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RNS
esure Group plc  -  ESUR   

2017 Preliminary results

Released 07:00 07-Mar-2018

RNS Number : 9088G
esure Group plc
07 March 2018
 

                                                                                       

7 March 2018

esure Group plc preliminary results for the year ended 31 December 2017

 

Delivering now; positioning for the future

 

Highlights

 

·     Gross written premiums up 25.2% to £820.2m (2016: £655.0m)

 

·     In-force policies up 9.2% to 2.373 million (2016: 2.174 million)

 

·     Profit before tax from continuing operations up 35.6% to £98.6m (2016: £72.7m)

 

·     Combined operating ratio improved 2.1ppts to 96.7% (2016: 98.8%)

 

·     Full year dividend of 13.5p per share (2016: 13.5p per share) reflects a payout ratio of 70% of earnings per share, inclusive of a 20% special dividend; and is 31% higher after adjusting for the impact of Gocompare.com in 2016(1)

 

·     Solvency coverage(2) 3ppts higher at 155% (2016: 152%)

 

 

 

Sir Peter Wood, Chairman, said: "2017 has been a year of positive momentum for the Group as it delivered for its customers, colleagues and shareholders.

 

"The Board have declared a final dividend of 9.4 pence per share, inclusive of a special dividend, and the Group's capital coverage of 155% is ahead of its normal operating range. The strong capital position allows us to pursue both our current strategy and to position the business for the future, as we look to stay at the forefront of our industry in an increasingly digital and data driven world.

 

"esure is a great business today and I am excited about the many opportunities we have to ensure we continue to be a great business in the future."

 

 

Darren Ogden, Interim Chief Executive Officer, said: "During 2017, we increased in-force policies by 9% to 2.373 million and gross written premiums by 25% to £820m, as more customers were attracted to our excellent products at competitive prices. Our footprint expansion in Motor continues to build momentum and we now have over 300,000 in-force policies in these new segments.

 

"Our digital proposition continues to evolve as we deploy innovative technologies across the business to deliver for our customers. I am continually impressed by my colleagues' hard work, energy and dedication in making sure we provide a great service to all our customers.

 

"We continue to deliver profitable growth and remain on track for our three million in-force policy target by 2020."

 

 

 

 

For further information:

 

Chris Wensley

Head of Investor Relations & Strategy

t: 01737 641324

e: ir@esure.com

Chris Barrie 

Citigate Dewe Rogerson

t: 0207 638 9571

e: esure@citigatedr.co.uk

 

 

Note

 

1.  The adjustment reflects the impact that the Group's share of Gocompare.com profits had on its 2016 full year dividend, assuming a consistent payout ratio of 70%

2.  Group solvency coverage is estimated, unaudited and after allowing for the final dividend as at 31 December 2017. The 2016 solvency coverage is audited.

 

About esure Group plc

 

esure Group plc is an efficient, customer-focused personal lines insurer, founded in 2000 by Chairman, Sir Peter Wood, Britain's foremost general insurance entrepreneur. The Group is one of the UK's leading providers of Motor and Home insurance products through the esure and Sheilas' Wheels brands.

 

Cautionary statement

 

Certain statements made in this announcement are forward-looking statements. Such statements are based on current expectations and assumptions and are subject to a number of known and unknown risks and uncertainties that may cause actual events or results to differ materially from any expected future events or results expressed or implied in these forward-looking statements. Persons receiving this announcement should not place undue reliance on forward-looking statements. Unless otherwise required by applicable law, regulation or accounting standard, the Group does not undertake to update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise.

 

Disclaimer

 

This announcement contains inside information which is disclosed in accordance with the Market Abuse Regulation which came into effect on 3 July 2016.         

 

The esure Group plc LEI number is 213800KOI3F5LM54PT80.    

 

The person responsible for arranging the release of this announcement on behalf of the esure Group is Alice Rivers.                                                                                                                                  

 

Chairman's statement

2017 has been a year of positive momentum for the Group. We have delivered for our customers, colleagues and shareholders, while positioning the business for the future.

 

Five years on from the Group's listing on the London Stock Exchange we are a bigger and better business. The Group has grown in this period to 2.4m in-force policies and delivered gross written premiums of over £800m in 2017. In addition, over a five year period we will have returned just under £300m to shareholders through dividends and created significant value for our shareholders through the acquisition and subsequent demerger of Gocompare.com. Customers have been at the centre of what we do throughout our history and it is encouraging to see our service metrics continue to improve and we were recently ranked the third most customer-friendly insurer by Insurance Times.

 

However, that is all in the past and we are focused on staying at the forefront of our industry to deliver for all our stakeholders in the near and long term.

 

In the near term, we remain on track to achieve our three million in-force policy target by 2020 through our footprint expansion programme in Motor, supported by our Home account.

 

As we look to the future, it is clear that the world is changing at an increasing pace, with advances in digital and data analytics, shaping customer expectations of all businesses.

 

The Board and Stuart Vann agreed that he would step down as Chief Executive Officer on 18 January 2018. This will allow new leadership, steeped in digital and data experience to take the business to the next level. Our search for a successor has commenced and we are looking for a leader with significant expertise and experience in a broad spectrum of customer facing businesses.

 

I worked closely with Stuart throughout his 17 years with the Group and he has been instrumental in helping to create the great business we have today and the value we have created for shareholders over the years. In the interim period, while we find a successor, Darren Ogden, CFO, will be Interim CEO, subject to regulatory approval, and I will be taking a more active role in the business. I have worked closely with Darren for many years and have no doubt that he is the right person to lead esure through this interim period, providing the continuity and experience we need to press on with our positive momentum.

 

The Board continue to demonstrate the value they add and with the addition of Alan Rubenstein and Peter Shaw in March 2017, the business has benefited from their wide breadth of skills and insight. Maria Dolores Dancausa will not be seeking re-election at the Annual General Meeting in May. I would like to thank Maria for her enormous contribution to the business in the four years she has been with the Group.

 

Today the Board has recommended a final dividend of 9.4 pence per share, taking the full year dividend to 13.5 pence per share. This represents a payout ratio of 70%, inclusive of a 20% special dividend. Excluding the contribution from Gocompare.com in 2016, this represents a year-on-year increase in the dividend of 31%, underpinned by a strong solvency coverage ratio of 155%. This demonstrates the Group's capital generative operations and the Board's commitment to returning excess capital to shareholders, while maintaining sufficient capital to fund its growth ambitions.  

 

In summary, we have a great business today and I am excited about the many opportunities we have to ensure we have a great business in the future.

 

 

 

 

Sir Peter Wood

Chairman
 

Interim Chief Executive Officer's review

 

Introduction

In January 2018 it was an honour to be asked by Sir Peter Wood and the Board to lead the business in the interim period during the search for a new Chief Executive Officer.

 

We have a great business and our performance in 2017 demonstrates this. We exceeded our premium growth expectations for the year with an increase of 25.2% to £820.2m, we grew in-force policies by 9.2% to 2.373 million, and we increased profits by 35.6% to £98.6m. This is an outstanding achievement by all my colleagues, and I am continually impressed by their hard work, energy and dedication in making sure we provide a great service to all our customers.

 

Customers

During 2017 we increased in-force policies by almost 200,000 as customers were attracted to the Group through its strong brands, competitive pricing and excellent customer service. In Motor, we continue to build momentum in our new segments and have over 300,000 policies in these segments. It is encouraging to see more and more new customers choosing the Group for their Motor insurance alongside a significant proportion of customers choosing to stay with us year after year.

 

Customers are demanding more of businesses and I am pleased that our Net Promoter Score increased to 45 in 2017, demonstrating the customer centric approach we take. I was delighted to see that our Sheilas' Wheels brand ranked first for sales, renewals and service in a recent benchmarking exercise across insurance brands (source: ServiceTick Q4 2017).

 

It is important, however, that we do not stand still and continue to evolve our proposition and digital offering to meet and exceed our customers' expectations. As a Group, we have delivered digital sales for over a decade primarily through our focus on price comparison website distribution. During 2017 we implemented a number of changes to help customers administer their policy, such as live chat and self service forms, or to make a claim online. We are also in the process of finalising our new online customer portal that will be launched in 2018 making it even easier for customers to interact digitally with us.

 

Our moment of truth is when a customer makes a claim and in 2017 we settled over 270,000 claims and made payments totalling £450m. While many of our customers like to talk to us during a claim, we are piloting new technologies to provide an omni-channel approach for our customers. This will allow them to submit and assess claims electronically and through the use of artificial intelligence techniques the Group will be able to settle claims more quickly.

 

Colleagues

The Group has 1,851 colleagues who are the lifeblood of our business and we strive to make esure a great place to work. We continue to invest in our people agenda and it was encouraging to see the Group's engagement score improve to 72% in 2017 (2016: 65%). Through improved communications, better training and development and leadership courses, colleagues are well informed and possess the skills necessary to keep delivering for our customers. We are proud of the work and support we provide to our local communities in Glasgow, Manchester and Reigate.

 

Shareholders

The growth in premiums, policies and profits has been achieved all while positioning the business for the future. Through strong profitable growth, we are able to retain sufficient capital to continue our positive momentum, while paying a significant proportion of our profits to shareholders through strong dividends. As we move forward, we will remain disciplined in our capital management strategy, balancing growth with returns to shareholders.

 

Summary & Outlook

2017 has been a year of significant delivery and I look forward to 2018 with great confidence. In 2018, we are targeting a similar combined operating ratio to 2017, assuming normal weather, as we look to deliver a positive contribution and grow the business. We remain on track to achieve our three million in-force policy target by 2020.

 

 

 

 

 

Darren Ogden

Interim Chief Executive Officer

 

Financial Review - 2017

 

Group

 

 

2017

2016

 

 

Gross written premiums (£m)

820.2

655.0

In-force policies (millions)

2.373

2.174

 

 

 

Trading profit from continuing operations (£m)

111.3

84.6

Profit before tax from continuing operations (£m)

98.6

72.7

 

 

 

Earnings per share from continuing operations (pence)

19.2

14.3

Dividend per share (pence)

13.5

13.5

 

 

 

Combined operating ratio (%)

96.7

98.8

Loss ratio (%)

72.3

74.2

Expense ratio (%)

24.4

24.6

 

 

 

Investment return - gross (%)

1.5

2.2

Solvency coverage (%)*

155

152

 

 *The 2017 solvency coverage is estimated, unaudited and after allowing for the final dividend. The 2016 solvency coverage is audited.

 

Premiums, policies and profit

 

 

2017

2016

 

 

Gross written premiums (£m)

820.2

655.0

Motor (£m)

734.3

563.7

Home (£m)

85.9

91.3

 

 

 

In-force policies (millions)

2.373

2.174

Motor (millions)

1.895

1.606

Home (millions)

0.478

0.568

 

 

 

Profit before tax from continuing operations (£m)

98.6

72.7

 

 

Gross written premiums increased 25.2% to £820.2m (2016: £655.0m) through strong growth in Motor in-force policies and higher average written premiums. In-force policies increased 9.2% to 2.373 million (2016: 2.174 million) as the Group delivered growth across all its Motor segments. Profit before tax from continuing operations increased 35.6% to £98.6m (2016: £72.7m) reflecting the Group's positive momentum in underwriting and non-underwritten additional services profit streams.

 

Motor

 

 

2017

 

2016

Gross written premiums (£m)

734.3

563.7

In-force policies (millions)

1.895

1.606

 

 

 

Combined operating ratio (%)

95.8

98.1

Loss ratio (%)

73.2

75.7

Expense ratio (%)

22.6

22.4

 

 

 

Trading profit (£m)

102.7

75.7

Underwriting (£m)

24.9

8.9

Non-underwritten additional services (£m)

65.8

50.7

Investments (£m)

12.0

16.1

 

Gross written premiums increased 30.3% to £734.3m (2016: £563.7m) through a combination of in-force policy growth and market pricing. In-force policies increased by 18.0% to 1.895 million (2016: 1.606 million) with all customer segments growing year-on-year through the Group's footprint expansion programmes. In addition, the Group continues to retain a significant proportion of its customers.  

 

Trading profit is 35.7% higher at £102.7m (2016: £75.7m). The underwriting performance of £24.9m (2016: £8.9m) reflects an improvement in the current accident year loss ratio of 5.0 percentage points to 76.9%, as the Group's positive rating actions earned through ahead of claims inflation, more than offsetting the reduction in favourable development of prior accident year reserves. Favourable development of prior accident year reserves of £22.2m equated to 3.7% of net earned premiums (2016: £29.4m; 6.2%).

 

Non-underwritten additional services increased 29.8% to £65.8m (2016: £50.7m) largely due to an increase in in-force policies.

 

The combined operating ratio improved by 2.3ppts to 95.8% (2016: 98.1%) and this was driven by an improvement in the loss ratio of 2.5ppts to 73.2% (2016: 75.7%), with the expense ratio broadly stable at 22.6% (2016: 22.4%).

 

 

 

2017

 

2016

Reported net loss ratio (%)

73.2

75.7

Prior year reserve releases (%)

3.7

6.2

Current accident year net loss ratio (%)

76.9

81.9

 

Home

 

 

2017

 

2016

Gross written premiums (£m)

85.9

91.3

In-force policies (thousands)

478

568

 

 

 

Combined operating ratio (%)

102.8

102.9

Loss ratio (%)

65.6

66.0

Expense ratio (%)

37.2

36.9

 

 

 

Trading profit (£m)

8.6

8.9

Underwriting (£m)

(2.3)

(2.4)

Non-underwritten additional services (£m)

9.9

9.3

Investments (£m)

1.0

2.0

 

Gross written premiums reduced 5.9% to £85.9m (2016: £91.3m) and in-force policies reduced 15.9% to 478 thousand (2016: 568 thousand) as a consequence of disciplined underwriting in soft market conditions. The Group implemented price increases ahead of the wider market during 2017 as it looked to mitigate against claims inflation and this impacted its competitiveness to attract and retain customers.

 

Trading profit is marginally lower than 2016 at £8.6m (2016: £8.9m). The Group's underwriting loss of £2.3m was similar to 2016 (loss of £2.4m), albeit 2017 has benefited from weather event costs that were lower than normal. Favourable development of prior accident year reserves of £4.7m equated to 5.8% of net earned premiums (2016: £9.3m; 11.0%).

 

Non-underwritten additional services increased by 6.5% to £9.9m (2016: £9.3m) aided by an improvement in non-underwritten additional insurance products.

 

The combined operating ratio was stable year-on-year at 102.8% (2016: 102.9%).

 

 

 

2017

 

2016

Reported net loss ratio (%)

65.6

66.0

Prior year reserve releases (%)

5.8

11.0

Current accident year net loss ratio (%)

71.4

77.0

 

Additional services revenues

 

 

2017

£m

 

2016

£m

Non-underwritten additional insurance products

11.9

9.8

Policy administration fees and other income

22.3

19.5

Claims income

7.8

7.6

Instalment income

48.5

37.6

Non-underwritten additional services

90.5

74.5

Underwritten additional insurance products

34.8

32.0

Total income from additional services

125.3

106.5

Motor

114.4

96.1

Home

10.9

10.4

 

 

 

Non-underwritten additional services

90.5

74.5

Other operating expenses

(14.8)

(14.5)

Non-underwritten additional services trading profit

75.7

60.0

Motor

65.8

50.7

Home

9.9

9.3

 

 

 

ASR per IFP - Motor (£)

64.8

63.6

ASR per IFP - Home (£)

21.1

18.1

 

Total income from additional services increased 17.7% to £125.3m (2016: £106.5m) driven by a strong performance across all income lines. Non-underwritten additional services trading profit increased 26.2% to £75.7m (2016: £60.0m) ahead of the Group's in-force policy growth and leveraged the efficient expense base. Instalment income, where customers choose to pay monthly, has also benefited from an increase in both Motor and Home average written premiums in the year.

 

Investment return

 

 

2017

£m

 

2016

£m

 

Investment income

12.9

14.3

Net gains on investments

1.0

3.8

Investment charges

(4.1)

(3.5)

Net investment return

9.8

14.6

Other income

3.2

3.5

Total investment return

13.0

18.1

 

 

 

Investment return - Gross (%)

1.5

2.2

Investment return - Net (%)

1.1

1.8

 

 

The Group's net investment return of £9.8m (2016: £14.6m) was aided by another year of strong equity returns, albeit to a lesser extent than that seen in 2016. In addition, increases in the shorter end of the UK Gilt Curve resulted in a reduction in the fair value for a number of fixed income positions, partly offsetting the one-off gain of £2.0m from the partial disposal of a long dated Gilt.

 

Other income reduced to £3.2m (2016: £3.5m) primarily as a result of lower income from the Group's investment in IMe Law Limited, operated by the Group's partner, Irwin Mitchell.

 

Trading profit

 

 

2017

£m

2016

£m

Trading profit from continuing operations

111.3

84.6

Motor

102.7

75.7

Home

8.6

8.9

Trading profit from discontinued operations

-

24.5

Gocompare.com

-

24.5

 

Trading profit from continuing operations, being earnings before interest, tax, non-trading expenses and amortisation of acquired intangible assets, is management's measure of the overall profitability of the Group's operating activities. The Group's reportable segments are Motor and Home and these delivered a trading profit of £111.3m (2016: £84.6m).

 

The Group generated a trading profit from discontinued operations (Gocompare.com) of £nil (2016: £24.5m). Gocompare.com was demerged from the Group on 3 November 2016.

 

Reconciliation of trading profit from continuing operations to profit before tax from continuing operations

 

 

2017

£m

 

2016

£m

Trading profit from continuing operations

111.3

84.6

Non-trading costs

(1.8)

(0.9)

Finance costs

(8.7)

(8.7)

Amortisation of acquired intangible assets

(2.2)

(2.3)

Profit before tax from continuing operations

98.6

72.7

 

The Group incurred £8.7m in finance costs (2016: £8.7m) relating to the £125.0m of 6.75% ten year tier two Subordinated Notes issued on 19 December 2014 ("the Notes").

 

Profit after tax

 

Profit after tax from continuing operations

 

The Group's profit after tax from continuing operations increased 35.1% to £80.4m (2016: £59.5m) largely driven by an improvement in the underwriting and non-underwritten additional service revenues performance.

 

Profit after tax from discontinued operations

 

The Group generated profit after tax from discontinued operations (Gocompare.com) of £nil (2016: £209.7m). In 2016, the Group recognised a fair value gain on disposal of Gocompare.com of £213.6m. Gocompare.com was demerged from the Group on 3 November 2016.

 

Earnings per share

 

Earnings per share from continuing operations

 

Earnings per share from continuing operations increased by 34.3% to 19.2 pence (2016: 14.3 pence) broadly in line with the increase in profit after tax from continuing operations.

 

Earnings per share

 

Earnings per share decreased 70.3% to 19.2 pence (2016: 64.6 pence) as a consequence of the profit after tax on discontinued operations not recurring.

 

Dividend per share

 

The Board has proposed a final dividend of 9.4 pence per share, comprised of a base dividend and special dividend, which together with the interim dividend of 4.1 pence per share, takes the full year dividend to 13.5 pence per share. The full year dividend of 13.5 pence per share represents a payout ratio of 70% of the Group's earnings per share. Excluding the profit contribution from Gocompare.com in 2016, this represents a year-on-year increase in the dividend of 31%. The dividend has been set with reference to the Group's profit after tax and allows for the approximate proportion of one-third (interim dividend) and two-thirds (final dividend), respectively.

 

The ex-dividend date is 12 April 2018, the record date is 13 April 2018 and the payment date is 25 May 2018. These dates are in respect of both the base and special dividend.

 

 

Cash flow

 

 

2017

2016

 

£m

 

£m

Profit after tax

80.4

269.2

 

 

 

Net cash generated from:

 

 

Operating activities

99.5

(3.8)

Investing activities

(9.4)

(25.7)

Financing activities

(69.0)

23.1

 

 

 

Net increase / (decrease) in cash and cash equivalents

21.1

(6.4)

 

 

 

Cash and cash equivalents at the beginning of the year

25.5

31.9

 

 

 

Cash and cash equivalents at the end of the period

46.6

25.5

 

 

The Group's cash and cash equivalents at the end of the period are £46.6m (2016: £25.5m).

 

Operating activities were a net inflow of £99.5m (2016: net outflow of £3.8m) largely driven by the Group's strong premium growth over the year ahead of the settlement of expected claims in the future. In 2016, the net outflow was largely driven by cash flows being invested into the Group's investment portfolio.

 

Investing activities were a net outflow of £9.4m (2016: net outflow of £25.7m) reflecting the Group's investment in property, plant, equipment and software. In 2016, investing activities included fees of £14.5m relating to the demerger of Gocompare.com that did not repeat in 2017.

 

Financing activities were a net outflow of £69.0m (2016: net inflow of £23.1m) of which £61.0m reflects the Group's 2016 final and 2017 interim dividends, and £8.4m relating to the interest payable on the Notes. In 2016, the financing activities included the Group's dividend payments of £42.9m, the inflow of cash from Gocompare.com of £73.1m prior to the demerger of Gocompare.com and the interest payable on the Notes.

 

The Group's cash flow statement can be found on page 18.

 

Investments

 

The Group manages its investment portfolio to maintain liquidity and preserve capital. Investments are held to meet the Group's cashflow requirements, pay customers' claims and seek a suitable return for an acceptable level of risk.

 

Strategic investment allocations

 

The Group's investment portfolio is in the process of transitioning towards the following strategic asset allocations and target returns. The Group's target allocations and target returns are outlined below:

 

Investment categories

Target allocations

Gross target returns

Cash & Liquidity

5%

0.1%

Claims

65%

1.0%

Surplus

30%

3.5%

 

As a result of the Group's strategic asset allocation review in 2017, capital commitments of £150m to new asset classes are recognised within its surplus liquidity funds at year end, ahead of these commitments being invested in 2018.

 

As at the 31 December 2017 the Group held the following investments:

 

 

2017

2016

 

%

£m

£m

Total

100

975.9

862.9

 

 

 

 

Cash & Liquidity

8

76.6

45.5

Liquidity funds

 

30.0

20.0

Cash

 

46.6

25.5

Claims

63

613.5

551.8

Liquidity funds

 

149.7

46.2

Fixed income

 

463.8

505.6

Surplus

29

285.8

265.6

Liquidity funds

 

192.5

143.0

Equity

 

53.9

42.5

Fixed income

 

39.4

80.1

 

The Group's total assets under management are 13.1% higher at £975.9m (2016: £862.9m), driven by the growth in premiums.

 

The Cash & Liquidity portfolio continues to reflect accessible cash for operational activities and includes a buffer for adverse events. At 8%, the allocation is higher than the Group's target allocation due to the timing of certain contractual outflows payable in early January 2018. The target allocation of 5% is in line with the Board-approved liquidity risk appetite.

 

The Claims portfolio is constructed with reference to the expected future cost of the Group's technical liabilities as defined under Solvency II. The duration of the Group's assets and liabilities has remained broadly stable across the period at 3.7 years (2016: 3.6 years) and 2.9 years (2016: 3.4 years) respectively. The Group continues to designate newly acquired assets within this portfolio as available for sale ('AFS') to minimise the impact of interest rate changes on the Group's earnings. At 31 December 2017 the Group has designated £342.0m as AFS (2016: £192.6m) and £160.3m as fair value through profit and loss (2016: £359.2m).

 

The Surplus portfolio seeks to deliver returns in asset classes that are aligned with the Group's risk appetite, in particular with reference to its solvency capital requirements. The Group's strategic asset allocation review was finalised in 2017. This resulted in a divestment from its high yield fixed income assets and a subsequent commitment of £150.0m to infrastructure equity and direct lending. Commitments are expected to be invested during 2018.

 

The remaining surplus assets continue to be invested across a mixture of liquidity funds, equities and fixed income.

 

The Group's total investment duration was 2.2 years (2016: 2.6 years).

 

Claims portfolio - Fixed income

 

2017

2016

 

            £m

£m

Total

503.1

505.6

Corporate bonds

227.5

216.7

Government bonds

159.6

189.7

Floating rate notes

39.0

84.3

Covered bonds

37.6

14.9

 

 

 

 

 

Claims portfolio - Credit risk quality

 

2017

%

2016

%

AAA

17

21

AA

36

37

A

26

22

BBB or below

21

17

 

The credit risk quality of the claims backed fixed income portfolio remains strong with 79% held in assets rated 'A' or above.

 

Reserving

 

The Group holds claims reserves, to cover the future cost of settling claims that have been incurred but not settled at the balance sheet date, whether already known to the Group or not yet reported, net of associated reinsurance recoveries.

 

For known periodic payment orders ("PPOs") and potential PPO awards, indexed cash flow projections are carried out in order to estimate an ultimate cost on a gross and net of reinsurance basis. The Group currently has 11 PPOs (2016: 11). The cash flow projections were undertaken on a discounted basis.

 

Due to the inherent uncertainties in reserving, the Group adopts a prudent approach to reserving through reserving in excess of the actuarial best estimate. Over time the inherent uncertainties in the actuarial best estimate reduce and the Group releases the margin above the best estimate. The Group's current reserve margin is comfortably in excess of its actuarial best estimate.

 

On 27 February 2017, the Lord Chancellor changed the Ogden discount rate from plus 2.5% to minus 0.75%, effective 20 March 2017. The impact of this change on the Group's 2017 performance was not material.

 

The Group benefited from favourable development of prior accident year reserves, with total prior year releases of £26.9m in 2017 (2016: £38.7m). The favourable development represents 4.0% of net earned premium (2016: 7.0%). 

 

Reinsurance

 

The Group purchases reinsurance as a risk transfer mechanism to mitigate risks that are outside the Group's appetite for individual claim or event exposure and to reduce the volatility caused by large individual and accumulation losses. By doing so, the Group reduces the impact that an event can have on its capital position and its underwriting results in both Motor and Home.

 

Currently, the Group has in place excess of loss reinsurance programmes for its Motor and Home underwriting activities. The purpose of these programmes is to provide cover for both individual large losses, for Motor and Home, and accumulation losses arising from natural and other catastrophe events for Home. Motor and Home reinsurance treaties are in place covering all years in which the Group has underwritten policies in each line of business.

 

The Group's Motor reinsurance programme was renewed on 1 July 2017 and subsequently extended for six months to the end of 2018:

 

Layer

Placement

1 January 2017 to 30 June 2017

Placement

1 July 2017 to 30 June 2018

Placement

1 July 2018 to 31 December 2018

 

£1m x £1m

100%

85%

100%

 

Unlimited x £2m

100%

100%

100%

 

 

The like-for-like cost increase of the programme renewed on 1 July 2017 was 33%, equating to an increase of £10 per vehicle, as a consequence of the change in the Ogden discount rate in February 2017 from 2.5% to minus 0.75%. The Home reinsurance programme was renewed on 1 July 2017 with no material changes to the programme.

 

The Group's reinsurance programmes are reviewed on an annual basis and capital modelling is used to identify the most appropriate structure and risk retention profile, taking into account the Group's business objective of minimising volatility and the prevailing cost and the availability of reinsurance in the market.

 

The Group has no quota share reinsurance or co-insurance arrangements in place.

 

Capital

 

The Group seeks to manage its capital in order to maintain a level of capitalisation and solvency to ensure that regulatory requirements are met with an appropriate buffer and that there is sufficient capital available to fund profitable growth opportunities.

 

The solvency capital requirement ("SCR") is the level of capital the Group is required to hold to meet its obligations if a 1 in 200 year event were to occur in the next 12 months. The Group's normal operating range of coverage of its SCR is 130-150%. The capital surplus above the SCR provides an appropriate level of capital coverage and should enable the Group to continue to meet its regulatory capital requirements. The Group adopts the standard formula to calculate its capital requirements under Solvency II.

 

The Group's capital position, after allowing for the final dividend, is outlined below:

 

 

 

 

 

2017

£m*

 

2016

£m

Own Funds

 

411

355

Tier 1

 

286

238

Tier 2

 

125

117

Solvency Capital Requirement

 

265

233

Coverage ratio

 

155%

152%

 

*The 2017 figures quoted are estimated, unaudited and after allowing for the final dividend. The 2016 solvency coverage is audited.  

 

The Group's Own Funds have increased 15.8% to £411m (2016: £355m) reflecting the capital generative nature of its operations and the increase in qualifying Tier 2 capital, net of its foreseeable dividends. The SCR increased 13.7% to £265m (2016: £233m) as a consequence of the Group's strong growth in the year, albeit the SCR at year end has benefited from a timing difference of £7m as the Group transitions its investment portfolio towards its strategic asset allocation. 

 

Own Funds comprise Tier 1 and Tier 2 qualifying capital. The Notes meet the qualifying criteria of a Tier 2 capital instrument and qualify up to a maximum of 50% of the SCR. The quality of the Group's capital remains strong with 70% in Tier 1 and 30% in Tier 2.

 

Solvency Capital Requirement

 

The Group's SCR allocation by risk type, based upon the undiversified capital requirement, can be seen below:

 

 

 

2017

 

2016

Underwriting risk

 

76%

72%

Market risk

 

14%

18%

Operational risk

 

8%

8%

Credit risk

 

2%

2%

 

The main risk driver is underwriting, consisting of premium, reserve and catastrophe risk, reflecting the capital requirements of the core business activities for the Group. The movement between Underwriting risk and Market risk is a timing difference as the Group transitions its investment portfolio towards its strategic asset allocation.

 

Sensitivities

 

The Group's capital structure is positioned to minimise the impact that adverse capital events have on its ability to meet its solvency capital requirements, were they to occur. The adverse capital events below are outlined to demonstrate the Group's capital resilience to such events. 

 

 

Impact on coverage*

 

Motor loss ratio 5ppts worse

(10)ppts

Yield curve 50bps lower

(0)ppt

Equities fall 25%

(2)ppt

Credit spreads widen 50bps

(2)ppt

1987 Hurricane

(3)ppt

Ogden discount rate of +0.5%

(1)ppt

 

* Capital coverage movements are stated after earnings, tax and dividend impact.

 

Dividend Policy

                                                              

The Group's dividend policy is to target a base dividend of 50% of profit after tax and enhance the base dividend with a further special dividend, if the Group has excess capital and distributable reserves. In determining the level of special dividend at the interim and final stage the Board will consider a number of factors which include but are not limited to: the level of available distributable reserves; opportunities for growth; potential strategic opportunities; the outlook for future capital generation; and headroom required to absorb adverse capital events. The Board remains committed to returning excess capital to shareholders where it does not believe it can utilise the retained capital for further opportunities to enhance shareholder value. The interim dividend will be paid in October of the relevant financial year and the final dividend in May of the following financial year, in the approximate proportions of one-third and two-thirds, respectively.

 

esure Group plc, the parent company of the Group, is a non-trading holding company that derives its profits from dividends paid by its subsidiary companies. The Board reviews the level of distributable reserves at least bi-annually, to align with the proposed interim and final dividend declaration dates, and aims to maintain distributable reserves that provide sufficient cover for these dividends.

 

Segmental Reporting

 

In 2017, the Group changed its reportable segments to Motor and Home to reflect its contribution approach. In 2016, the Group's reportable segments were: Motor underwriting; Home underwriting; Non-underwritten additional services; Investments; and prior to the demerger of Gocompare.com, Price Comparison.

 


 

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

 

Year ended

31 Dec 2017

Year ended

31 Dec 2016

 

Note

£m

£m

Gross written premiums

 

820.2

655.0

 

 

 

 

Gross earned premiums

 

734.0

598.0

Earned premiums, ceded to reinsurers

 

(56.2)

(43.1)

Earned premiums, net of reinsurance

 

677.8

554.9

Investment income and instalment interest

 

61.5

55.7

Other income

5

42.0

36.9

Total income

 

781.3

647.5

Claims incurred and claims handling expenses

 

(592.5)

(509.5)

Claims incurred recoverable from reinsurers

 

77.8

74.4

Claims incurred, net of reinsurance

 

(514.7)

(435.1)

Insurance expenses

6

(140.5)

(113.3)

Other operating expenses

6

(18.8)

(17.7)

Total expenses

 

(674.0)

(566.1)

Finance costs

 

(8.7)

(8.7)

Profit before tax

 

98.6

72.7

Taxation expense

 

(18.2)

(13.2)

Profit from continuing operations, net of tax

 

80.4

59.5

Profit from discontinued operations, net of tax

 

-

209.7

Profit attributable to the owners of the parent

 

80.4

269.2

Other comprehensive income

 

 

 

Items that will not be reclassified to profit or loss:

 

 

 

Revaluation of land and buildings

 

0.8

0.3

Tax relating to items that will not be reclassified.

 

0.0

0.0

 

 

0.8

0.3

Items that are or may be reclassified to profit or loss:

 

 

 

Available-for-sale financial assets - change in fair value

 

1.5

1.9

Tax relating to items that are reclassified

 

(0.1)

(0.3)

 

 

1.4

1.6

Total comprehensive income for the year attributable to owners of the parent

 

82.6

271.1

Earnings per share (pence per share)

 

 

 

- ordinary shares, basic

8

19.2

64.6

- ordinary shares, diluted

8

19.0

64.3

Earnings per share from continuing operations (pence per share)

 

 

 

- ordinary shares, basic

8

19.2

14.3

- ordinary shares, diluted

8

19.0

14.2

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

 

 

 

 

 

 

 

As at

31 Dec 2017

As at

31 Dec 2016

 

Note

£m

£m

Assets

 

 

 

Goodwill and intangible assets

10

16.6

12.7

Deferred acquisition costs

 

44.9

37.8

Property, plant and equipment

 

29.3

32.5

Financial investments

11

929.3

839.0

Reinsurance assets

12

370.2

291.7

Insurance and other receivables

 

307.0

245.6

Cash and cash equivalents

 

46.6

25.5

Total assets

 

1,743.9

1,484.8

 

 

 

 

Equity and liabilities

 

 

 

Share capital

 

0.3

0.3

Share premium account

 

45.8

45.4

Capital redemption reserve

 

44.9

44.9

Other reserves

 

5.1

2.9

Retained earnings

 

201.9

178.0

Total equity

 

298.0

271.5

 

 

 

 

Liabilities

 

 

 

Insurance contract liabilities

12

1,214.5

1,002.3

Borrowings

11

123.1

122.8

Insurance and other payables

 

96.7

77.3

Deferred tax liabilities

 

0.9

3.2

Derivative financial liabilities

11

0.2

1.6

Current tax liabilities

 

10.5

6.1

Total liabilities

 

1,445.9

1,213.3

Total equity and liabilities

 

1,743.9

1,484.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

 

 

Attributable to owners of the parent

Year ended 31 December 2017

 

Share capital

Share premium

Capital redemption reserve

Other reserves

Retained earnings

Total equity

Note

£m

£m

£m

£m

£m

£m

 

 

 

 

 

 

 

 

At 1 January 2017

 

0.3

45.4

44.9

2.9

178.0

271.5

Profit for the year

 

-

-

-

-

80.4

80.4

Other comprehensive income

 

-

-

-

2.2

-

2.2

Total comprehensive income for the year

 

-

-

-

2.2

80.4

82.6

Transactions with owners:

 

 

 

 

 

 

 

Issue of share capital

 

0.0

0.4

-

-

-

0.4

Share-based payments

 

-

-

-

-

3.5

3.5

Deferred tax on share-based payments

 

-

-

-

-

1.0

1.0

Dividends

7

-

-

-

-

(61.0)

(61.0)

Total transactions with owners

 

0.0

0.4

-

-

(56.5)

(56.1)

At 31 December 2017

 

0.3

45.8

44.9

5.1

201.9

298.0

 

 

 

Attributable to owners of the parent

 

Year ended 31 December 2016

 

Share capital

Share premium account

Capital redemption reserve

Available-for-sale reserve

Retained earnings

Total equity

 

Note

£m

£m

£m

£m

£m

£m

 

 

 

 

 

 

 

 

 

 

At 1 January 2016

 

0.3

44.0

44.9

1.0

251.1

341.3

 

Profit for the year

 

-

-

-

-

269.2

269.2

 

Other comprehensive income

 

-

-

-

1.9

-

1.9

 

Total comprehensive income for the year

 

-

-

-

1.9

269.2

271.1

 

Transactions with owners:

 

 

 

 

 

 

 

 

Issue of share capital

 

0.0

1.4

-

-

-

1.4

 

Share-based payments

 

-

-

-

-

2.4

2.4

 

Deferred tax on share-based payments

 

-

-

-

-

(0.0)

(0.0)

 

Demerger of Gocompare.com

 

-

-

-

-

(301.8)

(301.8)

 

Dividends

7

-

-

-

-

(42.9)

(42.9)

 

Total transactions with owners

 

0.0

1.4

-

-

(342.3)

(340.9)

 

At 31 December 2016

 

0.3

45.4

44.9

2.9

178.0

271.5

 

                               
 

CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

Year ended
31 Dec 2017

Year ended
31 Dec 2016

Cash flows from operating activities

Note

£m

£m

Profit after tax for the year

 

80.4

269.2

Adjustments to reconcile profit after tax to net cash flows:

 

 

 

- Finance costs

 

8.7

8.7

- Depreciation and revaluation of property, plant and equipment

 

4.8

3.8

- Amortisation of intangible assets

10

4.6

15.2

- Share based payments

 

3.5

2.4

- Non-cash gain on demerger of Gocompare.com

 

-

(213.6)

- Taxation expense

 

18.2

16.0

- Total investment return

 

(13.0)

(20.7)

- Instalment interest

 

(48.5)

(37.7)

- Loss on the sale of property, plant and equipment

 

0.2

0.5

 

Operating cash flows before movements in working capital, tax and interest paid

 

58.9

43.8

Sales of financial investments

 

707.4

358.1

Purchases of financial investments

 

(792.7)

(465.2)

Interest, rent and dividends received less investment management expenses on financial investments

 

7.9

15.9

Instalment interest received

 

53.3

41.6

Changes in working capital:

 

 

 

- Increase in insurance liabilities including reinsurance assets, unearned premium reserves and deferred acquisition costs

 

126.6

36.5

- Increase in insurance and other receivables

 

(61.9)

(49.3)

- Increase in trade and other payables including insurance payables

 

15.3

31.8

Taxation paid

 

(15.3)

(17.0)

Net cash generated / (used)  in operating activities

 

99.5

(3.8)

Cash flows from investing activities

 

 

 

Purchase of property, plant and equipment and software

 

(9.4)

(8.3)

Net cash outflow from the demerger of Gocompare.com

 

-

(17.4)

Net cash used in investing activities

 

(9.4)

(25.7)

Cash flows from financing activities

 

 

 

Proceeds on issue of Ordinary Shares

 

0.4

1.3

Interest paid on loans

 

(8.4)

(8.4)

Gocompare.com debt raise

 

-

73.1

Dividends paid

7

(61.0)

(42.9)

Net cash (used in) / generated from financing activities

 

(69.0)

23.1

Net increase / (decrease)  in cash and cash equivalents

 

21.1

(6.4)

Cash and cash equivalents at the beginning of the year

 

25.5

31.9

Cash and cash equivalents at the end of the year

 

46.6

25.5

 

 

 

NOTES TO THE FINANCIAL STATEMENTS

 

1.      General information

 

esure Group plc is a Company incorporated in England and Wales. Its registered office is The Observatory, Reigate, Surrey RH2 0SG.

 

The nature of the Group's operations is the writing of general insurance for private cars and homes. The Company's principal activity is that of a holding company.

 

All of the Company's subsidiaries are located in the United Kingdom, except for esure S.L.U., which is incorporated in Spain. 

 

2.      Accounting policies

Basis of preparation

 

These financial statements present the esure Group plc group financial statements for the year ended 31 December 2017, comprising the consolidated statement of comprehensive income, consolidated statement of financial position, consolidated statement of changes in equity, consolidated statement of cash flows and related notes, as well as the comparatives.

 

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union.

 

At a General Meeting on 1 November 2016, the Company's shareholders approved the demerger of Gocompare.com plc and on 3 November 2016 the demerger was completed.

 

Under IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations the results and the cash flows of the Gocompare.com business are, in line with the prior year financial statements, presented as discontinued operations.

 

These consolidated financial statements have been prepared on a going concern basis. As detailed in the Strategic Report (2017 Annual Report), the Directors have assessed the Group's prospects and viability for the three year period to 31 December 2020. Based on this robust assessment, the Directors confirm that they have a reasonable expectation that the Group has adequate resources to continue in operational existence for at least the next 12 months.

 

These consolidated financial statements have been presented in Sterling and rounded to the nearest hundred thousand. Throughout these consolidated financial statements any amounts which are less than £0.05m are shown by 0.0, whereas a dash (-) represents that no balance exists.

 

The consolidated financial statements have been prepared on the historical cost basis except for certain financial assets and land and buildings that are measured at fair value at the reporting date. The principal accounting policies adopted are set out below.

 

New and amended accounting standards adopted with no significant impact on the Group

 

The Group has applied the following standards and amendments for the first time for its annual reporting period commencing 1 January 2016:

 

·      Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12)

·      Disclosure Initiative (Amendments to IAS 7)

·      Annual Improvements to IFRS Standards 2014-2016 Cycle - Amendments to IFRS 12

 

The adoption of these amendments did not have any impact on the current or prior periods.                      

 

New and amended accounting standards that have been issued but are not yet effective

The following standards have been issued and are effective for accounting periods ending on or after 31 December 2017 and are expected to have an impact on the Group financial statements.

 

 

 

IFRS 9 Financial Instruments

As an insurance Group, the Group is expecting to take the option to defer the effective date of the new standard to 1 January 2021, in line with IFRS 17.  The standard includes requirements for recognition and measurement, impairment, derecognition of financial instruments and general hedge accounting.  The Group's current analysis is that this will not have a material impact on our results. 

 

IFRS 15 Revenue from Contracts with Customers

The new standard is effective for periods beginning on or after 1 January 2018.  The standard specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures.  The standard provides a single, principles based five-step model to be applied to all contracts with customers.  The Group has evaluated the impact of the new standard and believe that this will not have a material impact on our results. 

 

IFRS 16 Leases

The new standard is effective for periods beginning on or after 1 January 2019.  The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value.  This is in contrast to the current standard which differentiates between operating and finance leases. The Group has evaluated the impact of the new standard and believe that this will increase both fixed assets and leasing liabilities but will not have a material impact on our income statement. 

 

IFRS 17 Insurance Contracts

The new standard is effective for periods beginning on or after 1 January 2021.  The standard establishes principles for the recognition, measurement, presentation and disclosure of insurance and reinsurance contracts.  The Group is currently evaluating the impact of the standard on our results. 

 

Basis of consolidation

 

Subsidiaries are entities over which the Group has control. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiary companies are consolidated using the acquisition method.   

Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtained control, and continue to be consolidated until the date when such control ceases.

In preparing these consolidated financial statements, any intra-group balances, unrealised gains and losses or income and expenses arising from intra-group trading are eliminated.  Where accounting policies used in individual financial statements of a subsidiary company differ from Group policies, adjustments are made to bring these policies in line with Group policies.

3.      Critical accounting judgements and estimates

 

The preparation of these consolidated financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates; however the consolidated financial statements presented are based on conditions that existed at the balance sheet date.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Key sources of estimation uncertainty and critical judgements in applying the Group's accounting policies 

 

Insurance contract liabilities 

 

Estimates have to be made both for the expected ultimate cost of claims reported at the reporting date and for the expected ultimate cost of claims incurred but not reported ("IBNR") at the reporting date. It can take a significant period of time before ultimate claims cost can be established with certainty for some types of claims.

 

The ultimate cost of outstanding claims is estimated by carrying out standard actuarial projections in line with the Institute and Faculty of Actuaries Technical Actuarial Standards. These techniques use past claims information and development patterns of these claims to project the expected future claims cost both for notified and non-notified claims.

 

Similar judgements, estimates and assumptions are employed in the assessment of adequacy of provisions for unearned premium and hence whether there is a requirement for an unexpired risk provision.

 

 

4.      Segmental information

 

Differences to the Group's 2016 annual report and accounts in the basis of segmentation

 

The Group makes decisions on customer acquisition and retention based on contribution.  In addition to the underwriting contribution from Motor and Home, a diversified suite of additional insurance products and services provide opportunities to deliver enhanced customer contribution.

 

In order to facilitate the management of the Group and post the demerger of Gocompare.com the reporting to the Board of Directors has changed and the reportable segments under IFRS 8 Operating Segments reflect this change.  The 2016 segments have been restated to reflect the new segmental reporting.   

 

Operating segments

 

The Group has two operating segments as described below. These segments are also the Group's reportable segments and represent the manner in which the business is regularly reported to the Group's executive and Board of Directors.

 

Motor

 

This segment incorporates the revenues and expenses directly attributable to the Group's Motor insurance underwriting activities inclusive of additional insurance products underwritten by the Group and related non-underwritten additional services.  Investment income is allocated to the segment on the basis of premium income.

 

Home

 

This segment incorporates the revenues and expenses directly attributable to the Group's Home insurance underwriting activities and related non-underwritten additional services.  Investment income is allocated to the segment on the basis of premium income.

 

Segmental revenues, expenses and other information

 

An analysis of the Group's results by reportable segment is shown below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended

31 December 2017

Motor

Home

Total

 

£m

£m

£m

 

 

 

 

Gross written premiums

734.3

85.9

820.2

Earned premiums, net of reinsurance

596.3

81.5

677.8

Investment income

12.0

1.0

13.0

Instalment interest income

43.3

5.2

48.5

Other income

36.3

5.7

42.0

Total income

687.9

93.4

781.3

Net incurred claims

(436.5)

(53.5)

(490.0)

Claims handling costs

(21.5)

(3.2)

(24.7)

Insurance expenses

(113.4)

(27.1)

(140.5)

Other operating expenses

(13.8)

(1.0)

(14.8)

Total expenses

(585.2)

(84.8)

(670.0)

Trading profit

102.7

8.6

111.3

Non-trading costs

 

 

(1.8)

Amortisation of acquired intangibles

 

 

(2.2)

Finance costs

 

 

(8.7)

Profit before taxation from continuing operations

 

 

98.6

Tax expense

 

 

(18.2)

Profit after taxation from continuing operations

 

 

80.4

 

 

 

 

Net expense ratio

22.6%

37.2%

24.4%

Net loss ratio

73.2%

65.6%

72.3%

Combined operating ratio

95.8%

102.8%

96.7%

 

 

 

The average number of in-force policies during the year ended 31 December 2017 was 2.28m.

 

Year ended

31 December 2016 (restated)

Motor

Home

Total

 

£m

£m

£m

 

 

 

 

Gross written premiums

563.7

91.3

655.0

Earned premiums, net of reinsurance

470.6

84.3

554.9

Investment income

16.1

2.0

18.1

Instalment interest income

32.6

5.0

37.6

Other income

31.5

5.4

36.9

Total income

550.8

96.7

647.5

Net incurred claims

(356.4)

(55.6)

(412.0)

Claims handling costs

(19.5)

(3.6)

(23.1)

Insurance expenses

(85.8)

(27.5)

(113.3)

Other operating expenses

(13.4)

(1.1)

(14.5)

Total expenses

(475.1)

(87.8)

(562.9)

Trading profit

75.7

8.9

84.6

Non-trading costs

 

 

(0.9)

Amortisation of acquired intangibles

 

 

(2.3)

Finance costs

 

 

(8.7)

Profit before taxation from continuing operations

 

 

72.7

Tax expense

 

 

(13.2)

Profit after taxation from continuing operations

 

 

59.5

 

 

 

 

Net expense ratio

22.4%

36.9%

24.6%

Net loss ratio

75.7%

66.0%

74.2%

Combined operating ratio

98.1%

102.9%

98.8%

 

 

The average number of in-force policies during the year ended 31 December 2016 was 2.08m.

 

There are no other material components of income and expense or non-cash items.

 

Trading profit from continuing operations, being earnings before interest, tax, non-trading expenses and amortisation of acquired intangible assets, is management's measure of the overall profitability of the Group's operating activities. The Group's segmental trading profit, comprising of Motor and Home is £111.3m (2016: £84.6m).

 

The Group's profit in respect of continuing operations after tax is £80.4m (2016: £59.5m).

 

The Group incurred non-trading costs of £1.8m in 2017 of which £1.7m related to share-based payments in respect one-off awards.  The Group incurred non-trading costs of £0.9m in 2016 of which £0.4m related to share-based payments in respect of the long service and one-off awards and £0.2m related to stamp duty and legal fees in respect of a new lease.

 

In 2016 the Group generated a trading profit of £24.5m on its discontinued operation (Gocompare.com) prior to the demerger on 3 November 2016. 

 

Segmental profit drivers

 

Motor

Trading profit is 35.7% higher at £102.7m (2016: £75.7m).  The underwriting performance of £24.9m (2016: £8.9m) reflects an improvement in the Group's current accident year loss ratio in the year as higher pricing earned through ahead of claims inflation.  Instalment and other income net of other operating expenses increased 29.8% to £65.8m (2016: £50.7m) largely due to an increase in in-force policies.                                                                                   

 

The combined operating ratio improved by 2.3ppts to 95.8% (2016: 98.1%) and this was largely driven by an improvement in the loss ratio of 2.5ppts to 73.2% (2016: 75.7%), with the expense ratio broadly stable at 22.6% (2016: 22.4%).

                                                                       

Home

Trading profit is marginally lower at £8.6m (2016: £8.9m).  The Group's underwriting loss of £2.3m was similar to 2016 (loss of £2.4m), albeit 2017 has benefited from weather event costs that were lower than normal.  Instalment and other income net of other operating expenses increased 6.5% to £9.9m (2016: £9.3m) aided by an improvement in non-underwritten additional insurance products.

 

The combined operating ratio was stable year-on-year at 102.8% (2016: 102.9%).                                                                                                                                     

 

Statement of financial position

 

The assets and liabilities of the Group are reported on an aggregated consolidated basis. They are not allocated to reportable segments and are reported on the same basis as disclosed in the consolidated statement of financial position on page 16.

 

5.      Other income

 

Year ended 31 Dec 2017

Year ended 31 Dec 2016

 

£m

£m

 

 

 

Continuing operations

 

 

Fees for additional services

42.0

36.9

 

 

 

Total other income

42.0

36.9

 

6.      Insurance and other operating expenses

 

Year ended 31 Dec 2017

Year ended 31 Dec 2016

 

£m

£m

Continuing operations

 

 

Acquisition of insurance contracts

88.7

75.4

Change in deferred acquisition costs

(7.1)

(12.5)

Administration

58.9

50.4

 

 

 

Insurance expenses

140.5

113.3

 

 

 

Other operating expenses

18.8

17.7

 

During the year ended 31 December 2017, a reclassification of £0.1m is included within other operating expenses in relation to a revaluation of the Group's land and buildings (2016: £0.1m charge).

 

7. Dividends

 

A 2017 interim dividend per share of 4.1p (£17.1m) was declared by the Board of Directors in August 2017 (2016: interim dividend per share of 3.0p, £12.5m). Subsequent to the year end, a 2017 final dividend per share of 9.4p (£39.2m) was declared by the Board of Directors (2016: final dividend per share of 10.5p, £43.9m). 

 

8. Earnings per share

 

Basic

 

Basic earnings per share is calculated by dividing the earnings attributable to the owners of the Group and the weighted average of Ordinary Shares in issue during the period, excluding Ordinary Shares held as employee trust shares.  A calculation is also shown based on the earnings from continuing operations attributable to the owners of the Group.

 

Diluted

 

Diluted earnings per share is calculated by dividing the earnings attributable to the owners of the Group by the weighted average of Ordinary Shares in issue during the period adjusted for any dilutive potential Ordinary Shares. A calculation is also shown based on the earnings from continuing operations attributable to the owners of the Group.

 

The difference between the basic and diluted weighted average number of shares outstanding during the year, being 5,586,240 (2016: 2,009,742), relates to the dilutive potential of the share-based payment arrangements.

 

Basic and diluted earnings per Ordinary Share

 

Year ended 31 Dec 2017

Year ended 31 Dec 2016

Profit after taxation (£m)

80.4

269.2

 

 

 

Weighted average number of Ordinary shares (million) - basic

418.0

416.6

Earnings per share - basic (pence per share)

19.2

64.6

 

 

 

Weighted average number of Ordinary shares (million) - diluted

423.6

418.6

Earnings per share - diluted (pence per share)

19.0

64.3

Continuing operations earnings per share

 

Year ended 31 Dec 2017

Year ended 31 Dec 2016

Profit from continuing operations, net of tax (£m)

80.4

59.5

 

 

 

Weighted average number of Ordinary shares (million) - basic

418.0

416.6

Earnings per share from continuing operations - basic (pence per share)

19.2

14.3

 

 

 

Weighted average number of Ordinary shares (million) - diluted

423.6

418.6

Earnings per share from continuing operations - diluted (pence per share)

19.0

14.2

 

Discontinued operations earnings per share

 

 

Year ended 31 Dec 2017

Year ended 31 Dec 2016

Profit from discontinued operations, net of tax (£m)

-

209.7

 

 

 

Weighted average number of Ordinary shares (million) - basic

418.0

416.6

Earnings per share from discontinued operations - basic (pence per share)

-

50.3

 

 

 

Weighted average number of Ordinary shares (million) - diluted

423.6

418.6

Earnings per share from discontinued operations - diluted (pence per share)

-

50.1

 

9.      Taxation

 

The tax rate used for the calculations is the Corporation Tax rate of 19.25% (2016: 20.00%) payable by the corporate entities in the UK on taxable profits under tax law in that jurisdiction.

 

 

 

10.    Goodwill and intangible assets

 

 

Goodwill

 

Software

 

Acquired brands

 

Customer relationships

 

Total

 

£m

 

£m

 

£m

 

£m

 

£m

Cost

 

 

 

 

 

 

 

 

 

As at 1 January 2016

127.7

 

10.5

 

65.1

 

21.5

 

224.8

 

 

 

 

 

 

 

 

 

 

Additions in the year

-

 

5.2

 

-

 

-

 

5.2

Disposals in the year

-

 

(0.2)

 

-

 

-

 

(0.2)

Demerger of Gocompare.com

(127.7)

 

(1.7)

 

(40.9)

 

(10.2)

 

(180.5)

 

 

 

 

 

 

 

 

 

 

As at 31 December 2016

-

 

13.8

 

24.2

 

11.3

 

49.3

 

 

 

 

 

 

 

 

 

 

Additions in the year

-

 

8.7

 

-

 

-

 

8.7

Disposals in the year

-

 

(0.7)

 

-

 

-

 

(0.7)

 

 

 

 

 

 

 

 

 

 

As at 31 December 2017

-

 

21.8

 

24.2

 

11.3

 

57.3

 

 

 

 

 

 

 

 

 

 

Accumulated amortisation and impairment

 

 

 

 

 

 

 

 

 

As at 1 January 2016

-

 

4.7

 

23.5

 

15.1

 

43.3

 

 

 

 

 

 

 

 

 

 

Amortisation for the year

-

 

2.3

 

9.0

 

4.3

 

15.6

Disposals in the year

-

 

(0.2)

 

-

 

-

 

(0.2)

Demerger of Gocompare.com

-

 

(1.1)

 

(12.9)

 

(8.1)

 

(22.1)

 

 

 

 

 

 

 

 

 

 

As at 31 December 2016

-

 

5.7

 

19.6

 

11.3

 

36.6

 

 

 

 

 

 

 

 

 

 

Amortisation for the year

-

 

2.4

 

2.2

 

-

 

4.6

Disposals in the year

-

 

(0.5)

 

-

 

-

 

(0.5)

 

 

 

 

 

 

 

 

 

 

As at 31 December 2017

-

 

7.6

 

21.8

 

11.3

 

40.7

 

 

 

 

 

 

 

 

 

 

Net book value

 

 

 

 

 

 

 

 

 

As at 31 December 2016

-

 

8.1

 

4.6

 

-

 

12.7

 

 

 

 

 

 

 

 

 

 

As at 31 December 2017

-

 

14.2

 

2.4

 

-

 

16.6

 

 

Goodwill of £127.7m as at 1 January 2016 relates to goodwill arising on the acquisition of Gocompare.com by the Group.

 

Included in acquired brands and customer relationships are the Gocompare.com brand and the Gocompare.com customer relationships recognised on application of IFRS 3 to the acquisition of the outstanding 50% of the ordinary share capital of Gocompare.com on 31 March 2015. 

 

 

 

 

11.   Financial assets and liabilities

 

11.1  Financial assets

 

 

 

As at

31 Dec 2017

As at

31 Dec 2016

 

 

£m

£m

 

Financial investments designated at fair value through profit or loss:

 

 

 

Shares and other variable-yield securities and units in unit trusts

49.8

39.3

 

Debt securities and other fixed income securities

160.2

394.5

 

Deposits with credit institutions

372.1

209.3

 

 

 

 

 

Financial investments held for trading:

 

 

 

Derivative financial instruments

1.1

0.1

 

Financial investments at fair value through profit or loss

583.2

643.2

 

 

 

 

 

AFS financial assets:

 

 

 

Debt securities and other fixed income securities

342.0

192.6

 

Shares in unquoted equity investments

4.1

3.2

 

Total financial investments

929.3

839.0

 

 

 

 

 

Loans and receivables:

 

 

 

Insurance and other receivables

252.3

198.2

 

Cash and cash equivalents

46.6

25.5

 

 

 

 

 

Total financial assets

1,228.2

1,062.7

         

 

 

 

As at

31 Dec 2017

As at

31 Dec 2016

 

 

£m

£m

 

Derivative financial instruments

1.1

0.1

 

Debt securities

502.2

587.1

 

Deposits with credit institutions

372.1

209.3

 

Cash and cash equivalents

46.6

25.5

 

 

 

 

 

Investments bearing credit risk and cash and cash equivalents

922.0

822.0

 

 

 

 

 

AAA

427.7

300.9

 

AA

194.5

204.8

 

A

195.8

155.5

 

BBB

100.4

94.0

 

Below BBB or not rated

3.6

66.8

 

 

 

 

 

Investments bearing credit risk and cash and cash equivalents

922.0

822.0

 

Shares and other variable yield securities and units in unit trusts do not bear credit risk. Cash and cash equivalents are "A" rated

 

Available for sale financial assets

 

During 2017, the Group continued to refine and enhance its asset and liability matching for capital management purposes by designating some financial assets acquired during the year as available for sale. Any movements in fair value of these assets is accounted for in other comprehensive income, reducing volatility in the income statement. These assets continue to have a longer average duration of 4.1 years (2016: 2.6 years) which leads to an increased sensitivity to interest rate changes but are closely aligned to the Group's liability exposure.

 

Infrastructure equity and direct lending                                                                              

 

As a result of the Group's strategic asset allocation review in 2017, capital commitments to new asset classes are recognised within its surplus liquidity funds at year end, ahead of these commitments being invested in 2018.                                                                                                                              

 

The Surplus portfolio seeks to deliver returns in asset classes that are aligned with the Group's risk appetite, in particular with reference to its solvency capital requirements. The Group's strategic asset allocation review was finalised in 2017. This resulted in a divestment from its high yield fixed income assets and a subsequent commitment to infrastructure equity and direct lending. Commitments are expected to be invested during 2018.                                                                                                

                                                                                                                                                           

11.2  Financial liabilities

 

As at

31 Dec 2017

As at

31 Dec 2016

 

£m

£m

Financial liabilities held for trading:

 

 

Derivative financial instruments

0.2

1.6

 

 

 

Other financial liabilities:

 

 

Borrowings: 10 year Subordinated Notes 

123.1

122.8

Insurance and other payables

26.0

17.1

 

 

 

Total financial liabilities

149.3

141.5

 

The £125m 10 year Subordinated Notes were issued by esure Group plc on 19 December 2014 at the rate of 6.75% per annum, with payments made biannually.

 

The nominal £125m Subordinated Notes have a maturity date of 19 December 2024. The Notes are direct, unsecured and subordinated obligations of the Group, ranking pari passu and without preference amongst themselves, and will, in the event of the winding-up of the Group or in the event of an administrator of the Group being appointed and giving notice that it intends to declare and distribute a dividend, be subordinated to the claims of all Senior Creditors and policy holders of the Group.

 

11.3  Capital management and regulation

 

The Group maintains a capital structure consistent with the Group's risk profile and the regulatory market requirements of its business. The Group's objectives in managing its capital are:

 

-    to match the profile of its assets and liabilities, taking account of the risk inherent in the business;

-    to satisfy the requirements of its policyholders and regulators;

-    to maintain financial and capital strength to support growth; and

-    to retain financial flexibility by maintaining strong liquidity and access to a range of capital markets.

 

Solvency II is the solvency framework implemented on 1 January 2016 as the capital adequacy regime for the European insurance industry. It established a set of EU-wide capital requirements and risk management standards with the aim of increasing protection for policyholders. The Group is regulated by the Prudential Regulation Authority ("PRA") on both a Group basis and, for the Group's principal underwriter, esure Insurance Limited, on a solo basis.

 

The esure Board has considered the risk appetite of the Group as part of the Own Risk and Solvency Assessment process under Solvency II. The esure Board believe an appropriate level of capital coverage of its Solvency Capital Requirement ("SCR") to be in the region of 130-150%. The capital surplus above the SCR provides sufficient headroom to absorb adverse capital events and should enable the Group to continue to meet its regulatory capital requirements. As expected the Group has operated in the middle to upper end of the range, providing flexibility to fund further profitable growth.  

 

The Group's dividend policy is to target a base dividend of 50% of profit after tax and enhance the base dividend with a further special dividend, if the Group has sufficient capital and distributable reserves, after allowing for an appropriate level of capital coverage of the Group's SCR and future growth opportunities. The Board remains committed to returning excess capital to shareholders where it does not believe it can utilise retained capital for further profitable growth.

 

Refer to page 12 for further information about the Group's draft and unaudited 31 December 2017 Solvency II capital position.

 

11.4  Fair value estimation

 

In accordance with IFRS 13 Fair Value Measurement financial instruments reports at fair value and revalued properties have been categorised into a fair value measurement hierarchy as follows:

 

Quoted prices (unadjusted) in active markets for identical assets or liabilities - (Level 1)

 

Inputs to Level 1 fair values are quoted prices (unadjusted) in active markets for identical assets. An active market is a market in which transactions for the asset occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

 

Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) - (Level 2)

 

Fair value measurements that are derived from inputs other than quoted prices included in Level 1, if all significant inputs required to fair value an instrument are observable, would result in the instrument being included in Level 2. The majority of assets classified as Level 2 are over-the-counter corporate bonds, where trades are less frequent owing to the nature of the assets. Inputs used in pricing the Group's level 2 assets include:

 

·     quoted prices for similar (i.e. not identical) assets in active markets;

 

·     quoted prices for identical or similar assets in markets that are not active, the prices are not current, or price quotations vary among market makers, or in which little information is released publicly;

 

·     inputs that are derived principally from, or corroborated by, observable market data by correlation; and

 

·     for forward exchange contracts, the use of observable forward exchange rates at the balance sheet date, with the resulting value discounted back to present value.

 

The Group's policy, should there be a change to the valuation techniques or level of activity in the market in which that asset is traded, is to transfer the asset between levels effective from the beginning of the reporting period. In line with the requirements of IFRS 13 Fair Value Measurement, the Group classifies all debt securities as Level 2 assets with the exception of Government backed securities which are classified as Level 1 unless they are illiquid.

 

Following a review the liquidity funds held by the Group have been reclassified from Level 2 to Level 1 in both the current year and the comparatives.  

             

Inputs for the asset or liability that are not based on observable market data (unobservable inputs) - (Level 3)

 

Unobservable inputs have been used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset at the measurement date (or market information for the inputs to any valuation models). As such, unobservable inputs reflect assumptions about the inputs that market participants would use in pricing the asset.

 

If one or more of the significant inputs is not based on observable market data, the instrument is included in Level 3. The Group held Level 3 AFS financial assets of £4.1m as at 31 December 2017 (2016: £3.2m), representing an investment in an unquoted equity investment which has been valued using a discounted cash flow valuation model.

 

Under IFRS 13, land and buildings with a carrying value of £13.6m (2016: £12.9m) are classified as Level 3 assets. Owner-occupied properties are stated at their revalued amounts, as assessed by qualified external valuers annually, all with recent relevant experience. These values are assessed in accordance with the relevant parts of the current RICS Valuation Standards in the UK (''Red Book''). The valuer's opinion of fair value was primarily derived using comparable recent market transactions on arm's length terms. No sensitivity analysis has been performed due to the nature of the valuation.          

 

The following table presents the Group's financial assets and liabilities measured at fair value:

 

 

 

 

At 31 December 2017

Level 1

Level 2

Level 3

Total fair value

 

 

£m

£m

£m

£m

 

Financial assets

 

 

 

 

 

Assets at FVTPL:

 

 

 

 

 

Derivative financial instruments

-

1.1

-

1.1

 

Equity securities

49.8

-

-

49.8

 

Debt securities

63.2

97.0

-

160.2

 

Deposits with credit institutions

372.1

-

-

372.1

 

Total financial assets at FVTPL

485.1

98.1

-

583.2

 

 

AFS financial assets:

 

 

 

 

 

Debt securities

141.3

200.7

-

342.0

 

Unquoted equity securities

-

-

4.1

4.1

Total AFS financial assets

141.3

200.7

4.1

346.1

 

 

 

 

 

Land and buildings

-

-

13.6

13.6

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

Derivative financial instruments

-

0.2

-

0.2

 

Total financial liabilities at FVTPL

-

-

0.2

 

 

 

 

 

 

 

 

At 31 December 2016

 

Level 1

 

Level 2

 

Level 3

Total fair value

 

£m

£m

£m

£m

Financial assets

 

 

 

 

Assets at FVTPL:

 

 

 

 

Derivative financial instruments

-

0.1

-

0.1

Equity securities

39.3

-

-

39.3

Debt securities

106.9

287.6

-

394.5

Deposits with credit institutions

209.3

-

-

209.3

Total financial assets at fair value

355.5

287.7

-

643.2

 

 

 

 

 

AFS financial assets:

 

 

 

 

Debt securities

107.1

85.5

-

192.6

Unquoted equity securities

-

-

3.2

3.2

 

107.1

85.5

3.2

195.8

Land and buildings

 

 

 

 

 

-

-

12.9

12.9

Financial liabilities

 

 

 

 

Derivative financial instruments

-

1.6

-

1.6

Total financial liabilities at fair value

-

1.6

-

1.6

             

 

 

 

 

 

12.   Reinsurance assets and insurance contract liabilities

 

12.1  Analysis of recognised amounts

 

 

 

As at

31 Dec 2017

£m

As at

31 Dec 2016

£m

Gross

 

 

Claims outstanding (before deduction of salvage  

and subrogation recoveries) and claims handling expenses

798.9

672.9

Unearned premiums

415.6

329.4

Total insurance liabilities, gross

1,214.5

1,002.3

 

 

 

Recoverable from reinsurers

 

 

Claims outstanding

336.8

271.1

Unearned premiums

33.4

20.6

Total reinsurers' share of insurance liabilities

370.2

291.7

 

 

 

Net

 

 

Claims outstanding (before deduction of salvage and subrogation recoveries) and claims handling expenses

462.1

401.8

Unearned premiums

382.2

308.8

Total insurance liabilities, net

844.3

710.6

 

 

 

Due within one year (gross)

590.8

546.4

Due in more than one year (gross)

623.7

455.9

 

 

 

Reinsurance Assets

As at

31 Dec 2017

As at

31 Dec 2016

 

£m

£m

Reinsurers' share of insurance liabilities

370.2

291.7

Total assets arising from reinsurance contracts

370.2

291.7

 

 

 

Expected to be recovered within one year

67.1

39.0

Expected to be recovered in more than one year 

303.1

252.7

 

Amounts due from reinsurers in respect of claims already paid by the Group on the contracts that are reinsured are included in insurance and other receivables. No reinsurance assets have been impaired.

 

 

 

 

 

 

(a) Insurance claims - gross ultimate claims

 

Accident year

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Total

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

Ultimate gross earned premium

447.1

544.3

479.1

488.7

511.7

526.1

528.7

532.4

598.0

734.0

5,390.1

Estimate of ultimate gross claims costs:

 

 

 

 

 

 

 

 

 

 

- At end of reporting year

399.1

540.2

475.3

392.7

442.0

439.5

456.1

457.2

534.6

640.4

 

- One year later

398.2

535.3

416.8

355.7

399.8

386.9

442.4

446.1

481.5 

 

 

- Two years later

407.5

536.6

399.0

331.5

369.2

374.6

440.2

425.4

 

 

 

- Three years later

399.9

549.8

380.6

309.7

355.9

368.9

439.4

 

 

 

 

- Four years later

382.9

534.0

371.8

304.9

347.6

363.0

 

 

 

 

 

- Five years later

381.3

534.1

369.9

294.4

354.1

 

 

 

 

 

 

- Six years later

379.7

523.8

369.3

292.6

 

 

 

 

 

 

 

- Seven years later

372.4

523.4

369.3

 

 

 

 

 

 

 

 

- Eight years later

370.8

520.8

 

 

 

 

 

 

 

 

 

- Nine years later

375.5

 

 

 

 

 

 

 

 

 

 

Current estimate of cumulative claims

375.5

520.8

369.3

292.6

354.1

363.0

439.4

425.4

481.5

640.4

4,262.0

Cumulative payments to date

(365.3)

(511.7)

(368.3)

(291.5)

(331.2)

(330.0)

(362.1)

(343.2)

(355.2)

(291.3)

(3,549.8)

Liability recognised in the consolidated statement of financial position

 

 

 

 

 

 

 

 

 

712.2

Reserve in respect of prior periods

 

 

 

 

 

 

 

 

 

27.4

Provision for claims handling costs

 

 

 

 

 

 

 

 

 

11.6

Salvage and subrogation

 

 

 

 

 

 

 

 

 

47.7

Total reserve included in the consolidated statement of financial position

 

 

 

 

 

 

 

 

 

798.9

 

 

 

 

 

 

 

 

 

 

 

                         

 

 

 

 

 

 

 

 

(b) Insurance claims - net ultimate claims

 

Accident year

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Total

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

Ultimate gross earned premium

424.1

514.9

452.1

459.7

480.2

489.2

490.8

495.6

554.9

677.8

5,039.3

Estimate of ultimate gross claims costs:

 

 

 

 

 

 

 

 

 

 

- At end of reporting year

374.5

510.3

446.8

360.1

401.0

404.7

423.8

423.1

450.8

516.8

 

- One year later

373.8

495.0

392.5

317.3

356.7

357.9

394.8

396.3

435.2

 

 

- Two years later

372.0

495.0

374.6

296.4

331.9

345.9

391.4

389.8

 

 

 

- Three years later

371.7

495.1

363.9

285.0

326.3

340.4

390.0

 

 

 

 

- Four years later

367.6

494.5

360.9

284.5

325.6

339.8

 

 

 

 

 

- Five years later

366.3

492.7

358.6

281.8

324.8

 

 

 

 

 

 

- Six years later

364.7

489.5

358.6

281.6

 

 

 

 

 

 

 

- Seven years later

362.1

489.4

358.3

 

 

 

 

 

 

 

 

- Eight years later

361.0

489.2

 

 

 

 

 

 

 

 

 

- Nine years later

362.0

 

 

 

 

 

 

 

 

 

 

Current estimate of cumulative claims

362.0

489.2

358.3

281.6

324.8

339.8

390.0

389.8

435.2

516.8

3,887.5

Cumulative payments to date

(360.9)

(487.2)

(357.2)

(280.9)

(321.9)

(329.3)

(360.1)

(343.2)

(355.0)

(290.9)

(3,486.6)

Liability recognised in the consolidated statement of financial position

 

 

 

 

 

 

 

 

 

400.9

Reserve in respect of prior periods

 

 

 

 

 

 

 

 

 

1.9

Provision for claims handling costs

 

 

 

 

 

 

 

 

 

11.6

Salvage and subrogation

 

 

 

 

 

 

 

 

 

47.7

Total net reserve included in the consolidated statement of financial position

 

 

 

 

 

 

 

 

 

462.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(c) Insurance claims - net loss ratio development

Accident year

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Estimate of ultimate loss ratio:

 

 

 

 

 

 

 

 

 

 

- At end of reporting year

88%

99%

99%

78%

84%

83%

86%

85%

81%

76%

- One year later

88%

96%

87%

69%

74%

73%

80%

80%

78%

 

- Two years later

88%

96%

83%

64%

69%

71%

80%

79%

 

 

- Three years later

88%

96%

80%

62%

68%

70%

79%

 

 

 

- Four years later

87%

96%

80%

62%

68%

69%

 

 

 

 

- Five years later

86%

96%

79%

61%

68%

 

 

 

 

 

- Six years later

86%

95%

79%

61%

 

 

 

 

 

 

- Seven years later

85%

95%

79%

 

 

 

 

 

 

 

- Eight years later

85%

95%

 

 

 

 

 

 

 

 

- Nine years later

85%

 

 

 

 

 

 

 

 

 

 

 

 

12.3  Movement in insurance liabilities and reinsurance assets

 

(a) Claims reported in the financial statements and claims handling expenses

 

The movements in claims reported, including claims handling expenses, both gross and net of reinsurance, are shown below:

 

 

2017

2016

 

Gross

Reinsurers share

Net

Gross

Reinsurers share

Net

 

£m

£m

£m

£m

£m

£m

At 1 January

619.9

(271.1)

348.8

567.6

(209.3)

358.3

Cash paid for claims settled in year

(448.1)

12.2

(435.9)

(434.3)

12.6

(421.7)

 

 

 

 

 

 

 

Change arising from:

 

 

 

 

 

 

Current year claims

640.4

(123.6)

516.8

534.6

(83.7)

450.9

Prior year claims

(72.6)

45.7

(26.9)

(48.0)

9.3

(38.7)

 

 

 

 

 

 

 

Total at end of year

739.6

(336.8)

402.8

619.9

(271.1)

348.8

Provision for claims handling costs

11.6

-

11.6

12.5

-

12.5

Salvage and subrogation

47.7

-

47.7

40.5

-

40.5

Total  reserve per statement of financial position

798.9

(336.8)

462.1

672.9

(271.1)

401.8

 

Claims incurred and claims handling expenses as disclosed in the consolidated statement of comprehensive income comprise:

 

Year ended 31 Dec 2017

Year ended 31 Dec 2016

 

Gross

Reinsurers share

Net

Gross

Reinsurers share

Net

 

£m

£m

£m

£m

£m

£m

Claims incurred

567.8

(77.8)

490.0

486.6

(74.4)

412.2

Claims handling expenses

24.7

-

24.7

22.9

-

22.9

Claims incurred and claims handling expenses

592.5

(77.8)

514.7

509.5

(74.4)

435.1

 

During 2017, the Group continued to experience favourable development of prior accident year reserves (£26.9m reduction in prior year claims reserves in the year ended 31 December 2017), but to a lesser extent than during the year ended 31 December 2016 (£38.7m reduction in prior year claims reserves in the year ended 31 December 2016).

 

 

 

 

 

 

 

 

 

(b) Provisions for unearned premiums

 

The movements for the year, both gross and net of reinsurance, are summarised below:

 

 

2017

2016

 

Gross

Reinsurers share

Net

Gross

Reinsurers share

Net

 

£m 

£m 

£m 

£m 

£m 

£m 

Unearned premium provision

At beginning of the year

329.4

(20.6)

308.8

272.4

(15.9)

256.5

Premiums written in the year

820.2

(69.0)

751.2

655.0

(47.8)

607.2

Premiums earned in the year

(734.0)

56.2

(677.8)

(598.0)

43.1

(554.9)

At end of year

415.6

(33.4)

382.2

329.4

(20.6)

308.8

                 

 

13.    Related party transactions

 

The following transactions took place with related parties during the year:

 

a) Transactions with shareholders

 

The following transactions took place with shareholders and entities under common control:

 

·     One of the Directors has a beneficial part ownership interest in a company which leased office space from the Group. The company also charged the Group for travel expenses incurred by employees of the Group.

 

·     Eight of the Directors hold shares in Gocompare.com post demerger which pays commissions and charges fees for introducing insurance business.

 

·     One of the Directors had a beneficial part ownership interest in a restaurant which has been used by the Group for corporate events and entertaining purposes.

 

 

 

Year ended

Year ended

 

 

31 Dec 2017

31 Dec 2016

 

 

£m

£m

 

Value of income / (expense) for the year:

 

 

Lease of office space net of travel expenses charged

0.1

0.2

 

Net fees charged by Gompare.com

(10.2)

(1.6)

 

Restaurants

(0.0)

(0.1)

 

Total expense for the year

(10.1)

(1.5)

 

 

 

 

 

Amount receivable / (payable) at the year end:

 

 

Lease of office space net of travel expenses charged

-

0.1

 

Net fees payable to Gompare.com

(0.4)

(0.7)

 

Restaurants

-

(0.0)

 

Total amount payable at the year end  

(0.4)

(0.6)

 

             

 

b) Compensation of key management personnel

The key management personnel are considered to be the Directors.  Please refer to the Directors remuneration report for more details.

 

14.    Risk management

 

The Board is responsible for prudent oversight of the Group, ensuring that it is conducted in accordance with sound business principles and within applicable law and regulation. This encompasses responsibility to set and monitor adherence to strategic risk objectives and risk appetite statements. The Board also ensures that measures are in place to provide effective monitoring, identification, control and acceptance of risk.

 

Principal risks and uncertainties

 

Underwriting Risk

 

Key elements

Mitigation

Definition

Underwriting risk is the most material risk for the Group. It represents the uncertainty in the profitability of the business written due to variability in the value and timing of claims and premium rates - this can impact historic (reserve risk) as well as future exposures (pricing and catastrophe).

 

Current risk profile

There is some future uncertainty within the market in terms of the future rating environment and potential legal changes through the government consultation on Ogden discount rate and whiplash reforms.

Pricing Risk

 

Reserving Risk

 

Catastrophe Risk

There is strong and regular monitoring in place of the external environment to understand and react to the changing market, ensuring that we are well placed to benefit from any developments.

 

There is a strong claims management process that ensures that there is strong customer service, management of claims costs and management information to understand claims trends.

 

There is a robust monitoring process in place that tests the key variables affecting loss performance, including loss ratios, risk mix, pricing, quote conversion, renewal retention ratios, claims costs, claims frequency and the adequacy of reserves.

 

There is use of external data to support our analysis of risk exposure for underwriting and catastrophe risk.

 

There is a prudent approach to reserving risk with a risk appetite to hold a margin above the actuarial best estimate.

 

The Group's Actuarial function analyses and projects historical claims development data and uses a number of actuarial techniques to both test and forecast claims provisions. In addition, independent external actuaries assess the adequacy of the Group's reserves.

 

There is reinsurance in place to protect the business from large losses and catastrophe events.

Market Risk

 

Key elements

Mitigation

Definition

Market risk represents the uncertainty in the financial position due to fluctuations in the level and in the volatility of market prices of assets and liabilities.

 

The Group policy concerning market risk ensures compliance with SII 'Prudent Person Principle' requirements.

 

Current risk profile

There continues to be uncertainty in the Ogden discount rate which impacts the cash flows relating to large claims and frequency of Periodical Payment Orders, and this affects the ability to match assets to these liabilities. In addition, there is volatility in UK based assets due to Brexit.

Interest rate Risk

 

Equity Risk

 

Spread Risk

 

Concentration Risk

The investment strategy is set with consideration to the

overall market risk of the portfolio. Oversight of the Group's

investment strategy is undertaken by the management

Investment Committee and overall financial risks by the

Financial Risk Committee, both chaired by the Chief Finance

Officer.

 

Market risk is managed through regular monitoring, including the drivers of investment return and value at risk measures, counterparty exposures and interest rate sensitivities of our assets and liabilities.

 

Asset liability management is a key area of focus within the investment strategy, with continuous monitoring and actions taken against the risk appetites set.

 

The Group manages the level of investment counterparty credit risk it accepts by placing limits on its exposure to a single counterparty or groups of counterparties, and on geographical counterparties, geographical segments and sectors. Investment manager mandates limit concentration risk, ensuring diversification in such a way as to avoid excessive accumulation of risk in the portfolio. Such risks are subject to regular review within the Investment Committee.

 

Our investment strategy does not expose the Group to material currency risk or the risks arising from active trading of derivatives. Derivative instruments are only used as a risk mitigation technique.

Credit Risk

 

Key elements

Mitigation

Definition

Credit risk is the loss or adverse change in the financial situation, resulting from fluctuations in the credit standing of counterparties and any debtors to which the Group is exposed.

 

Current risk profile

There are no specific concerns currently.

Reinsurance counterparty Risk

 

Supplier debtor Risk

There are risk appetite metrics set against the creditworthiness of reinsurers and concentration risk - these are monitored prior to finalisation of any contract and on an ongoing basis to ensure that it remains in line with our risk appetite.

 

As part of our supplier management process, credit exposures to third parties are regularly monitored and controlled.

Liquidity Risk

 

Key elements

Mitigation

Definition

Liquidity risk is the risk that the Group is unable to realise investments and other assets in order to settle financial obligations when they fall due.

 

Current risk profile

The Group's risk appetite is aligned to a 1-in-200 year liquidity stress, which is assessed by the capital model, and as such no additional capital is held from the Group's own assessment of risk and solvency requirements for liquidity risk.

Liquidity Risk

The Group continues to monitor its liquidity risk by considering the Group's operating cash flows, stressed for catastrophe scenarios, dividend payouts, liquidity strains and investment strategy to mitigate this risk.

 

Oversight of liquidity risk is undertaken by the Financial Risk Committee.

Operational Risk

 

Key elements

Mitigation

Definition

Operational Risk is the loss or adverse impact due to failures with processes, people or systems - either within the Group or within material partners.

 

Current risk profile

Whilst there are strong controls in place, there are currently material external cyber threats that could impact the business.

Business process Risk

 

IT systems and disaster recovery Risk

 

Data Security and Cyber Risk

 

Infrastructure risk and business continuity Risk

 

Financial Crime and Fraud Risk

 

Outsourcing Risk

 

Distribution Risk

The Group has a robust governance and risk framework in place which provides an effective structure within which operational risks are identified, measured and managed. It ensures that there is clear ownership for risks with effective reporting and escalation mechanisms, supporting management oversight and decision-making.

 

There are specialist teams that reside within the business functions that provide expertise and support, including for business continuity, IT disaster recovery, fraud and financial crime and cyber risk.

 

Oversight, support and challenge are provided by the second line Risk function which works closely with the first line business and specialist functions.

Conduct Risk

 

Key elements

Mitigation

Definition

Conduct Risk is a risk of reputational or financial damage driven by regulatory or legal intervention.

 

Current risk profile

Whilst we are on track to deliver on these projects there is a significant level of change from regulation including General Data Protection Regulation, Insurance

Distribution Directive and the extension of the Senior Managers Regime.

Legal and Political Risk

 

Conduct and Compliance Risk

 

Regulatory Risk

There is a low appetite for this risk and this is reflected in management decision making, with our culture and tone from the top ensures the interests of our customers and their fair treatment is paramount.

 

We have a strong governance framework and our Conduct Risk and Customer Committee reviews all aspects of our customer service.

 

Board oversight is ensured by upward reporting of a suite of customer and conduct risk appetite statements and measures.

 

The Group continues to monitor legal and regulatory developments in the UK and Europe, through our close relationship with our regulators (the FCA and PRA) and other official bodies and the use of proactive risk management tools and processes to mitigate our exposure to regulatory risk.

 

17.    Statutory information

 

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2017 or 2016 but is derived from those accounts. Statutory accounts for 2016 have been delivered to the registrar of companies, and those for 2017 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

 

 

Glossary of terms

 

The definitions set out below apply throughout this document, unless the context requires otherwise.

 

"Board" means the board of Directors of the Company from time to time.

 

"Business" means the business of the Group.

 

"Company" means esure Group plc, a company incorporated in England and Wales with registered number 7064312 whose registered office is The Observatory, Castlefield Road, Reigate, Surrey RH2

0SG.

 

"Defaqto" is a leading independent financial research company in the UK.

 

"Flood Re" is a not-for-profit flood reinsurance fund, owned and managed by the insurance industry.

 

"Footprint expansion" means the Group's underwriting initiative to quote competitively for more customers

 

"Fraud savings" are the estimated cost savings that the Group has made from initiatives undertaken to deter and identify fraudulent activity. This measure demonstrates the operational savings and claims indemnity cost benefits the Group has delivered in the period.

 

"Gocompare.com" is a company incorporated in England and Wales with registered number 6062003 whose registered office is Unit 6, Imperial Courtyard, Newport, Gwent NP10 8UL.

 

"Group" or "esure Group" means the Company and its subsidiaries.

 

"IFRS" means International Financial Reporting Standards.

 

"Lifetime Customer Value" the Group looks to deliver a positive return across the period that a customer chooses to stay with the business.

 

"Ogden Rate" is the discount rate set by the Lord Chancellor and used by UK courts to calculate lump sum settlements.

 

"Ordinary Shares" means the ordinary shares with a nominal value of 1⁄12 pence each in the capital of the Company.

 

"ORSA" means Own Risk and Solvency Assessment and aims to assess the overall solvency needs of an insurance company.

 

"Periodic Payment Orders" ("PPOs") are claims payments used to settle large personal injury claims. In addition to providing a lump sum, PPOs provide regular index-linked payments for some or all of the future financial loss suffered.

 

"Prudent Person Principle" is a Solvency II rule requiring insurers to only make investments that a "prudent person" would make. It does not require that those charged with governance should always makes correct decisions; but requires them to make decisions that will be generally accepted as sound by an average person, such decisions should be made as if they were managing their own affairs.

 

"Reinsurance" is an arrangement whereby the Group transfers part of the accepted insurance risk to a panel of insurers. This allows the Group to mitigate its risk of losses from claims.

 

"SFCR" means Solvency and Financial Condition Report.

 

"Solvency II" is an EU legislative programme implemented in all 28 Member States on 1 January 2016. Primarily it concerns the amount of capital that EU insurance companies must hold to reduce the risk of insolvency.

 

"the Notes" means the £125 million 6.75% ten year tier two Subordinated Notes issued on 19 December 2014.

 

"Underwriting" is the receipt of premium in return for the provision of insurance to a policyholder. The underwriting year refers to the financial year in which the policy begins.

 

Alternative performance metrics

 

Throughout this report, the Group uses a number of Alternative Performance Measures ("APMs"). The Group prepares its financial statements under IFRS and by definition these measures are not IFRS metrics.

 

These APMs are used by the Group, alongside IFRS measures, for both internal performance analysis and to help shareholders and other users of the Annual Report and financial statements to understand the Group's performance better.

 

Additional Services Revenue ("ASR")

(1)   "Non-underwritten additional insurance products" is the commission margins for the Group generated from sales of such products.

(2)   "Policy administration fees and other income" is the income received as a result of administration charges, e.g. as a result of mid-term alterations to policy details by the policy holder and cancellation charges. Other income includes introduction fees where the Group does not have a continuing relationship with the customer.

(3)   "Claims income" is the income generated by the Group from the appointment of firms used during the claims process, including car hire and medical suppliers. This also includes legal panel membership fees from Scotland.

(4)   "Non-underwritten additional services" is the total income from the Group's non-underwritten additional services and products.

(5)   "Underwritten additional insurance products" is the revenue calculated by deducting the Group's claims costs associated with is underwritten additional insurance products from the gross written premiums relating to these products in a particular period.

(6)   "Non-underwritten additional services trading profit" is the total non-underwritten additional services income less the total associated expenses.

 

"ASR per IFP" is the income derived from additional services revenues divided by the average number of in-force policies in the year. This measure demonstrates that the Group is able to generate additional revenue alongside the core insurance premium.

 

"Combined operating ratio" is a metric for assessing the performance of a general insurance firm, calculated as the loss ratio plus the expense ratio.

 

"Contribution" means the trading profit/(loss) generated from underwriting, non-underwritten additional services revenues and investments

 

"Cost per policy" is the total expenses incurred by the Group (excluding claims indemnity costs) divided by the average number of in-force policies in the year.

 

"Expense ratio" means net insurance expenses plus claims handling costs as a percentage of earned premiums, net of reinsurance.

 

"Loss ratio" means claims incurred net of reinsurance as a percentage of earned premiums, net of reinsurance.

 

"In-force policies" means the number of live policies as at 31 December.

 

"Net Promoter ScoreTM" is an index that measures the willingness of customers to recommend a company's products or services to others.

 

"Non-trading costs" means costs incurred by the business that do not relate to the on-going operations of the Group.

 

"Total Shareholder Return" is a performance measure which compares share price movement with reinvested dividends as a percentage of the share price at the beginning of the period.

 

"Trading profit" is earnings before interest, tax, non-trading expenses and amortisation of acquired intangible assets.

 

 

 


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2017 Preliminary results - RNS