its own sake.

General Insurance - UK & Ireland

Our UK and Ireland business reports an underwriting profit of £9.0m and a net combined ratio of 87.5% (H1 2015 £13.8m profit, COR 81.9%). Property claims experience returned to more normal levels when compared to the exceptionally benign weather experience of the first half of 2015 and reflected flash flooding across the UK which impacted our result by £3.4m at the net level during June.

Our liability business performance was in line with the same period last year overall. We have seen more favourable development of prior year liability claims than was experienced in 2015 but this has been partly offset by the effect of the reduction in discount rate (£8.2m). We discount some of our liability claims reserves in respect of physical and sexual abuse and asbestosis. The reserves relate to liability policies written over many decades and represent very long-tail risks. The dramatic fall in bond yields following the UK's vote to leave the EU increased those reserves by £8.2m, adding ten points to the reported combined operating ratio.

UK & Ireland GWP was £113.5m in the six months to 30 June 2016 (H1 2015: £115.0m). We continue to maintain very high retention levels across our UK & Ireland business, reflecting the value that our customers place on our expertise and specialist knowledge as well as exceptional customer service.

One of the main contributors to the 1% fall in GWP in the first half of the year was our Education sector where academies continue to transition to the Department for Education's risk protection arrangement.

As part of our sustainable growth strategy for Real Estate we have updated our existing Property Owners policy and are pleased at the half year to have achieved GWP growth of 15%, well ahead of our target. We have also achieved a 6% increase in GWP in our Heritage business. The launch of our new Art & Private Client Insurance policy in July will help us build on these successes, reinforcing our confidence in our ability to deliver moderate growth through the addition of good quality business at a steady rate, in line with our strategy.

In May 2016 we were delighted to win Insurance Company of the Year at the annual Better Society Awards. The awards celebrate the efforts commercial organisations make to create a better society. Our home insurance product remains top of the UK's Fairer Finance league table and in customer surveys, 99% of our UK customers tell us that they are satisfied with how we handle their claims.

General Insurance - Canada

Our Canadian branch reported a £1.8m estimated net loss in respect of the Fort McMurray wildfires in Alberta, which was the main factor behind an underwriting loss of £2.0m and net combined ratio of 113.0% (H1 2015: £0.5m profit, COR 96.9%).

We have an effective reinsurance programme in place which has helped to minimise the net loss to the Group from the Fort McMurray wildfires. The cover will continue to provide a high level of protection should the ultimate loss from the event deteriorate from our estimates.

Our Canadian business has continued to grow, with GWP increasing by 4% in local currency to £18.3m as a result of strong premium retention and new business wins. GWP has grown in each of the last ten years, a success built on trilateral partnerships between insurer, broker and insured and supported by our network of experienced and highly regarded independent brokers.

Ecclesiastical was proud to be named one of Canada's Top Employers for Young People in 2016 for a fourth successive year, joining a select group of winners alongside some of Canada's most highly respected organisations.

General Insurance - Australia

Our business in Australia has continued to deliver a consistent level of underlying underwriting performance, but reports an overall loss almost all of which is due to a fall in discount rates applied to the claims reserves we hold for long-tail risks.

The fall in discount rates followed reductions in Australian risk free interest rates which reduced bond yields. The overall underwriting loss for the period was £1.3m, a net combined ratio of 115.6% (H1 2015 £0.1m profit, COR 98.3%).

GWP was £18.0m in the period (H1 2015: £19.7m), a fall of 9% in local currency, as we took the decision not to renew one large poorly performing account which accounted for most of the shortfall on prior year as part of our on-going portfolio remediation and focus on profit over growth. New business and rate increases are in line with our expectations.

Our cost reduction initiative in Australia has produced cumulative inflation adjusted savings of 42% since 2012.

The business is a shortlisted finalist for the Small-Medium General Insurance Company of the Year in the 2016 Australian Insurance Industry Awards reflecting the sense of community, the innovative spirit, and the commitment to excellence of our Australian colleagues.

Group Investment Returns

Overall, investment performance in the first six months of the year has been broadly in line with our expectations despite the extraordinary volatility in financial markets in the final days of June following the UK's decision to leave the EU.

Our investment portfolio reports a profit of £22.2m (H1 2015: £21.6m). The performance of our equity portfolio, which is weighted towards UK mid-cap stocks, suffered from the fall in financial markets following the Brexit announcement, partially offset by significant currency gains on our overseas equities. Overall, our equity portfolio suffered a £4.7m fair value loss in the six months to June, but the recovery in equity markets since the reporting date has led to an overall gain for the seven months to the end of July.

The losses on equities at the half year were offset by £6.5m of gains on gilts and bonds, with all of the gains relating to the longer dated bonds held to match the liabilities of our life insurance business. These gains have been fully offset by increases to life insurance contract liabilities.

We consider investment property to be an attractive asset class in the current low yield environment and have added to our portfolio over the last few years. Investment property is valued at £112.7m at the half year (2015 year end: £98.8m). The increase in value since the end of the year is due to acquisitions, and we do not believe the fair value has changed as at the reporting date.

Our investment property holdings are highly weighted to South East England outside of central London. The portfolio is well let, on long leases, to high quality tenants and with low vacancy levels. We do expect some negative effects from recent developments, but believe that it is inappropriate to consider any change in valuation at this stage.

While the full implications of the EU referendum will not be known for some time, the consequences surrounding Brexit will resonate for years. Our approach to management of risks resulting from the Group's exposure to financial markets is outlined in note 4 to our latest annual report.

Asset Management - EdenTree

We successfully relaunched our asset management business as EdenTree Investment Management in July 2015, and were delighted to see recognition of the rebrand work reflected by winning the Proposition Development Award at the Investment Week Marketing and Innovation Awards which reward creativity and innovation in the investment management sector.

Investment market conditions over the first half 2016 were marked by extreme bouts of volatility. Slowing global growth and concerns ahead of the outcome of the EU referendum weighed heavily on investor sentiment and this was borne out by the worst ISA season on record. Against this challenging backdrop, gross inflows were ahead of budget in the first six months of the year at £113m, but are around half the level of last year as market volatility drove investor caution as we anticipated. Despite this, overall funds under management fell by just 0.4% to £2.3bn, partly due to net outflows of £27m over the first half of the year.

We report a profit of £0.8m (H1 2015: £1.6m profit), reflecting the investment we continue to make in the asset management business and lower fee income derived from the reduction in asset values in the period.

Our rebrand, together with regional events and a comprehensive communications programme, continues to contribute to EdenTree's growth and helped us achieve greater reach, reflected in rising levels of activity and an increase in new asset management mandate opportunities, particularly in the charity space. Consequently we have added a number of new clients over the period in both the institutional and charity sectors.

Broking and advisory - SEIB Insurance Brokers

SEIB Insurance Brokers continues to provide a stable flow of income for the Group returning a profit before tax of £1.6m (H1 2015: £1.3m). A 4% growth in turnover has been achieved while keeping costs in line with last year, which has seen SEIB's already impressive profit margin grow to 34% (H1 2015: 29%).

Life business (closed to new business)

Our life insurance business reported a loss before tax of £0.4m at the half year (H1 2015: £0.2m profit). The business is currently in run off following the decision in 2013 to cease writing new funeral plan business. Assets and liabilities are well matched, demonstrated by the small loss emerging following a very significant change in credit spreads and the valuation discount rate following the Brexit vote.

Balance Sheet and Capital Position

Total shareholders' equity reduced by £17.3m to £487.6m in the first six months of the year. Profits in the period and positive foreign exchange movements were offset by actuarial losses on retirement benefit plans following the reduction in corporate bond yields which followed the Brexit vote.

The IAS 19 valuation of the pension fund provides a degree of balance sheet volatility for the Group. Interest rate risk is the biggest risk to which the scheme is exposed and further falls in real yields could lead to further actuarial losses in the second half of the year. Note 19 in our last annual report sets out the scheme's sensitivity to changes in material assumptions.

We paid the normal first half dividend to preference shareholders of £4.6m and also paid a grant of £7.0m to our charitable owner in March 2016.

Our regulatory capital position remains very strong under the new Solvency II regime. Our solvency capital requirement is currently based on the PRA's standard formula, but we have a well-developed internal model and will be applying for model approval during 2017.

Charitable Giving

Ecclesiastical has always been committed to giving back to the communities where it operates. In 2015, we launched our 'Greater Giving' programme - the new shape of our Group-wide corporate responsibility approach. We achieved our financial goal of giving £50m to charity over three years in March 2016, many months ahead of schedule, benefitting over 3,000 charitable causes around the world.

Our ambitious new goal is to donate a further £100m to good causes by the end of 2020. In order to achieve this we will need to continue to deliver stable financial results which meet or exceed our expectations. Our results at the half year are in line with our budget and we will make a further charitable grant of £5m during September 2016.

Group Outlook

We are on track to deliver another strong underwriting performance in 2016, subject to volatile items such as weather, large losses and market driven discount rate changes. There are pressures on GWP growth, but we will continue to take the right underwriting and risk decisions rather than seek growth for growth's sake. We expect markets to remain competitive, and we will continue to develop the right products for our customers, and expect to generate continued profitable growth in our areas of expertise where we see significant further headroom.

We are well placed to withstand the continuing financial market volatility that we anticipate over the medium term. In our view, the full impact of Brexit and its longer term effect is currently uncertain. The economic risks to which our business is exposed - equity price volatility, narrowing of interest and discount rates, movements in exchange rates and long term UK growth prospects - may lead to greater short term volatility in our reported financial performance. 

The principal risks and uncertainties the Group is exposed to and our approach to management of those risks is outlined in our latest annual report. The changes in risk and uncertainty since the date of that report are explained in note 1 to the condensed financial statements.

We have a thorough understanding of the implications of the risks we choose to accept, and the capital base to underpin our long term strategy of sustainable controlled growth in a business where we have the advantage of deep experience and expertise. 

We believe that our strategy will enable us to outperform others over the long term and deliver a strong return to our charitable owner, enabling both our organisations to continue improving people's lives.

Mark Hews

Group Chief Executive

23 August 2016

CONDENSED CONSOLIDATED STATEMENT OF PROFIT OR LOSS

For the 6 months to 30 June 2016

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the 6 months to 30 June 2016

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the 6 months to 30 June 2016

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

At 30 June 2016

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

For the 6 months to 30 June 2016

NOTES TO THE CONDENSED SET OF FINANCIAL STATEMENTS

1. General information

The information for the year ended 31 December 2015 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditor reported on those accounts: its report was unqualified, did not draw attention to any matters by way of emphasis without qualifying the report, and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

The half-yearly financial report was approved by the Board on 23 August 2016. The Group results for the six-month periods to 30 June 2016 and 30 June 2015 are unaudited, but have been reviewed by Deloitte LLP whose review report for the period ended 30 June 2016 is at the end of this report.

The principal risks and uncertainties of the Group are in respect of insurance risk and financial risk. The risk under any one insurance contract is the possibility that the insured event occurs and the uncertainty of the amount and timing of the resulting claim. Factors such as the business and product mix, the external environment including market competition and reinsurance capacity all may vary from year to year, along with the actual frequency, severity and ultimate cost of claims and benefits. The Group's underwriting strategy is designed to ensure that the underwritten risks are well diversified in terms of type and amount of risk and geographical spread. In all operations pricing controls are in place, underpinned by sound statistical analysis, market expertise and appropriate external consultant advice. Gross and net underwriting exposure is protected through the use of a comprehensive programme of reinsurance using both proportional and non-proportional reinsurance and supported by proactive claims handling. The overall reinsurance structure is regularly reviewed and modelled to ensure that it remains optimum to the Group's needs. The optimum reinsurance structure provides the Group with sustainable, long-term capacity to support its specialist business strategy, with effective balance sheet and profit and loss protection at a reasonable cost.

The most important components of financial risk are interest rate risk, credit risk, currency risk and equity price risk. The Group is exposed to equity price risk because of financial investments held by the Group which are stated at fair value through profit or loss. The Group mitigates this risk by holding a diversified portfolio across geographical regions and market sectors, and through the use of derivative contracts from time to time which would limit losses in the event of a fall in equity markets. These principal risks and uncertainties, together with details of the financial risk management objectives and policies of the Group, are disclosed in the latest annual report. The EU referendum result has introduced additional uncertainty into financial markets and is expected to have an impact on UK long term economic growth prospects. The risk to our business is mitigated, in part, by the Group's foreign operations and globally diversified portfolio of investment assets.

The Group derives insurance premiums from a range of geographical locations and classes of business. Depending on the location and class of the risk, there may be a seasonal pattern to the incidence of claims. However, given the mix of business that the Group writes, overall the half-yearly results are not subject to any significant impact arising from the seasonality or cyclicality of operations.

The Directors have a reasonable expectation that the Group will continue in operation for at least twelve months from the date of this report. They assessed the going concern of the Group with reference to its considerable financial resources, high percentage of liquid investments, zero borrowings, solvency position, resilience to stress testing and strong risk management framework. Accordingly, the Directors continue to adopt the going concern basis in preparing the half-yearly financial report.

2. Accounting policies

Ecclesiastical Insurance Office plc (hereafter referred to as the "Company"), a public limited company incorporated and domiciled in England, together with its subsidiaries (collectively the "Group") operates principally as a provider of general insurance and in addition offers a range of financial services, with offices in the UK & Ireland, Australia and Canada.

The annual financial statements are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34, Interim Financial Reporting.

The same accounting policies and methods of computation are followed in the condensed set of financial statements as applied in the Group's latest audited annual financial statements.

There have been no newly issued Standards or changes to existing Standards during the interim period which significantly impact on the condensed set of financial statements.

3. Segment information

The Group segments its business activities on the basis of differences in the products and services offered and, for general insurance, the underwriting territory. Expenses relating to Group management activities are included within 'Corporate costs'. This reflects the management and internal Group reporting structure.

The activities of each operating segment are described below.

Segment revenue

The Group uses gross written premiums as the measure for turnover of the general and life insurance business segments. Turnover of the non-insurance segments comprises fees and commissions earned in relation to services provided by the Group to third parties. Segment revenues do not include net investment return or general business fee and commission income, which are reported within revenue in the consolidated statement of profit or loss.

Group revenues are not materially concentrated on any single external customer.

Segment result

General business segment results comprise the insurance underwriting profit or loss, investment activities and other expenses of each underwriting territory. The Group uses the industry standard net combined operating ratio (COR) as a measure of underwriting efficiency. The COR expresses the total of net claims costs, commission and underwriting expenses as a percentage of net earned premiums.

The life business segment result comprises the profit or loss on insurance contracts (including return on assets backing liabilities in the long-term fund), shareholder investment return and other expenses.

All other segment results consist of the profit or loss before tax measured in accordance with IFRS.

4. Tax

Income tax for the six month period is calculated at rates representing the best estimate of the average annual effective income tax rate expected for the full year, applied to the pre-tax result of the six month period.

5. Dividends

Dividends paid on the 8.625% Non-Cumulative Irredeemable Preference shares amounted to £4.6m (H1 2015: £4.6m).

6. Retirement benefit schemes

The table below provides a reconciliation of the movement in the Group's pension fund position under IAS 19 from 1 January 2016 to 30 June 2016:

* Remeasurements includes change in actuarial assumptions and return on assets in excess of discount rate

** Other movements includes service cost, contributions, administration expenses and net interest income

The Group's IAS 19 pension position has moved by £35.5m during the first half of the year from an asset of £10.7m to a deficit of £24.8m. The main adverse movement in the period was from a change in actuarial assumptions in relation to the scheme's liabilities (£50.4m) mainly driven by market movements, in particular the fall in yields. Other movements in the pension position were due to gains on scheme assets in excess of the discount rate £8.3m, service costs of (£1.7m), contributions of £1.3m, and removal of the £7.0m asset ceiling recognised under the requirements of IFRIC 14.

The Group's IAS 19 valuation has historically been more conservative than the Trustee's full actuarial valuation as it makes allowance for certain discretionary benefits. The next triennial valuation is due to be carried out at 31 December 2016. If market conditions remain as they were at the end of the reporting period, we would expect the full actuarial valuation to show a deficit that is significantly lower than the figures reported under IFRS. Interest rate risk is the biggest risk to which the scheme is exposed.

7. Financial instruments' fair value disclosures

IAS 34 requires that interim financial statements include certain of the disclosures about the fair value of financial instruments set out in IFRS 13, Fair Value Measurement and IFRS 7, Financial Instruments Disclosures.

The fair value measurement basis used to value those financial assets and financial liabilities held at fair value is categorised into a fair value hierarchy as follows:

Level 1: fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities. This category includes listed equities in active markets, listed debt securities in active markets and exchange-traded derivatives.

Level 2: fair values measured using inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes listed debt or equity securities in a market that is not active and derivatives that are not exchange-traded.

Level 3: fair values measured using inputs for the asset or liability that are not based on observable market data (unobservable inputs). This category includes unlisted debt and equities, including investments in venture capital, and suspended securities. Where a look-through valuation approach is applied, underlying net asset values are sourced from the investee and adjusted to reflect illiquidity and a credit rating adjustment where appropriate, with the fair values disclosed being directly sensitive to this input.

There have been no transfers between investment categories in the current period.

Fair value measurements in level 3 consist of financial assets, analysed as follows:

The valuation techniques used for instruments categorised in Levels 2 and 3 are described below.

Listed debt and equity securities not in active market (Level 2)

These financial assets are valued using third party pricing information that is regularly reviewed and internally calibrated based on management's knowledge of the markets. Where material, these valuations are reviewed by the Group Audit Committee.

Non exchange-traded derivative contracts (Level 2)

The Group's derivative contracts are not traded in active markets. Foreign currency forward contracts are valued using observable forward exchange rates and interest rates corresponding to the maturity of the contract. Over-the-counter equity or index options and futures are valued by reference to observable index prices.

Unlisted equity securities (Level 3)

These financial assets are valued using observable net asset data, adjusted for unobservable inputs including comparable price-to-book ratios based on similar listed companies, and management's consideration of constituents as to what exit price might be obtainable. Where material, these valuations are reviewed by the Group Audit Committee.

The valuation is most sensitive to the level of underlying net assets, the euro exchange rate, the price-to-book ratio chosen, an illiquidity discount and a credit rating discount applied to the valuation to account for the risks associated with holding the asset. If the price-to-book ratio, illiquidity discount and credit rating discount applied changes by +/-10%, the value of unlisted equity securities could move by +/-£4m.

The increase in value during the period is the result of the strengthening of Sterling against the Euro. An increase in underlying net assets was offset by a decrease in the price / book ratio based on comparator companies. 

Unlisted debt (Level 3)

Unlisted debt is valued using an adjusted net asset method whereby management uses a look-through approach to the underlying assets supporting the loan, discounted using observable market interest rates of similar loans with similar risk, and allowing for unobservable future transaction costs. Where material, these valuations are reviewed by the Group Audit Committee.

The valuation is most sensitive to the level of underlying net assets, but it is also sensitive to the interest rate used for discounting and the projected date of disposal of the asset, with the exit costs sensitive to an expected return on capital of any purchaser and estimated transaction costs. Reasonably likely changes in unobservable inputs used in the valuation would not have a significant impact on shareholders' equity or the net result.

The decrease in value during the period is due to a decrease in the level of underlying net assets.

8. Changes in estimates

The estimation of the ultimate liability arising from claims made under general insurance business contracts is a critical accounting estimate. There are various sources of uncertainty as to how much the Group will ultimately pay with respect to such contracts. There is uncertainty as to the total number of claims made on each class of business, the amounts that such claims will be settled for and the timing of any payments.

During the six month period, changes to claims reserve estimates made in prior years as a result of reserve development resulted in a release of £10m (H1 2015: £7m) net of an £8m increase in reserves due to discount rate movements on UK reserves.

9. Related party transactions

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation.

Charitable grants to the ultimate parent company are disclosed in the condensed consolidated statement of changes in equity.

During the period the Company increased the amount lent to Ecclesiastical Insurance Group plc, its immediate parent company, by £4m, as part of the Group's capital management.

There have been no other changes to related party transactions in the period which require disclosure.

10. Holding company

The ultimate holding company is Allchurches Trust Limited, a company limited by guarantee and a registered charity.

RESPONSIBILITY STATEMENT

We confirm that to the best of our knowledge:

(a) the condensed set of financial statements has been prepared in accordance with IAS 34, 'Interim Financial Reporting';

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

(c) the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related party transactions and changes therein).

The Board of Directors is as per the latest audited annual financial statements, with the following changes:

- W.M. Samuel resigned from the Board on 16 March 2016

- D. Christie resigned from the Board on 16 March 2016

- E.G. Creasy was appointed Chairman on 16 March 2016

- J.F. Hylands was appointed Deputy Chairman on 16 March 2016

- R.D.C. Henderson was appointed to the Board on 20 April 2016.

By order of the Board,

Mark Hews Edward Creasy

Group Chief Executive Chairman

23 August 2016

INDEPENDENT REVIEW REPORT TO ECCLESIASTICAL INSURANCE OFFICE PLC

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2016 which comprises the condensed consolidated statement of profit or loss, the condensed consolidated statement of comprehensive income, the condensed consolidated statement of changes in equity, the condensed consolidated statement of financial position, the condensed consolidated statement of cash flows and related notes 1 to 10. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

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

Directors' responsibilities

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

As disclosed in note 2, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting', as adopted by the European Union.

Our responsibility

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

Scope of review

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

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2016 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Deloitte LLP

Chartered Accountants and Statutory Auditor

London, United Kingdom

23 August 2016