Half-year Report

2019 INTERIM RESULTS

Ecclesiastical Insurance Office plc 20 August 2019

Ecclesiastical Insurance Office plc ("Ecclesiastical"), the specialist financial services group, today announces its 2019 interim results. A copy of the 2019 interim results will be available on the Company's website at www.ecclesiastical.com

Highlights

·; Gross written premiums (GWP) up 7% from the same period last year at £185.0m (H1 2018: £172.7m), supported by strong retention, new propositions and benefiting from favourable foreign exchange

·; Profit before tax of £42.8m (H1 2018: £19.4m)

·; Investment returns of £42.0m (H1 2018: £17.7m), where markets have recovered since the end of 2018

·; Continuing to see steady measured progress in our insurance business with underwriting profits* of £9.5m giving a combined operating ratio (COR) of 91.4% (H1 2018: profit of £8.0m, COR 92.3%)

·; We will grant a further £5m to our charitable owner in September to give to good causes. This will take us to £70m towards our target of £100m in charitable donations by the end of 2020.

Mark Hews, Group Chief Executive Officer of Ecclesiastical, said: "Our purpose at Ecclesiastical is to contribute to the greater good of society. By delivering sustainable, profitable, long-term growth, we are able to support thousands of good causes across the UK through our charitable giving. I'm very proud that in April we launched the Movement for Good Awards, giving away £1m to charities in 2019.

"Alongside this we're announcing today a further £5m will be granted to our charitable owner in September. This will bring us to £70m towards our target of £100m by the end of 2020.

"This giving is made possible thanks to the hard work and dedication of everyone at Ecclesiastical. I'm delighted to report a positive financial performance in the first half of 2019, underpinned by continued strong underwriting performance. This is a result of our disciplined underwriting approach, and a benign environment in the first half of the year. Positive growth in global stock markets has also delivered strong investment returns, demonstrating the benefit of our long term equity investment strategy.

 "Our strategic goal is to be the most trusted and ethical specialist financial services group and we continue to win external accolades for the way we do business.

"Ecclesiastical home insurance was once again rated first by Fairer Finance overall and came first for trust and first for customer happiness. Ecclesiastical Canada was awarded Top Employer for Young people 2019 for the seventh consecutive year.

"Our reputation for claims excellence was also enhanced with our UKGI business being the only insurer to win multiple awards at the Insurance Post Claims Awards."

\* The Group uses APMs to help explain performance. More information on APMs is included in note 12.

Key Financial Performance Data

\* The Group uses APMs to help explain performance. More information on APMs is included in note 12.

Interim Management Report

It has been a good first half of the year with a stable underwriting performance and strong investment returns, with stock markets recovering from the falls seen at the end of 2018. We report a profit before tax of £42.8m (H1 2018: £19.4m).

Our strategy over the medium term continues to deliver moderate GWP growth, by maintaining our strong underwriting discipline and focusing on profit over growth. We have deep specialist capabilities, which we continue to develop through investment in technology and innovation, and by providing appealing customer propositions and excellent service.

We have delivered good growth and steady underwriting profits in the first half with underwriting profit of £9.5m (H1 2018: £8.0m). This reflects improved current year performance which benefited from benign weather and favourable large loss experience in most of our territories compared with previous years with the COR of 91.4% (H1 2018: 92.3%).

Gross written premiums grew by 7.1% to £185.0m (H2 2018: £172.7m), benefiting from strong retention, new business wins and favourable currency movements.

Investment markets have partially recovered from a poor Q4 2018 where worldwide markets fell but remain around 3% below half year 2018 levels. Interest rates have been held and there has been less volatility from quarter to quarter than in the prior year. The unrealised investment losses we suffered at the end of 2018 were partially recovered as we have benefited from unrealised gains in H1 2019. Our overall investment return for the first half of the year was above our expectations at £42.0m (H1 2018: £17.7m). We are expecting further volatility in the second half of the year as the uncertainty around Brexit and global economic conditions continues.

These positive half-year results allow us to make a grant of £5m (H2 2018: £5m) to our charitable owner, Allchurches Trust, which has been approved by the Board and will be paid in September 2019.

Strategic Update

Investment in both our business and our people continues under a broad range of initiatives. Within the UK, a new private client product has been launched to help capitalise on growth opportunities available in this market. In May we launched a series of enhancements to our education proposition with a redesigned survey report, e-learning support, cyber guidance and a lesson kit for teachers to assist with the promotion of digital resilience with primary and secondary pupils. Investment in our staff continues to take place through our General Insurance Academy and as part of this a national training plan has been created, focusing on the continued development of our underwriters.

Investment in new technology is also progressing well: our new policy administration system for the UK and Ireland is under development; the UK's new claims workflow and document repository system is expected to go live shortly; and our Australian subsidiary has begun development of its new policy administration system. Our UK broking business has completed a successful trial of a new claims portal and will begin to roll this out more widely during 2019.

Our work in innovation and loss prevention continues. The UK has successfully piloted thermal imaging equipment that identifies electrical faults before they can cause a fire, with the rollout of training and equipment now underway. Work continues on the use of drones and their potential to support our risk management proposition. The UK has undertaken a series of trial drone flights. This will enable us to develop our understanding of how this technology can be embedded within our current survey approach. We are exploring how connected technology can prevent common losses thus saving the customer time and expense on the cost of property maintenance, including a trial of a smart water leak detector and equipping a heritage property with a wide range of sensors to identify potential risks.

Our purpose is to contribute to the greater good of society. Earlier this year we launched our £1m Movement for Good Awards, and recently announced awards of £1,000 each to 500 charities. Further grants totalling £500,000 to 10 charities will be announced during September. We continue to be motivated by our target to donate £100m to charity by the end of 2020 - after the £5m grant, we will have donated £70m towards this goal. Together with our customers and business partners, we are building a movement for good - championing a more caring, ethical and trusted way of doing business.

General Insurance - UK and Ireland

UK and Ireland report an underwriting profit of £9.2m and a net combined ratio of 87.8% (H1 2018: £11.8m profit, COR 83.8%). The property result has been better than expected in the first half of the year due to unusually benign weather and lower than average large loss experience. The strong performance of our liability business has continued into 2019 with the current year liability claims experience similar to last year, but with levels of reserve releases less than last year. We expect to see this trend of a reduction in the level of these releases continue as the run-off of claims in respect of the unprofitable business we exited in 2012 and 2013 is now well progressed.

UK and Ireland GWP grew by 4% to £124m in the six months to 30 June 2019 (H1 2018: £119.3m). This is driven by particularly strong growth in our Art & Private Client, Real Estate and Schemes business together with continued growth in our Heritage business as we demonstrate our position as a leading insurer of heritage, listed and period properties.

General Insurance - Canada

Canada reports GWP of £25.5m (H1 2018: £22.4m), an increase of 12.5% in local currency. Good progress continues to be made in strengthening the existing portfolio through rate and retention. New business production is behind the prior year as we continued to focus on profitability over growth.

Canada delivered an underwriting profit of £0.4m with a net combined operating ratio of 98.0% (H1 2018: £3.7m loss, COR 119.1%) which represented an improved performance in large loss and catastrophe events compared with both 2018 and 2017 where underwriting losses were delivered. Although the first few months saw a higher level of claims from the adverse winter weather, the last few months have seen the benefit of the rating action and a return to more normal weather experience.

General Insurance - Australia

Our Australian business continues to be successful in generating new business which has been a key driver of an 18% increase in GWP in local currency. After the negative effects of exchange, reported GWP was up 15% to £33.7m (H1 2018: £29.4m). We expect to see growth continue into the second half of the year although the market is becoming more competitive.

The underwriting loss for the period has remained relatively stable at £0.4m with a net combined ratio of 103.3% (H1 2018: £0.3m loss, COR 103.0%). Australia's gross underwriting results were significantly impacted by the Townsville floods however, these events were substantially reinsured and made a minimal impact on the net results. The small loss is in line with expectations.

Group Investment Returns

Investment performance has performed above our expectations in the first half of the year, with the markets recovering from a poor Q4 2018 where worldwide markets fell. There has been less volatility from quarter to quarter than in the prior year.

Our investment portfolio delivered profit of £42.0m (H1 2018: £17.7m). The returns were predominantly driven by fair value gains and dividend and interest income.

We discount some of our liability claims reserves. The reserves relate to liability policies, written over many decades, and represent very long-tail risks. The movement in yields from the year end has resulted in a negative impact of £8.5m in the first six months of the year, which partially offset the fair value gains on our financial investments.

We remain cautious on our expectations for investment returns given continued uncertainty around the UK's exit from the EU and the US's international trade disputes. Our approach to the 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

Fee income grew by 1% reflecting positive market movements and new flows. Our strategic investment in people and technology has resulted in lower overall profitability, with EdenTree reporting a small loss less than £0.1m (H1 2018: £0.8m).

Total assets under management (AUM) increased by 4% over the six months to stand at almost £2.9bn (H1 2018: £2.8bn).

Despite positive market movements, investors remained cautious during the early part of the year as the industry reported weak retail inflows and particularly hard hit has been UK equity sector with many groups suffering net outflows. Against this background EdenTree were pleased to report OEIC pooled funds delivered positive flows of £24m (H1 2018: £94m) into our pooled fund products. Net inflows were driven by our multi asset product and bond funds.

Overall net inflows from all sources was £25m (H1 2018: £125m).

Broking and Advisory - SEIB Insurance Brokers

SEIB general commission and fees, excluding profit share commission, has increased by 6% in the first half of the year. Retention rates remain high but new business in some sectors is proving to be challenging. SEIB continues to deliver stable returns to the Group, reporting a half year profit before tax of £1.6m (H1 2018: £1.8m).

Life Business

Our life insurance business, which is closed to new business, reported a profit before tax of £0.2m at the half year (H1 2018: £0.4m). Assets and liabilities are well matched, and the small profit is in line with what we would expect as the business runs off.

Balance Sheet and Capital Position

Total shareholders' equity increased by £30.8m to £616.8m in the first six months of the year. Profits in the period were partially offset by actuarial losses on retirement benefit plans and a small exchange loss on overseas operations.

We paid the normal first-half dividend to preference shareholders of £4.6m (H1 2018: £4.6m) and also expect to make a grant of £5m (H1 2018: £5m) to our charitable owner in September 2019.

Our Solvency II regulatory capital position remains strong. Own funds increased in line with profits and our estimated internal model capital requirement has also increased in line with the growth in our business. Overall, the level of Solvency II cover is ahead of the position at the end of 2018 (226% vs 215%), in line with our expectations.

Principal Risks and Uncertainties

The principal risks and uncertainties faced by the Group and our approach to managing them are outlined in our latest annual report and in note 1 to these condensed financial statements.

Group Outlook

We remain confident about future profitability and have delivered a fifth consecutive year of strong underwriting profits at the half year, with a greater contribution coming from the current year performance than we have seen in more recent years. Our short term underwriting results can be subject to volatile items such as weather and large losses and we recognise that there is the potential for challenges in the period ahead.

In the first half of the year we have seen a strong performance in our investment result, reflecting the recovery seen in investment markets since the start of the year. We recognise that there is continued political and economic uncertainty and this has the potential to create short term volatility in the second half of the year. We remain well placed to withstand any such volatility and have substantial headroom over our Solvency II capital requirement.

Core to our purpose is to deliver strong and sustainable returns to our ultimate shareholder, and to benefit not only our customers but also the wider communities we serve. We do this through our deep understanding and management of risks; by providing trusted specialist expertise and by maintaining the strength of our capital base. We benefit from the diversity within our financial services group which gives us the opportunity us to grow both organically and inorganically within our chosen markets and remain well placed to deliver sustainable profitable growth.

By order of the Board

Mark Hews

Group Chief Executive

20 August 2019

CONSOLIDATED INTERIM FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENT OF PROFIT OR LOSS

For the 6 months to 30 June 2019

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the 6 months to 30 June 2019

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the 6 months to 30 June 2019

The revaluation reserve represents cumulative net fair value gains on owner-occupied property. Further details of the translation and hedging reserve are included in note 8.

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

At 30 June 2019

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

For the 6 months to 30 June 2019

NOTES TO THE CONDENSED SET OF FINANCIAL STATEMENTS

1. General information

The information for the year ended 31 December 2018 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 condensed consolidated interim financial statements were approved by the Board on 20 August 2019. These condensed consolidated interim financial statements have been reviewed, not audited.

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 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 consolidated interim financial statements are not subject to any significant impact arising from the seasonality or cyclicality of operations.

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. The Group's exposure to interest rate risk arises primarily from movements on financial investments that are measured at fair value and have fixed interest rates, which represent a significant proportion of the Group's assets, and from those insurance liabilities for which discounting is applied at a market interest rate. The Group's investment strategy is set in order to control the impact of interest rate risk on anticipated cash flows and asset and liability values. The fair value of the Group's investment portfolio of fixed income securities reduces as market interest rates rise as does the present value of discounted insurance liabilities, and vice versa. 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 Directors have assessed the going concern of the Group. The directors have considered the Group's plans and forecasts, financial resources, investment portfolio and solvency position. Accordingly, the Directors continue to adopt the going concern basis in preparing the consolidated interim financial statements.

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 the 2019 interim results has been prepared in accordance with IAS 34, Interim Financial Reporting.

Other than those detailed below, the same accounting policies and methods of computation are followed in the consolidated interim financial statements as applied in the Group's latest audited annual financial statements.

IFRS 16, Leases

The Group has adopted IFRS 16 from 1 January 2019 using the modified retrospective approach, as permitted by the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening balance sheet on 1 January 2019. Comparative figures for the 2018 reporting period have not been restated, as permitted under the specific transitional provisions in the standard. There was no impact on the Group's opening equity.

On adoption of IFRS 16, the Group recognised lease liabilities in relation to leases which had previously been classified as 'operating leases' under the principles of IAS 17, Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee's incremental borrowing rate as of 1 January 2019. The Group's weighted average lessee's incremental borrowing rate applied to the lease liabilities on 1 January 2019 was 4.0%.

Right-of-use assets have been measured at 1 January 2019 at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the balance sheet as at 31 December 2018.

For leases previously classified as finance leases the Group recognised the carrying amount of the lease asset and lease liability immediately before transition as the carrying amount of the right of use asset and the lease liability at the date of initial application.

In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard:

·; the use of a single discount rate to a portfolio of leases with reasonably similar characteristics;

·; the accounting for operating leases with a remaining term of less than 12 months as at 1 January 2019 as short-term leases;

·; the exclusion of initial direct costs for the measurement of right-of-use assets at the date of initial application; and

·; the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.

The Group has also elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date the Group relied on its assessment made applying IAS 17 and IFRIC 4 Determining whether an Arrangement contains a Lease.

The change in accounting policy affected the following items on the balance sheet on 1 January 2019:

From 1 January 2019, leases are recognised as a right-of use-asset and a corresponding liability at the date at which the lease asset is available for use by the Group. Each lease payment is deducted from the lease liability. Finance costs are charged to the profit and loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis.

Lease liabilities include the net present value of:

·; fixed payments less any lease incentives receivable;

·; variable lease payments that are based on an index or rate;

·; amounts expected to be payable by the lessee under residual value guarantees;

·; the exercise price of an option if the lessee is reasonably certain to exercise that option; and

·; payments and penalties from terminating the lease, if the lease term reflects the lessee exercising that option.

Right-of-use assets are measured at cost comprising:

·; the amount of the initial measurement of lease liability;

·; any lease payment made at or before the commencement date, less any lease incentives received;

·; any initial direct costs; and

·; restoration costs.

Right-of-use assets are presented within property, plant and equipment in the statement of financial position.

Payments associated with short term leases are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less.

Other standards adopted since the year end are either outside the scope of Group transactions or do not significantly impact the Group.

The following standards were in issue but not yet effective and have not been applied to these condensed financial statements.

IFRS 9, Financial Instruments, which provides a new model for the classification and measurement of financial instruments, is effective for periods beginning on or after 1 January 2018. However the Group has taken the option available to insurers to defer the application of IFRS 9 as permitted by IFRS 4, Insurance Contracts. The Group qualifies for the temporary exemption, which is available until annual periods beginning on or after 1 January 2021, since at 31 December 2015 greater than 90% of the Group's liabilities were within the scope of IFRS 4. There has been no significant change to the Group's operations since that date and, as a result, the Group continues to apply IAS 39, Financial Instruments.

IFRS 17, Insurance Contracts, was issued in May 2017 and is effective for periods beginning on or after 1 January 2021. A one-year deferral has tentatively been proposed by the International Accounting Standards Board (IASB) subject to due process. The standard establishes revised principles for the recognition, measurement, presentation and disclosure of insurance contracts. The Group has progressed implementation of the standard in line with expectations.

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.

Inter-segment and inter-territory transfers or transactions are entered into under normal commercial terms and conditions that would also be available to unrelated third parties.

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.

Revenue is attributed to the geographical region in which the customer is based. 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. Further details on the underwriting profit or loss and COR, which are alternative performance measures that are not defined under IFRS, are detailed in note 12.

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

Interim dividends paid on the 8.625% Non-Cumulative Irredeemable Preference shares amounted to £4.6m (H1 2018: £4.6m).

6. Financial instruments' held at 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, translated into the Group's functional currency and adjusted to reflect current market conditions.

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

The derivative liabilities of the Group at the end of the prior year were measured at fair value through profit or loss and categorised as level 2.

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

All the above gains included in profit or loss for the period are presented in net investment return within the statement of profit or loss.

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 corresponding to the maturity of the contract and the contract forward rate. 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 +/-£7m (H1 2018: +/-£5m). The range is higher than the half year due to the increase in value.

The increase in value during the period is the result of a purchase of additional shares in the current holding and an increase in the underlying net assets.

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.

7. 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 net release of £13.0m (H1 2018: £16.8m) offset by a £8.5m increase (H1 2018: £2.3m decrease) in reserves due to discount rate movements.

The estimation of the ultimate liability arising from claims made under life insurance business contracts is also a critical accounting estimate. Estimates are made as to the expected number of deaths in each future year until claims have been paid on all policies, as well as expected future real investment returns from assets backing life insurance contracts. During the six month period there was a £2.7m increase (H1 2018: £1.0m decrease) in reserves due to discount rate movements.

8. Translation and hedging reserve

The translation reserve arises on consolidation of the Group's foreign operations. The hedging reserve represents the cumulative amount of gains and losses on hedging instruments in respect of net investments in foreign operations.

9. Insurance contract liabilities and reinsurers' share of contract liabilities

10. 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.

There have been no material related party transactions in the period or changes thereto since the latest annual report which require disclosure.

11. Holding company

The ultimate holding company is Allchurches Trust Limited, a company limited by guarantee and a registered charity incorporated in the United Kingdom.

12. Reconciliation of Alternative Performance Measures

The Group uses alternative performance measures (APM) in addition to the figures which are prepared in accordance with IFRS. The financial measures in our key financial performance data include the combined operating ratio (COR). This measure is commonly used in the industries we operate in and we believe it provides useful information and enhances the understanding of our results.

Users of the accounts should be aware that similarly titled APM reported by other companies may be calculated differently. For that reason, the comparability of APM across companies might be limited.

In line with the European Securities and Markets Authority guidelines, we provide a reconciliation of the combined operating ratio to its most directly reconcilable line item in the financial statements.

The underwriting profit of the Group is defined as the operating profit of the general insurance business.

The Group uses the industry standard net combined operating ratio 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. It is calculated as( [1] - [2] ) / [1].