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ELLA Ecclesiastl.8fe

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Ecclesiastical Insurance Office PLC Annual Financial Report (5366G)

18/03/2020 7:00am

UK Regulatory


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TIDMELLA

RNS Number : 5366G

Ecclesiastical Insurance Office PLC

17 March 2020

Ecclesiastical Insurance Office plc announces results

for the year ended 31 December 2019

Robust underwriting profits and a strong investment return

Ecclesiastical Insurance Office plc ("Ecclesiastical"), the specialist financial services group, today announces its full year 2019 results.

Highlights

   --      Profit before tax of GBP73.3m (2018: GBP15.4m) 

-- Investment returns of GBP74.4m (2018: GBP4.0m), reflecting recovery of markets following a downturn at the end of 2018

-- Underwriting profit of GBP20.0m (2018: GBP29.2m), giving a Group COR(1) of 91.1% (2018: 86.4%). Underwriting profit reflects strong current year performance, and lower reserve releases compared with prior year

-- Gross written premium (GWP) increased by 10% to GBP394.0m (2018: GBP357.0m), supported by strong retention levels in existing markets and substantial growth in overseas territories

-- More than GBP32m was donated to charities during 2019 (2018: GBP18.8m). Over GBP96m of charitable donations have been made since 2016 towards our target of GBP100m by the end of 2020

-- Continued external recognition of the Group as a trusted and specialist financial services organisation. This included being named as the UK's best and most trusted insurer for the tenth time by independent ratings agency Fairer Finance, and EdenTree winning MoneyFacts Best Ethical Investment Provider for the 11th year in a row

(1) Alternative performance measure, refer to the Reconciliation of Alternative Performance Measures note to this announcement for further explanation

Mark Hews, Group Chief Executive Officer of Ecclesiastical, said:

"2019 was another successful year for Ecclesiastical as we continued to focus on delivering sustainable and profitable growth for the long-term. I'm pleased to report an increase in pre-tax profits of GBP73.3m (2018: GBP15.4m) driven by strong investment returns. Underwriting results were again strong across the group at GBP20.0m (2018: GBP29.4m) and reflected anticipated lower reserve releases compared to prior year. This robust performance has strengthened our capital position which provides us with security today - including the ability to withstand any temporary economic disruption - as well as flexibility for the future.

"Thanks to the incredible support of our customers, brokers, business partners, employees and all our supporters, I am pleased to report that in 2019 we donated over GBP32m to charities. This takes our total donations since 2016 to over GBP96m and across the group we have now supported over 7,000 charities worldwide. With this wide ranging support, we are now within short reach of our GBP100m target and hope to achieve it by the end of 2020.

"Our focus on sustainable growth over the past few years has enabled us to invest significantly in the future of our business and 2019 saw us push forward with our ambitious plans. Work on our new head office is on schedule to be complete by the end of the year and we have continued to invest in new systems and technology, most notably the ongoing development of a new strategic UK General Insurance system which, once live, will help us to provide our customers and brokers with an enhanced experience and give us better processes and capacity.

"In line with our strategic goal to be the most trusted and ethical specialist financial services group, we have continued to win external accolades for the way we do business. For the tenth consecutive time, we were named by Fairer Finance as the best and most trusted provider of UK home insurance while EdenTree, our investment management business, was named MoneyFacts Best Ethical Investment Provider for the 11th year in a row. Our UK General Insurance business claimed two Insurance Post "Claims Awards", recognising the exceptional service and lengths our teams go to in order to ensure our customers are in safe hands."

ECCLESIASTICAL INSURANCE OFFICE PLC

ANNUAL FINANCIAL REPORT FOR THE YEARED 31 DECEMBER 2019

The Company has now approved its annual report and accounts for 2019.

This Annual Financial Report announcement contains the information required to comply with the Disclosure and Transparency Rules, and extracts of the Strategic Report and Directors' Report forming part of the full financial statements.

The financial information set out below does not constitute the Company's statutory accounts for the year ended 31 December 2019. The annual report and accounts will be available on or before 1 April 2020 on the Company's website at www.ecclesiastical.com. Copies of the audited financial statements are also available from the registered office at Beaufort House, Brunswick Road, Gloucester GL1 1JZ.

A copy of the Company's statutory accounts for the year ended 31 December 2019 will be submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk

Chairman's Statement

My first year

This is my first annual statement as Chairman and it's been a pleasure and privilege to have led the Group following my appointment in March 2019. Over the past year, I've enjoyed visiting our businesses across the UK and also in Canada and Ireland, and am looking forward to visiting our Australia business this year. I've had the opportunity to meet some of our customers and talented colleagues and I have been thoroughly impressed to see, at first hand, just how much our customers value our expertise. We put customers at the heart of everything we do and because of that, I am delighted to say it's been another successful year. My heart-felt thanks to everyone who has worked so hard to deliver these significant financial results that enable us to recycle our profits back into the communities in which we do our business. The more we make, the more we can give away.

A strong set of results

It is our unique charitable purpose that makes us special. Our charitable ownership continuously influences the way we do our business and our approach to growth. We believe in taking the long-term view and we believe growth must be sustainable. It is a business model that works and I am delighted that the Group's strong performance has allowed us to donate GBP30m to our charitable owner and over GBP2m to the good causes we support directly through our Corporate Social Responsibility programme. We ended 2019 having given over GBP96m in total to good causes since 2016 and are now only a short way from reaching our GBP100m target by the end of 2020.

Achievements and reflections

In the past few years, the Group has been through a period of change. This change programme has continued to strengthen our core insurance business as well as expand our other portfolios and specialisms. In 2019 our immediate parent, Ecclesiastical Insurance Group plc, expanded the broking business with investments in Robertson-McIsaac and Lloyd & Whyte which both offer niche specialist insurance services.

In late 2020, we will relocate our Gloucestershire head office to a purpose-built unit which will house all of our people in the area. I am pleased that sustainability, energy efficiency and environmental impacts have been a significant consideration for this development.

We have also invested in the development of a new system for the UK General Insurance business to provide our customers and brokers with an enhanced experience and give us better processes and capacity.

Board developments and governance

In 2019 we were delighted to welcome Denise Cockrem, the Group's Chief Financial Officer, as an Executive Director to the Board. We were also delighted to welcome Angus Winther and Francois-Xaviar Boisseau to the Board as Non-Executive Directors during the year and Neil Maidment as a Non-Executive Director in January 2020. Their diversity of skills and experience across the insurance and financial services sector adds to the constructive challenge and support the Board provides to the executive management team.

The Board and I were also delighted that Tim Carroll, who has served on the Board since 2013, has now taken up the position of Chairman of our charitable parent company, Allchurches Trust Limited. We thank Tim for his service to the Ecclesiastical Group and look forward to working with him in his new role.

We are also committed to supporting our people right across the business, at every level and from every background so we can develop a sustainable pool of talent and allow them to develop their careers with us.

The future

As the Board looks towards the next chapter for Ecclesiastical, it is especially critical that we respond to broader issues of sustainability and climate change. Our people are often on the front line of flooding and other natural catastrophes and it has never been more important to focus on our risk management services and try to prevent disaster before it happens. Given the depth of our expertise we are well placed to play our part in making a better, safer future for all. Added to that, we believe we are also proving that a different way of doing business is possible.

A way that makes returns beyond conventional shareholders to a broader, diverse group of stakeholders, including the most vulnerable and needy in society. Nothing would please us more than to encourage others to join us and create a movement for good.

Chief Executive's Report

A unique business with a clear and caring purpose

In the world of financial services, Ecclesiastical treads a very different path. Over 130 years ago, our founders created a commercial company with a charitable purpose. Today, we are one of the largest corporate donors to charity in the UK, contributing to thousands of good causes in this country and abroad.

Owned by a charity we are not driven by the need to grow at any cost in order to satisfy short-term shareholder demands. Instead we are driven to build a sustainable, ethical, values driven business that supports and cares for its customers, their communities and society as a whole. We do this by using our specialist expertise to provide products, cover and service that customers value and trust.

We seek to provide insurance that you can believe in rather than cheap insurance that may not provide the cover you expected at your time of need.

It is for this reason that we continue to be trusted to protect and preserve so much of the country's irreplaceable heritage and history, covering many of the nation's most iconic palaces, castles, estates, World Heritage Sites, churches and cathedrals. In fact we are a leading insurer of Grade I listed buildings in England, including places like St Paul's Cathedral and Westminster Abbey that are recognised by millions of people around the world.

Building a Movement for Good, thanks to your support

In 2016, we announced a new strategic goal for the Group that built on our ethical foundations. It was clear, stretching and inspirational.

To work together to be the most trusted and ethical specialist financial services group, giving GBP100m to charity.

Thanks to the incredible support of our customers, brokers, business partners, employees and all our supporters, I am pleased to report that in 2019, together, we donated over GBP32m to charities. This takes our total donations to over GBP96m and we have now supported over 7,000 charities worldwide. With this wide ranging support, we are now within short reach of our GBP100m target and hope to achieve it by the end of 2020.

Of course, whilst it is easy to focus on the impressive numbers that headline this achievement, it is the positive impact these donations have made to so many people's lives which is truly inspiring. We are very proud to have supported charities tackling so many different and important issues. Their work is lifting people out of poverty, making society more inclusive and strengthening communities. But their work also shares a common aim - to change lives for the better and make a positive impact.

Looking at all the charities we've supported, and the many thank you letters received, is a humbling and uplifting experience. It is an experience that inspires us all to get behind our charitable purpose and build and widen our movement for good so that more people can benefit.

Always learning from our customers

As a business we strive to do the right thing; it is part of our DNA. But we are only human and, given the breadth and depth of our global Group, it is inevitable there will be times - hopefully few and far between - when we fall short of our own high standards. When this happens it is important that we learn from this and recognise where we can do things better.

Over the years, this approach of continuous learning has led to exceptionally high UK customer satisfaction levels, at 97%-99% across all sectors.

Overall we successfully deal with thousands of claims every year and I am pleased to report that 98% of surveyed customers were satisfied with how we handled their claim last year, and 93% being very and extremely satisfied, which is consistent with previous years.

However, there have been a few claims relating to historical sexual abuse over 30 years ago, which have been difficult to handle to the satisfaction of all concerned. I am speaking here of claims for physical and sexual abuse which represent a very small percentage of our total claims (less than 0.4%), but are particularly traumatic and challenging for victims and survivors and must therefore be conducted with sensitivity, empathy and compassion. Sadly for a very small number of survivors, the experience of bringing a claim has been a difficult and painful process, not helped by the adversarial nature of the civil justice system within which we must all work.

To this end, we welcome the work of the Independent Inquiry into Child Sexual Abuse, IICSA, and have contributed positively to the Inquiry's consideration of how the civil justice system can better deliver reparations to victims and survivors. Ecclesiastical works hard to settle claims fairly on a full and final basis with the agreement of its claimants and with the benefit of such claimants normally having received independent legal advice. While we do not always get everything right, EIO itself strives for the highest standards in the industry and we were the first insurer to introduce and publish clear guiding principles having obtained survivors input. We have also taken a lead in working with a number of claimant solicitors to improve the claims experience within the current civil justice system and have introduced several positive changes including offering the services of psychological rehabilitation specialists Moving Minds to offer counselling support for every claimant.

That said, it is clearly impossible to turn back time and undo the damage of childhood abuse, and so we all continue to learn how best to support and help those who have experienced it within the Church or elsewhere. Moreover we encourage and support the Church and many of our customers on the implementation of strong safeguarding practices so that childhood abuse is prevented in the first place.

Striving for continual improvement is essential for any business, but is vital for one with a purpose like ours. I am delighted that these efforts have led to external recognition on a wide front.

Delivering for society and our customers

We recognise there remains a lack of trust in businesses, and every year the leading global trust survey shows the financial services sector as having the lowest level of trust(1) . Against this background, I am especially pleased that some of our businesses were positively recognised by independent bodies for their exceptional contributions. Of note, in 2019:

-- Ecclesiastical was rated as the "Most Trusted" home insurer in the UK by Fairer Finance. It also scored top for customer happiness

-- Ecclesiastical won the "Public Safety Award" at the CIR Risk Management Awards for their Cyber Ready toolkit

-- Our UK General Insurance business claimed two Insurance Post "Claims Awards", recognising the exceptional service and lengths our teams go to in order to ensure our customers are in safe hands

-- Ecclesiastical Canada were recognised as a "Top Employer in Greater Toronto" and for the eighth consecutive year as one of Canada's "Top Employers for Young People"

-- EdenTree, our pioneering investment management business picked up the Moneyfacts "Best Ethical Investment Provider" for the 11th year running

-- Ecclesiastical Financial Advisory Services were recognised as the "Best Firm, South West" in the Local Hero Mortgage Awards

-- SEIB, our broking business, won "Personal Lines Broker of the Year" at the British Claims Awards

And recognising our focus is on more than just providing outstanding service to our customers:

-- Ecclesiastical won the "Best Corporate Communications Campaign" and "Best Low Budget Campaign" for the Movement for Good Awards PR campaign at the CIPR awards

-- Ecclesiastical Canada won "Excellence in Philanthropy and Community Service" at the Insurance Business Awards

Of course awards such as these only transpire following years and years of focus by dedicated individuals working hard to do the right thing. A few deserve a special mention this year:

-- Our SEIB Deputy CEO was awarded "Insurance Broker of the Year" at the Women in Insurance Awards

-- Our EdenTree Chief Investment Officer once again made it to the "FE Alpha Manager Hall of Fame" for long term performance and consistency

-- One of our talented claims team won the "New Professional of the Year" award from the Chartered Insurance Institute

The trust placed in us is not something we take for granted and we will continue to invest and work hard to ensure our customers receive exceptional service and performance.

(1) 2019 Edelman Trust Barometer Global Report

A sustainable and resilient business

I am pleased to report that we concluded 2019 in a position of financial strength, reporting a pre-tax profit of GBP73.3m, (2018: GBP15.4m) and have benefited from the more favourable investment markets in 2019. This robust performance has not only enabled us to make a GBP30m charitable grant, it has further strengthened our capital position which provides us with both security today and flexibility for the future.

Taking a long-term perspective together with maintaining our strong solvency ratio continues to enable us to hold a greater proportion of higher risk investment assets which are designed to deliver greater returns. Notwithstanding the uncertainty in the external environment which affected the markets during the latter parts of 2018 and the majority of 2019, our long-term investment approach remained consistent resulting in investment income in the year of GBP34.8m (2018: GBP35.3m) and fair value gains of GBP52.1m (2018: fair value losses of GBP35.4m). Underwriting results in the year were strong across the group at GBP20.0m (2018: GBP29.2m) and reflected the anticipated reduction in reserves releases compared with prior year.

Our diverse portfolio of companies, not least in the core insurance businesses, have supported our objective for delivering sustainable and profitable growth for the long-term.

Group Gross Written Premium (GWP) has grown 10.4% to GBP394m (2018: GBP357m). During the year we continued to focus on delivering profits that are sustainable for the long-term, so we can continue to deliver our charitable purpose.

Our strategy for a sustainable future

Over the last few years we have made good progress on our journey to become the most trusted and ethical specialist financial services group and have given significantly to good causes. We empowered and invested in our people who have transformed the Group with an ambitious change programme, which continues to gain momentum. As such we now enter 2020 from a position of strength. We still have our sights firmly set on reaching GBP100m to charity in 2020 and believe we are well positioned to capture the opportunities that lie ahead.

A year or so ago, at around the time of our 130th year as "Ecclesiastical", we took the decision to take a fresh look at our brand. At a time when businesses continue to come under scrutiny for questionable behaviours, we concluded that it has never been so important to celebrate our charitable ownership and the unique business model that differentiates us from others. Over the coming years, while keeping faithful to our origins, we will be introducing some changes to our brand to reflect better the diversity of financial businesses within the Ecclesiastical Group.

In addition to investing in our people and brand, we have also continued to invest in new systems and technology, helping our businesses to innovate with purpose and increase our agility and efficiency. Some of these projects will span over a number of years, not least the development of a new strategic UK General Insurance system which, once live, will help us to provide our customers and brokers with an enhanced experience and give us better processes and capacity.

The insurance market remains a highly competitive one, and we see this continuing. However, we are confident we can continue to confront such challenges as our depth of expertise, reputation and focus on doing the right thing for our customers put us in a position of strength. Coupled with our financial strength and an ethical approach, this provides the foundation on which we will continue to build our business and deliver our vision.

In early 2020, the existence of a new coronavirus, now known as COVID-19, was confirmed and since this time it has spread across the globe and is now characterised by the World Health Organisation as a pandemic. We are managing the impact of COVID-19, utilising business continuity and risk management processes where appropriate. Our capital resources can withstand significant short-term temporary market disruption. Whilst there is the potential for the outbreak to impact on our day to day operations, we have plans in place to ensure that we can continue to provide critical services to our customers. Serving our customers and the health, safety and well-being of our employees will be our priority throughout the duration of the outbreak.

Working together for the greater good

With our GBP100m charitable target within our near term grasp, we remain energised and inspired to work together for our customers and society.

The progress we have made and the speed we have done it would not be possible were it not for the dedication of our specialist teams worldwide. As such, the Board and I say "Thank You" to our exceptional colleagues who, no matter where they might be in the business, will always put doing what is right for our customers and our charitable purpose at the centre of everything they do. And thank you all for helping those who need it most with your tireless fundraising, volunteering and nomination of good causes.

Moreover, thank you to our customers, brokers and business partners for trusting us with their business and allowing us to champion the many worthwhile causes they care about.

To those who are reading about Ecclesiastical for the first time, I invite you to join us, whether as a colleague, customer or business partner, and experience for yourself how it is possible to do business differently. Because I believe that together, we are creating something very special - a movement for good that touches and transforms lives in our homes, in our communities, in this country and abroad.

Each day, we each make a small step forward - helping our customers or beneficiaries. Each day, we're building a movement for good. And together we are capable of more than you can imagine.

Financial Performance Report

Our 2019 results have delivered a pre-tax profit of GBP73.3m (2018: GBP15.4m) and are a demonstration of our long-term objective to deliver sustainable profitable growth. We continue to be a trusted partner to our brokers and customers, and this is reflected in our high retention and satisfaction levels, which supports our growth in revenue. Our business is managed for a long-term view of risk and as a result, we have a strong capital position that can withstand short-term volatility.

The recovery of the market from Q4 2018 and subsequent favourable investment market conditions resulted in fair value gains on financial instruments of GBP56.0m (2018: losses of GBP35.5m) and our underwriting profit remained strong at GBP20.0m, (2018: GBP29.2m).

To support our growth and sustainability ambitions we have continued to invest in our people, technology and our real estate. The development of our new general insurance underwriting platform is progressing well and has been designed to provide an outstanding customer, broker and employee experience.

We made charitable grants of GBP32.5m (2018: GBP18.8m) for the year as part of our commitment towards the GBP100m target by 2020 and have seen the positive and substantial impact this charitable giving makes to people's lives.

General insurance

Our underwriting performance for the year was in line with expectations and returned a profit of GBP20.0m (2018: GBP29.2m profit), and a Group COR(1) of 91.1% (2018: 86.4%). We delivered good growth and steady underwriting profits. We've seen the results of strengthening reserves in the Australian and Canadian businesses and began to see the impacts of anticipated lower prior year releases.

1 Alternative performance measure, refer to the Reconciliation of Alternative Performance Measures note to this announcement for further explanation.

United Kingdom and Ireland

The UK and Ireland reported an underwriting profit of GBP20.4m (2018: GBP29.4m profit) and a COR of 86.8% (2018: 80.2%). This represents another good performance with a favourable result on the liability account and a solid outturn on the property book. As expected, the level of prior year releases in 2019 was significantly lower than in 2018 and this has resulted in an overall reduction in the underwriting result in 2019. We anticipate this reduction to continue, with a greater contribution coming from our current year underwriting performance. The underwriting result on the property account was similar to 2018 due to an absence of large weather events, although we experienced an increase in theft and subsidence claims during 2019. The current year loss ratios are better than expectations due to the absence of catastrophe events. The underwriting result from the liability account continues to perform favourably.

The claims releases that we have seen this year have come from historical claims that have settled more favourably than expected. The run-off of unprofitable business exited in 2012 and 2013, combined with the prudent approach to reserving have positively impacted the overall result over the last four years.

In 2019, GWP grew by 6.2% to GBP257m (2018: GBP242m).Trading conditions across the year remained competitive and we expect they will continue to be so. The education sector was particularly competitive, although we observed some market hardening in property, specifically for risks with large exposures such as heritage buildings. We have continued to achieve high levels of retention across our UK and Ireland business whilst also carrying positive rate change, which demonstrates the strength of our proposition and reputation for exceptional service. Our Real Estate and Art & Private Client business delivered particularly strong growth. GWP in respect of our Faith business remained in line with prior year reflecting a good result in a competitive market.

We expect the market to continue to harden in property, and casualty may follow. Education is likely to remain a key competitive area as the Government's risk protection arrangement (RPA) now attracts local authority maintained schools in addition to academies. This has left the independent schools sector exposed to competition from all education insurers.

This hardening of certain parts of the property market provides us with the opportunity to improve overall rate strength and to acquire good quality new business at profitable rates.

Our strategy over the medium term is to deliver moderate GWP growth, while maintaining our strong underwriting discipline and our philosophy to seek profit over growth. We will continue to deepen our specialist capabilities through investment in technology and innovation, and to provide propositions that our customers value and excellent service.

Ansvar Australia

Our Australian business reported an underwriting loss of AUD$6.0m resulting in a COR of 114.1% (2018: AUD$2.5m profit, COR of 93.7%). The liability account was adversely impacted by the strengthening of physical and sexual abuse (PSA) reserves. We saw a higher than expected number of claims, a strengthening across industry as the process for claimants evolves following the conclusion of the Royal Commission, together with development in some high profile cases. The property account was also adversely impacted by higher claims handling expenses and risk margins following the Townsville flood event. GWP grew by 24.6% in local currency to AUD$126.5m (2018: AUD$101.6m) with strong retention and rate increases.

Canada

Our Canadian business continued its track record of delivering premium growth, reporting a 17% increase in the branch's contribution towards Group GWP at CAD$109.5m (2018: CAD$93.5m) supported by strong retention, growth in new business and rating increases.

Canada reported underwriting profit of CAD$3.4m resulting in a COR of 95.1% (2018: CAD$4.5m loss, COR of 106.5%). The property book performed well with good current year experience driven by fewer large losses and the favourable development of prior year claims, helping to offset the impact of a series of weather events during the first and third quarters. The underwriting result from the liability account was adverse as reserves were strengthened in older years for PSA claims

Other insurance operations

General insurance profits benefited from favourable releases of prior year reserves from our businesses in run-off resulting in an overall profit of GBP0.6m (2018: GBP1.0m profit). As expected, the level of prior year reserve releases in 2019 was lower than experienced in 2018.

Investments

We saw a far less volatile end to 2019 compared with 2018, with strong returns in UK and worldwide stock markets resulting in a net investment return of GBP74.4m (2018: GBP4.0m). Income from financial assets remained stable at GBP26.2m (2018: GBP27.0m) reflecting the continued low interest rate environment and downwards pressure on yields. Fair value gains on financial instruments of GBP56.0m contrasted with losses of GBP35.5m in 2018, as both equities and bonds strengthened over the year, with the UK market in particular benefiting latterly from renewed confidence. In spite of this strong 2019 result, there remains as ever political and economic uncertainty which could impact the performance of our investments, and as for all businesses, we are subject to the consequences of disruption that events such as the current Coronavirus outbreak can have on financial markets. Nevertheless we remain confident in our long-term value investment philosophy, and are relatively defensively positioned and well diversified across a broad range of asset classes.

Within our UK equity portfolio, the mid-cap bias proved beneficial as the FTSE 250 index outperformed the FTSE AllShare index by 10%, driven in large part by fourth quarter strength as the election of a majority Government reduced Brexit uncertainty.

Our directly-held sterling bond portfolio underperformed the FTSE Gilts benchmark by 2.8% due to our greater exposure to short dated bonds, which we hold for liability matching and liquidity management purposes. In the final quarter, as yields improved, we saw the benefit of our shorter dated portfolio in our portfolio's performance. The fixed interest portfolio also benefited as a result of allocation to corporate bonds where narrowing credit spreads drove higher returns relative to gilts.

The downward movement in bond yields led to a decrease in the discount rate applied to long-tail general insurance liabilities. The change in discount rate on those liabilities resulted in a GBP12.4m loss recognised within investment returns (2018: GBP4.1m profit).

Investment management

The Group's investment management business, EdenTree, continued to develop its presence in the charity and institutional markets. Net inflows of GBP219m (2018: GBP181m) were the highest in EdenTree's history.

Global equity markets delivered double digit returns over the year and coupled with strong net fund inflows resulted in total funds under management increasing by 14% to GBP3.1bn (2018: GBP2.7bn).

Fee income was marginally ahead at GBP12.8m (2018: GBP12.6m). Overheads have increased by 13% in the year primarily from our continued investment in people and technology to support delivery of future growth plans. As a result, our investment management business reported a loss before tax of GBP0.3m (2018: profit before tax GBP0.9m).

Long-term insurance

Our life insurance business, which is closed to new business, reported a profit before tax of GBP0.3m for the year (2018: GBP1.6m). Assets and liabilities are well matched, and the small profit is in line with our expectations for this business as it runs off.

Broking and advisory

Overall, broking and advisory had modest growth in income and profit, reporting a profit before tax of GBP2.1m (2018: GBP2.0m). This area of our business includes our insurance broker, South Essex Insurance Brokers (SEIB), our financial advisory businesses, Ecclesiastical Financial Advisory Services (EFAS) and Ansvar Risk Management Services (ARMS). SEIB reported an increase in profit before tax to GBP2.6m (2018: GBP2.4m). EFAS reported a loss of GBP0.4m in the year (2018: GBP0.2m loss).

Outlook

The Group takes a long-term view to managing and investing in the business and our 2019 financial results, including our strong capital position, is reflective of this approach. The decisions we take are also made with a focus on delivering sustainable profitability and our vision to be the most trusted and ethical financial services group. As we look forward to 2020 and beyond, we will exercise caution where our businesses may need to operate around uncertainty and market disruption. We will continue to focus on delivering sustainable profit growth and remain optimistic about the opportunities to continue to evolve our business for the greater good of society and to make a positive impact on people's lives.

Directors' Report

Principal activities

The Group operates principally as a provider of general insurance in addition to offering a range of financial services, with offices in the UK, Ireland, Canada, and Australia.

Ownership

At the date of this report, the entire issued Ordinary share capital of the Company and 3.16% of the issued 8.625% Non-Cumulative Irredeemable Preference Shares of GBP1 each ('Preference shares') were owned by Ecclesiastical Insurance Group plc. In turn, the entire issued Ordinary share capital of Ecclesiastical Insurance Group plc was owned by Allchurches Trust Limited, the ultimate parent of the Group.

Dividends

Dividends paid on the Preference shares were GBP9,181,000 (2018: GBP9,181,000).

The directors do not recommend a final dividend on the Ordinary shares (2018: GBPnil), and no interim dividends were paid in respect of either the current or prior year.

Charitable and political donations

Charitable donations paid, and provided for, by the Group in the year amounted to GBP32.5 million (2018: GBP18.8 million).

During the last 10 years, a total of GBP188.2 million (2018: GBP165.0 million) has been provided by Group companies for church and charitable purposes.

It is the Company's policy not to make political donations. No political donations were made in the year (2018: GBPnil).

Principal risks and uncertainties

The directors have carried out a robust assessment of the principal risks facing the Group including those that threaten its business model, future performance, solvency and liquidity. The principal risks and uncertainties, together with the financial risk management objectives and policies of the Group, are included in the Risk Management section of this announcement.

Going concern

The Group has considerable financial resources: financial investments of GBP857.9m, 91% of which are liquid (2018: financial investments of GBP799.0m, 92% liquid), cash and cash equivalents of GBP74.8m and no borrowings (2018: cash and cash equivalents of GBP109.4m and no borrowings). Liquid financial investments consist of listed equities and open-ended investment companies, government bonds and listed debt. The Group also has a strong risk management framework and solvency position, is well placed to withstand significant short-term market disruption and has proved resilient to stress testing. As a consequence, the directors have a reasonable expectation that the Group is well placed to manage its business risks successfully and continue in operational existence for at least 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts.

Risk Management

Introduction

Strong governance is fundamental to what we do and drives the ongoing embedding of our enterprise-wide risk management framework. This provides the tools, guidance, policies, standards and defined responsibilities to enable us to achieve our strategy and objectives and ensure that individual and aggregated risks to our objectives are identified and managed on a consistent basis.

The risk management framework is integrated into the culture of the Group and is owned by the Board. Responsibility for implementation and oversight is delegated via the Group Chief Executive to the Group Risk Function, led by the Group Chief Risk Officer (CRO).

The risk management process demands accountability and is embedded in performance measurement and reward, thus promoting clear ownership for risk and operational efficiency at all levels. On an annual basis, the Group Risk Committee (on behalf of the Board) carries out a formal review of the key strategic risks for the Group with input from the Group Management Board (GMB) and the Strategic Business Units (SBUs). The Group Risk Committee (GRC) allocates responsibility for each of the risks to individual members of the Group's executive management team. Formal monitoring of the key strategic risks is undertaken quarterly including progress of risk management actions and is overseen by the Executive Risk Committees.

Ecclesiastical has clearly defined the accountabilities, roles and responsibilities of all key stakeholders in implementing and maintaining its Risk Management Framework. These are defined, documented and implemented through the terms of reference (TORs) of board sub committees, management and executive forums, position descriptions and functional charters.

The Group's Risk Management Framework itself is part of a wider Internal Control Framework. Systems of internal control are designed to manage rather than eliminate the risk of failure to achieve business objectives, and provide reasonable, but not absolute assurance as to the prevention and detection of financial misstatements, errors, fraud or violation of law or regulations.

Key to the successful operation of the internal control framework is the deployment of a strong Three Lines of Defence Model whereby:

-- 1st Line (Business Management) is responsible for strategy execution, performance and identification and management of risks and application of appropriate controls;

-- 2nd Line (Reporting, Oversight and Guidance) is responsible for assisting the Board in formulating risk appetite, establishing minimum standards, developing appropriate reporting, oversight and challenge of risk profiles and risk management activities within each of the business units. This includes Executive Risk Management Committees (Insurance, Market and Investment and Operational, Regulatory and Conduct Risk and is subject to oversight and challenge by the GRC

-- 3rd Line (Assurance) provides independent and objective assurance of the effectiveness of the Group's systems of internal control. This activity principally comprises the Internal Audit function which is subject to oversight and challenge by the Group Audit Committee.

We seek to develop and improve our risk management framework and strategy on an ongoing basis to ensure it continues to support the delivery of our strategy and objectives.

The Group risk appetite defines the level of risk-taking that the Board feels is appropriate for the Group as we pursue our business objectives. It is defined in line with the different categories of risk that the Group faces, and provides the backdrop against which the business plan is developed and validated. This ensures that the risk profile resulting from the business plan is in line with the risk-taking expectations of the Board. Compliance with the risk appetite is formally monitored every quarter and reported to the GRC at each meeting.

The risk appetite is formally reviewed annually with approval and sign-off by the Board and there are ongoing assessments to ensure its continued appropriateness for the business.

The Own Risk and Solvency Assessment (ORSA) process is carried out at least once a year and is a key part of the business management and governance structure. This integrates the risk management, business planning and capital management activities and ensures that risk, capital and solvency considerations are built into the development and monitoring of the Group's business strategy and plans and all key decision making.

The Company has regulatory approval for the use of an Internal Model to determine our regulatory capital requirement. In addition, the Internal Model's capability to quantify material risks and assess the impacts on capital requirements across a range of scenarios allows us to gain a deeper insight into the relationship between risk and capital management.

The Internal Model is used extensively to inform key business decisions across the Group, including setting business strategies and objectives, producing risk profiles and capital requirements for different scenarios, informing risk taking guidelines, informing and defining the Group risk appetite and Investment Strategy, determining risk mitigation mechanisms and responses to regulatory capital requirements.

Risk environment

The risk environment is monitored on an ongoing basis and key areas of concern are escalated to the GRC.

The uncertainty around Brexit continued during 2019 although reduced by year end. The main risk identified for the Group as a result of Brexit was the loss of its ability to carry out business in the Republic of Ireland using the freedom to provide services currently afforded by the United Kingdom's membership of the EU. This risk has been mitigated as during 2019 approval in principle was obtained for the Ireland branch to become regulated by the Central Bank of Ireland as a Third Country branch after Brexit. The Group has no other material business elsewhere in the EU. The remaining uncertainty of the outcome of Brexit has the potential to result in adverse economic conditions and affect the value of our investments and our customers. We have not identified any further material risks to our business as a result of Brexit and we continue to monitor this position as well as the potential impact of other risks such as global trade disputes.

During 2019 we maintained our existing investment approach and made no material changes to our asset mix. We continue to hold a diversified portfolio of assets including equities which we believe remain a good prospect for long-term returns. Consequently, we take a relatively high level of market risk which is well understood and closely managed. The defined benefit pension scheme was closed to future accrual from June 2019 which will enable further reductions in the risk associated with the scheme.

Within the insurance businesses of the Group and in the wider markets firms continue to enhance their analytical skills and deepen their portfolio knowledge. Therefore, high quality technical underwriting standards, pricing and portfolio management abilities are increasingly important to ensure business written and retained is profitable. Our strategy is to achieve controlled and profitable growth within our defined niches.

The potential for adverse development of long-tail liability claims, particularly in respect of PSA claims, remains a key risk that we continue to actively manage. The Independent Inquiry into Child Sexual Abuse in the UK is progressing and we have participated in one of the investigations during 2019. We are monitoring this inquiry, and also developments in the other territories in which we operate to determine the potential impacts on these claims.

Competitor activity is an ever present risk across all our business operations and chosen niches. This could have an adverse impact on our ability to charge the appropriate price for a risk, threaten our growth plans or even lead to a decline in scale with resultant adverse financial impact.

Regulatory change continued during 2019 including the extension of the Senior Managers and Certification Regime to additional companies within the Group. Management of change in the regulatory environment continues to be a focus to ensure that we operate within relevant legal, regulatory and consumer protection requirements and guidelines and that our people maintain the highest standards of conduct.

Cyber risk continues to evolve at a pace. We hold customer data and therefore any event involving a significant loss of such data could result in harm to the data subjects, significant operational disruption and an impact on our service to customers as well as sizeable regulatory fines and reputational damage. The increased societal focus on data security and appropriateness of use, through regulations such as GDPR, results in increased scrutiny and prominence.

The Group aims to be the most trusted, specialist insurer and therefore maintaining a positive reputation is critical. Our reputation could potentially be damaged as a result of a range of factors including poor business practices and behaviours. High standards of conduct are a core part of the Group's brand, values and culture and there is an ongoing focus on ensuring this is maintained.

Climate change presents increasing levels of risk to our businesses and our customers. Whilst the greatest impacts of these risks are expected to materialise in the medium to long-term, we are considering the actions that we should be taking to mitigate and manage these risks now. Our potential exposures include transition risk, primarily related to our investment portfolio, and physical risk affecting the insurance risks that we cover.

The Group considers COVID-19 a new emerging risk. The Group has business continuity plans in place and a crisis management team has been active in preparing for responses to this event. The Group will continue to monitor the situation and the advice from Governments and relevant health authorities in the countries we operate in as the outbreak evolves and will take appropriate action.

Principal risks

There is an ongoing risk assessment process which has identified the current principal risks for the Group as follows:

Insurance risk

The risk that arises from the fluctuation in the timing, frequency and severity of insured events relative to the expectations of the firm at the time of underwriting.

 
 Risk detail            Key mitigants                                                             Change from last 
                                                                                                  year 
                                                                                                   There have not been 
  Underwriting risk             *    A robust pricing process is in place                          material changes to 
  The risk of failure                                                                              this risk during 
  to price insurance                                                                               the year. We 
  products adequately           *    The Underwriting Licencing process has been refreshed         continue to focus 
  and failure to                                                                                   on 
  establish                                                                                        managing our 
  appropriate                   *    A documented underwriting strategy and risk appetite          portfolios through 
  underwriting                       is in place together with standards and guidance and          various initiatives 
  disciplines. The                   monitored by SBUs                                             in order to 
  premium charged                                                                                  mitigate this risk 
  must be appropriate                                                                              as our 
  for the nature of             *    This is supported by formally documented authority            insurance business 
  the cover                          levels for all underwriters which must be adhered to.         develops. 
  provided and the                   Local checking procedures ensure adherence 
  risk presented to 
  the Group. 
  Disciplined                   *    Monitoring of rate strength compared with technical 
  underwriting is                    rate is undertaken on a regular basis within SBUs 
  vital to ensure 
  that only business 
  within risk                   *    There are ongoing targeted underwriting training 
  appetite and                       programmes in place 
  desired niches is 
  written. 
                       ------------------------------------------------------------------------  --------------------- 
 
  Reserving risk                                                                                   This risk is not 
  Reserving risk is             *    Claims development and reserving levels are closely           considered to have 
  the risk of actual                 monitored by the Group Reserving team                         changed materially 
  claims payments                                                                                  during the year. No 
  exceeding the                                                                                    significant 
  amounts we are                *    For statutory and financial reporting purposes,               developments 
  holding                            prudential margins are added to a best estimate               have impacted this 
  in reserves. This                  outcome to allow for uncertainties                            risk. 
  arises primarily 
  from our long-tail 
  liability business.           *    Claims reserves are reviewed and signed-off by the 
  Failure to                         Board acting on the advice and recommendations of the 
  interpret                          Group Chief Actuary, following review by the 
  emerging experience                Reserving Committee. An independent review is also 
  or fully understand                conducted by the Actuarial Function Director. 
  the risks written 
  could result in the 
  Group holding 
  insufficient 
  reserves to meet 
  our obligations. 
                       ------------------------------------------------------------------------  --------------------- 
 
  Catastrophe risk                   *    Modelling is undertaken to understand the risk           There have been no 
  The risk of large                       profile and inform the purchase of reinsurance           material changes to 
  scale extreme                                                                                    this risk. We 
  events giving rise                                                                               continue to monitor 
  to significant                     *    There is a comprehensive reinsurance programme in        our aggregations 
  insured losses.                         place to protect against extreme events. All             and exposures to 
  Through                                 placements are reviewed and approved by the Group        such events and 
  our general                             Reinsurance Board                                        ensure careful 
  insurance business                                                                               management 
  we are exposed to                                                                                utilising 
  significant natural                *    A Catastrophe Risk Management Group provides             appropriate 
  catastrophes in the                     oversight and sign off of reinsurance modelling          protections. 
  territories 
  in which we do 
  business.                          *    The Group Risk Appetite specifies the reinsurance 
                                          purchase levels and retention levels for such events 
 
 
                                     *    Local risk appetite limits have been established to 
                                          manage concentrations of risk and these are monitored 
                                          by SBUs 
 
 
                                     *    Exposure monitoring is undertaken on a regular basis 
                       ------------------------------------------------------------------------  --------------------- 
 
  Reinsurance risk              *    We take a long-term view of reinsurance relationships         The level of this 
  The risk of failing                to deliver sustainable capacity                               risk has remained 
  to access and                                                                                    broadly similar 
  manage reinsurance                                                                               since last year. 
  capacity at a                 *    A well-diversified panel of reinsurers is maintained 
  reasonable price.                  for each element of the programme 
  Reinsurance 
  is a central 
  component of our              *    A Group Reinsurance Board is in place which approves 
  business model,                    all strategic reinsurance decisions 
  enabling us to 
  insure a portfolio 
  of large risks 
  in proportion to 
  our capital base. 
                       ------------------------------------------------------------------------  --------------------- 
 

Other financial risks

The risk that proceeds from financial assets are not sufficient to fund the obligations arising from insurance contracts.

 
 Risk detail               Key mitigants                                                       Change from last year 
 
  Market and investment           *    An investment strategy is in place which is reviewed 
  risk                                 annually and signed off by the Finance and Investment    Overall the market 
  The risk of adverse                  Committee (F&I). This includes consideration of the      risk profile has not 
  movements in net asset               Group's liabilities and capital requirements             materially changed and 
  values arising from a                                                                         we remain invested for 
  change in interest                                                                            the 
  rates,                          *    A Market and Investment Risk Committee is in place       long term. We continue 
  equity and property                  and provides oversight and challenge of these risks      to monitor the 
  prices, credit spreads               and the agreed actions. There is a formalised            remaining uncertainty 
  and foreign exchange                 escalation process to Group Management Board (GMB)       from the outcome of 
  rates. This                          and F&I in place                                         Brexit as 
  principally arises                                                                            well as the potential 
  from investments held                                                                         impact of other risks 
  by the Group. We                *    There are risk appetite metrics in place which are       such as global trade 
  actively take such                   agreed by the Board and include limits on exposures      disputes. Since the 
  risks to seek enhanced               and counterparties                                       end of 
  returns on                                                                                    2019 markets have 
  these investments.                                                                            shown increased 
  The Group's balance             *    Derivative instruments are used to hedge elements of     uncertainty due to the 
  sheet is also exposed                market risk, notably equity and currency. Their use      COVID-19 outbreak and 
  to market risk within                is monitored to ensure effective management of risk      we are continuing 
  the defined benefit                                                                           to monitor the 
  pension                                                                                       situation. 
  fund.                           *    There is tracking of risk metrics to provide early 
                                       warning indicators of changes in the market 
                                       environment 
 
 
                                 Further information on this risk is given in the Financial 
                                 Risk and Capital Management note 
                                 to this announcement. 
                          ------------------------------------------------------------------  ------------------------ 
 
  Credit risk 
  The risk that a                 *    Strict ratings criteria are in place for the 
  counterparty, for                    reinsurers that we contract with and a Reinsurance       The level of this risk 
  example a reinsurer,                 Security Committee approves all of our reinsurance       is materially 
  fails to perform its                 partners                                                 unchanged from last 
  financial obligations                                                                         year. 
  to the Group or does 
  not perform them in a           *    Group Reinsurance monitors the market to identify 
  timely manner                        changes in the credit standing of reinsurers 
  resulting in a loss 
  for the Group. 
  The principal exposure          *    There are risk appetite limits in place in respect of 
  to credit risk arises                reinsurance counterparties which are agreed by the 
  from reinsurance,                    Board 
  which is central to 
  our business 
  model. Other elements           *    Strong credit control and risk management processes 
  are our investment in                are in place to manage broker exposures, policyholder 
  debt securities, cash                exposures and other elements of credit risk 
  deposits and amounts 
  owed 
  to us by                       Further information on this risk is given in the Financial 
  intermediaries and             Risk and Capital Management note 
  policyholders.                 to this announcement. 
                          ------------------------------------------------------------------  ------------------------ 
 
  Liquidity risk                  *    We hold a high proportion of our assets in readily 
  The risk that the                    realisable investments to ensure we could respond to 
  Group, although                      such a scenario                                          There have been no 
  solvent, either does                                                                          material changes to 
  not have sufficient                                                                           this risk since last 
  financial resources             *    We maintain cash balances that are spread over           year. 
  available to enable it               several banks 
  to meet its 
  obligations as they 
  fall due, or can                *    We have arrangements within our reinsurance contracts 
  secure them only at                  for reinsurers to pay recoverables on claims in 
  excessive cost. We may               advance of the claim settlement 
  need to pay 
  significant amounts of 
  claims at short notice 
  if there 
  is a natural 
  catastrophe or other 
  large event in order 
  to deliver on our 
  promise to our 
  customers. 
                          ------------------------------------------------------------------  ------------------------ 
 
  Climate change 
  The financial risks             *    There is an established ethical and responsible 
  arising through                      investment policy in place for our funds and property    This risk has been 
  climate change. The                  investments                                              added to the Group 
  key impacts for the                                                                           Risk Register during 
  Group are the                                                                                 2019. A programme of 
  long term impact on             *    We are developing catastrophe modelling with             work is underway 
  the risks insured,                   reinsurers to support better understanding of climate    to fully analyse the 
  particularly through                 risk                                                     risks and develop an 
  changes to the nature,                                                                        appropriate risk 
  scale and                                                                                     management response. 
  frequency of future 
  catastrophe events; 
  and the impacts on the 
  investment portfolio 
  due to 
  developments in how 
  the firms invested in 
  respond to movements 
  towards a lower carbon 
  economy. 
                          ------------------------------------------------------------------  ------------------------ 
 

Operational risk

The risk of loss arising from inadequate or failed internal processes, people and systems, or from external events.

 
 Risk detail               Key mitigants                                                       Change from last year 
 
  Systems risk                    *    Systems monitoring is in place together with regular     During 2019 a new 
  The risk of                          systems and data backups                                 claims system was 
  inadequate, ageing or                                                                         implemented and 
  unsupported systems                                                                           strategic systems 
  and infrastructure and          *    A strategic systems programme is underway to deliver     programme continued 
  system failure                       improved systems, processes and data                     to make progress. The 
  preventing processing                                                                         scale and complexity 
  efficiency. Systems                                                                           of this programme 
  are critical to enable          *    Business recovery plans are in place for all critical    results in heightened 
  us to provide                        systems and are regularly tested according to risk       change 
  excellent service                    appetite                                                 risk during the 
  to our customers.                                                                             development and 
                                                                                                implementation period. 
                          ------------------------------------------------------------------  ------------------------ 
                                                                                                Although the threats 
  Cyber risk                                                                                    continue to evolve we 
  The risk of criminal             *    A number of security measures are deployed to ensure    proactively review and 
  or unauthorised use of                protected system access                                 update our controls 
  electronic                                                                                    and 
  information, either                                                                           therefore the overall 
  belonging to the                 *    Security reviews and assessments are performed on an    residual level of risk 
  Group or its                          ongoing basis                                           is unchanged but we 
  stakeholders e.g.                                                                             acknowledge the need 
  customers, employees                                                                          for 
  etc. Cyber security              *    There is ongoing maintenance and monitoring of our      vigilance and strong 
  threats from malicious                systems and infrastructure in order to prevent and      security measures. 
  parties continue to                   detect cyber security attacks 
  increase in both 
  number and 
  sophistication across 
  all industries. 
                          ------------------------------------------------------------------  ------------------------ 
                                                                                                The level of this risk 
  Change risk                     *    We ensure that there is adequate resourcing for          has not materially 
  The risk of failing to               change projects using internal and external skills       changed. There 
  manage the change                    where appropriate                                        continues to be a 
  needed to transform                                                                           significant volume 
  the business. A number                                                                        of change within the 
  of strategic                    *    A Group Development Director is in place with            business which is 
  initiatives are                      responsibility for overseeing the delivery of all        monitored closely. 
  underway under six                   strategic initiatives 
  themes, including a 
  transformation of our 
  core system and                 *    A Change Board and change governance processes have 
  key processes, which                 been established and are operated on an ongoing basis 
  will deliver 
  significant change for 
  the company over the            *    The GMB undertakes close monitoring and oversight of 
  next few years.                      the delivery of the strategic initiatives and key 
  There are a number of                Group change programmes 
  material risks 
  associated with major 
  transformation, not 
  only on the 
  risks to project 
  delivery itself, but 
  the potential impacts 
  on business as usual. 
                          ------------------------------------------------------------------  ------------------------ 
 
  Operational resilience          *    A recovery and resilience framework is in place          This risk has changed 
  The risk that the                    aligned to the delivery of customer services             materially since 2019 
  Group does not                                                                                year end. The 
  anticipate, prepare                                                                           COVID-19 outbreak has 
  for, respond and adapt          *    Recovery exercises including IT systems are regularly    the potential to 
  to incremental                       performed across the Group with actions identified       result in significant 
  change and sudden                    addresses within an agreed timescale                     operational impact. 
  disruptions resulting                                                                         This is being 
  in an inability to                                                                            managed closely and 
  continue to deliver             *    All suppliers are subject to ongoing due diligence       developments 
  customer critical                                                                             monitored. A 
  services.                                                                                     Crisis Management Team 
  The Group provides a            *    There is ongoing maintenance and monitoring of our       has been active in 
  wide range of services               systems and infrastructure in order to prevent and       preparing for required 
  to a diverse customer                detect issues                                            responses in line with 
  base and has a                                                                                advice 
  reputation                                                                                    from Governments and 
  for delivering                                                                                relevant health 
  excellent service.                                                                            authorities for the 
  Therefore, we seek to                                                                         countries we operate 
  minimise the potential                                                                        within. 
  for any such 
  disruption that would 
  impact on the service 
  provided to our 
  customers. 
                          ------------------------------------------------------------------  ------------------------ 
                                                                                                The level of this risk 
  Data management and             *    Group Data Governance and Group Data Management and      is materially 
  governance                           Information Security Policies are in place               unchanged from last 
  The risk that the                                                                             year. It is being 
  confidentiality,                                                                              monitored and managed 
  integrity and/or                *    A Group Data Optimisation Programme is in place which    in the context of 
  availability of data                 is responsible for ensuring the delivery of the data     major change 
  held across the Group                strategy and all aspects relating to the governance,     programmes. 
  is compromised, or                   management, use and control of the Group's data in 
  data is misused. The                 line with regulatory requirements 
  Group holds 
  significant amounts of 
  customer and financial 
  data and there could 
  be significant 
  implications if this 
  is compromised or is 
  found to be 
  inaccurate. 
                          ------------------------------------------------------------------  ------------------------ 
 

Regulatory and conduct risk

The risk of regulatory sanction, operational disruption or reputational damage from non-compliance with legal and regulatory requirements or the risk that Ecclesiastical's behaviour may result in poor outcomes for the customer.

 
 Risk detail             Key mitigants                                                           Change from last year 
                                                                                                  There continues to 
  Regulatory risk                                                                                 be a significant 
  The risk of                    *    We undertake close monitoring of regulatory                 volume of regulatory 
  regulatory sanction,                developments and use dedicated project teams                change. We remain 
  operational                         supported by in-house and external legal experts to         focused on the 
  disruption or                       ensure appropriate actions to achieve compliance            management of 
  reputational damage                                                                             regulatory change 
  from non-compliance                                                                             and therefore the 
  with legal and                 *    An ongoing compliance monitoring programme is in            overall risk level 
  regulatory                          place across all our SBUs                                   is unchanged. 
  requirements. We 
  operate in a highly 
  regulated                      *    Regular reporting to the Board of regulatory 
  environment which                   compliance issues and key developments is undertaken 
  is experiencing a 
  period of 
  significant change. 
                        ----------------------------------------------------------------------  ---------------------- 
                                                                                                  The level of this 
  Conduct risk                        *    Ongoing staff training to ensure that customer         risk is unchanged 
  The risk of unfair                       outcomes are fully considered in all business          from last year. 
  outcomes arising                         decisions 
  from the Group's 
  conduct in the 
  relationship with                   *    Customer charters have been implemented in all SBUs 
  customers, 
  or in performing our 
  duties and                          *    Conduct Risk Reporting to relevant governing bodies 
  obligations to our                       is undertaken on a regular basis 
  customers. We place 
  customers at the 
  centre                              *    Customer and conduct measures are used to assess 
  of the business,                         remuneration 
  aiming to treat them 
  fairly and 
  ethically, whilst 
  safeguarding the 
  interests 
  of all other key 
  stakeholders. 
                        ----------------------------------------------------------------------  ---------------------- 
 

Reputation risk

The risk that our actions lead to reputational damage in the eyes of customers, brokers, or other key stakeholders.

 
 Risk detail               Key mitigants                                                       Change from last year 
                                                                                                Maintaining a positive 
  Brand and reputation            *    There is ongoing training of core customer facing        reputation is critical 
  risk                                 staff to ensure high skill levels in handling            to the Group's vision 
  The Group aims to be                 sensitive claims                                         of being the most 
  the most trusted                                                                              trusted 
  specialist insurer and                                                                        and ethical specialist 
  as a consequence this           *    We adopt a values led approach to ensure                 financial services 
  brings                               customer-centric outcomes                                group. 
  with it high                                                                                  Risks to our brand and 
  expectations from all                                                                         reputation are 
  of our stakeholders,            *    Dedicated Marketing and PR function responsible for      inherently high in an 
  be they consumers,                   the implementation of the marketing and communication    increasingly 
  regulators or the                    strategy                                                 interconnected 
  wider industry.                                                                               environment, 
  Whilst we aim to                                                                              with the risks of 
  consistently meet and           *    Ongoing monitoring of various media to ensure            external threats such 
  where possible exceed                appropriate responses                                    as cyber security 
  these expectations,                                                                           attacks, and viral 
  increasing                                                                                    campaigns through 
  consumer awareness and                                                                        social media always 
  increased regulatory                                                                          present. 
  scrutiny across the                                                                           The ongoing IICSA 
  sector exposes the                                                                            inquiry and related 
  Group to                                                                                      PSA issues continue to 
  an increased risk of                                                                          be a key area of 
  reputational damage                                                                           executive management 
  should we fail to meet                                                                        focus. 
  them, for example as a 
  consequence 
  of poor business 
  practices and 
  behaviours 
                          ------------------------------------------------------------------  ------------------------ 
 

Directors' Responsibility Statement

The following statement is extracted from page 104 of the 2019 annual report and accounts, and is repeated here for the purposes of the Disclosure and Transparency Rules. The statement relates solely to the Company's 2019 annual report and accounts and is not connected to the extracted information set out in this announcement. The names and functions of the directors making the responsibility statement are set out on pages 96 to 98 of the full annual report and accounts.

The directors confirm to the best of their knowledge:

-- The financial statements, prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole.

-- The Strategic Report within the 2019 Annual Report and Accounts includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

-- The Annual Report and financial statements, taken as a whole, are fair, balanced and understandable, and provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

For the year ended 31 December 2019

 
 
 
                                                                                  2019        2018 
                                                                                GBP000      GBP000 
  Revenue 
  Gross written premiums                                                       393,952     356,971 
  Outward reinsurance premiums                                               (152,886)   (137,640) 
  Net change in provision for unearned premiums                               (15,080)     (5,241) 
  Net earned premiums                                                          225,986     214,090 
                                                                            ----------  ---------- 
 
  Fee and commission income                                                     71,240      62,996 
  Other operating income                                                           544       1,039 
  Net investment return                                                         74,438       3,994 
  Total revenue                                                                372,208     282,119 
                                                                            ----------  ---------- 
 
 
  Expenses 
  Claims and change in insurance liabilities                                 (157,808)   (111,873) 
  Reinsurance recoveries                                                        52,800      26,188 
  Fees, commissions and other acquisition costs                               (72,740)    (66,346) 
  Other operating and administrative expenses                                (120,577)   (114,388) 
  Total operating expenses                                                   (298,325)   (266,419) 
                                                                            ----------  ---------- 
 
 
  Operating profit                                                              73,883      15,700 
  Finance costs                                                                  (620)       (329) 
                                                                            ----------  ---------- 
  Profit before tax                                                             73,263      15,371 
  Tax expense                                                                 (11,450)       (958) 
                                                                            ----------  ---------- 
  Profit for the year (attributable to equity holders of the Parent)            61,813      14,413 
                                                                            ----------  ---------- 
 
 
 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2019

 
 
 
                                                                                     2019      2018 
                                                                                   GBP000    GBP000 
 
  Profit for the year                                                              61,813    14,413 
                                                                                 --------  -------- 
 
  Other comprehensive income 
  Items that will not be reclassified to profit or loss: 
  Fair value gains on property                                                          -       105 
  Actuarial (losses)/gains on retirement benefit plans                            (7,049)     4,288 
  Attributable tax                                                                  1,198     (747) 
                                                                                 --------  -------- 
                                                                                  (5,851)     3,646 
  Items that may be reclassified subsequently to profit or loss: 
  Losses on currency translation differences                                      (1,368)   (3,082) 
  Gains on net investment hedges                                                      640     1,692 
  Attributable tax                                                                   (19)     (187) 
                                                                                 --------  -------- 
                                                                                    (747)   (1,577) 
 
  Net other comprehensive (expense)/income                                        (6,598)     2,069 
                                                                                 --------  -------- 
 
  Total comprehensive income attributable to equity holders of the Parent          55,215    16,482 
                                                                                 --------  -------- 
 
 
 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2019

 
 
                                                                       Translation 
                                                                       and hedging 
                                     Share     Share     Revaluation                   Retained 
                                   capital   premium         reserve       reserve     earnings      Total 
                                    GBP000    GBP000          GBP000        GBP000       GBP000     GBP000 
 
  At 1 January 2019                120,477     4,632             565        19,071      441,259    586,004 
  Profit for the year                    -         -               -             -       61,813     61,813 
  Other net expense                      -         -               -         (747)      (5,851)    (6,598) 
                                 ---------  --------  --------------  ------------  -----------  --------- 
  Total comprehensive 
   (expense)/income                      -         -               -         (747)       55,962     55,215 
  Dividends                              -         -               -             -      (9,181)    (9,181) 
  Gross charitable grant                 -         -               -             -     (30,000)   (30,000) 
  Tax relief on charitable 
   grant                                 -         -               -             -        5,497      5,497 
  At 31 December 2019              120,477     4,632             565        18,324      463,537    607,535 
                                 ---------  --------  --------------  ------------  -----------  --------- 
 
  At 1 January 2018                120,477     4,632             478        20,648      446,238    592,473 
  Profit for the year                    -         -               -             -       14,413     14,413 
  Other net income/(expense)             -         -              87       (1,577)        3,559      2,069 
                                 ---------  --------  --------------  ------------  -----------  --------- 
  Total comprehensive 
   income/(expense)                      -         -              87       (1,577)       17,972     16,482 
  Dividends                              -         -               -             -      (9,181)    (9,181) 
  Gross charitable grant                 -         -               -             -     (17,000)   (17,000) 
  Tax relief on charitable 
   grant                                 -         -               -             -        3,230      3,230 
  At 31 December 2018              120,477     4,632             565        19,071      441,259    586,004 
                                 ---------  --------  --------------  ------------  -----------  --------- 
 
 
 

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

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

At 31 December 2019

 
 
                                                           2019         2018 
                                                         GBP000       GBP000 
  Assets 
  Goodwill and other intangible assets                   38,651       30,064 
  Deferred acquisition costs                             38,199       33,907 
  Deferred tax assets                                     2,203        1,749 
  Pension assets                                          8,505       16,131 
  Property, plant and equipment                          20,322        8,391 
  Investment property                                   148,146      152,182 
  Financial investments                                 857,913      798,974 
  Reinsurers' share of contract liabilities             159,556      140,346 
  Current tax recoverable                                 4,211           59 
  Other assets                                          178,358      153,630 
  Cash and cash equivalents                              74,775      109,417 
  Total assets                                        1,530,839    1,444,850 
                                                    -----------  ----------- 
 
  Equity 
  Share capital                                         120,477      120,477 
  Share premium account                                   4,632        4,632 
  Retained earnings and other reserves                  482,426      460,895 
  Total shareholders' equity                            607,535      586,004 
                                                    -----------  ----------- 
 
  Liabilities 
  Insurance contract liabilities                        763,977      720,049 
  Lease obligations                                      12,923        1,379 
  Provisions for other liabilities                        4,867        5,216 
  Retirement benefit obligations                          5,998        5,813 
  Deferred tax liabilities                               35,649       31,665 
  Current tax liabilities                                   123        2,905 
  Deferred income                                        22,815       19,900 
  Other liabilities                                      76,952       71,919 
  Total liabilities                                     923,304      858,846 
                                                    -----------  ----------- 
 
  Total shareholders' equity and liabilities          1,530,839    1,444,850 
                                                    -----------  ----------- 
 
 
 

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 31 December 2019

 
 
 
                                                                                        2019        2018 
                                                                                      GBP000      GBP000 
 
  Profit before tax                                                                   73,263      15,371 
  Adjustments for: 
  Depreciation of property, plant and equipment                                        5,081       2,437 
  Revaluation of property, plant and equipment                                             -        (85) 
  Loss/(profit) on disposal of property, plant and equipment                             171         (3) 
  Amortisation and impairment of intangible assets                                     1,016         949 
  Net fair value (gains)/losses on financial instruments and investment 
   property                                                                         (52,091)      35,506 
  Dividend and interest income                                                      (26,218)    (27,107) 
  Finance costs                                                                          620         329 
  Adjustment for pension funding                                                         815       2,931 
 
  Changes in operating assets and liabilities: 
  Net increase/(decrease) in insurance contract liabilities                           49,537    (42,161) 
  Net (increase)/decrease in reinsurers' share of contract liabilities              (21,265)      16,431 
  Net increase in deferred acquisition costs                                         (4,553)     (3,078) 
  Net increase in other assets                                                      (25,272)     (5,388) 
  Net increase in operating liabilities                                               11,153       5,838 
  Net increase/(decrease) in other liabilities                                           784       (286) 
                                                                                  ----------  ---------- 
  Cash generated by operations                                                        13,041       1,684 
 
  Purchases of financial instruments and investment property                       (156,760)   (125,739) 
  Sale of financial instruments and investment property                              148,308     149,562 
  Dividends received                                                                   9,605       9,790 
  Interest received                                                                   16,293      17,347 
  Tax paid                                                                           (8,296)     (4,998) 
  Net cash from operating activities                                                  22,191      47,646 
                                                                                  ----------  ---------- 
 
  Cash flows from investing activities 
  Purchases of property, plant and equipment                                         (4,394)     (1,822) 
  Proceeds from the sale of property, plant and equipment                                  -          55 
  Purchases of intangible assets                                                     (9,613)     (2,371) 
  Acquisition of business, net of cash acquired                                         (40)       (225) 
  Net cash used by investing activities                                             (14,047)     (4,363) 
                                                                                  ----------  ---------- 
 
  Cash flows from financing activities 
  Interest paid                                                                        (620)       (329) 
  Payment of lease liabilities                                                       (2,787)       (346) 
  Dividends paid to Company's shareholders                                           (9,181)     (9,181) 
  Charitable grant paid to ultimate parent undertaking                              (30,000)    (17,000) 
  Net cash used by financing activities                                             (42,588)    (26,856) 
                                                                                  ----------  ---------- 
 
  Net (decrease)/increase in cash and cash equivalents                              (34,444)      16,427 
  Cash and cash equivalents at beginning of year                                     109,417      93,767 
  Exchange losses on cash and cash equivalents                                         (198)       (777) 
  Cash and cash equivalents at end of year                                            74,775     109,417 
                                                                                  ----------  ---------- 
 
 
 

NOTES TO THIS ANNUAL FINANCIAL REPORT ANNOUNCEMENT OF RESULTS

for the year ended 31 December 2019

Accounting policies

The Company has prepared this announcement of its consolidated results using the same accounting policies and methods of computation as the full financial statements for the year ended 31 December 2019 as prepared in accordance with International Financial Reporting Standards (IFRS) as adopted for use in the EU. The Group has adopted the following new standards and amendments with effect from 1 January 2019.

IFRS 16, Leases

The Group has adopted IFRS 16 using the modified retrospective approach, as permitted by the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening balance sheet on 1 January 2019. Comparative figures for the 2018 reporting period have not been restated, as permitted under the specific transitional provisions in the standard. There was no impact on the Group's opening equity. For further details see notes 1 and 32 to the full financial statements.

The other standards adopted in the year do not significantly impact the Group.

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

General Information

Whilst the financial information included in this announcement has been prepared in accordance with the recognition and measurement criteria of IFRS, this announcement does not itself contain sufficient information to comply with IFRS. Full financial statements that comply with IFRS were approved by the Board of Directors on 17 March 2020.

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2019 or 2018, but is derived from those accounts. Statutory accounts for 2018 have been delivered to the Registrar of Companies and those for 2019 will be delivered following the Company's annual general meeting. The auditors have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under sections 498(2) and 498(3) of the Companies Act 2006.

This announcement was approved at a meeting of the Board of Directors held on 17 March 2020.

Ecclesiastical Insurance Office plc is a subsidiary of Ecclesiastical Insurance Group plc which is an investment holding company whose ordinary shares are not listed.

The ordinary shares of Ecclesiastical Insurance Office plc are not listed.

Copies of the audited financial statements are available from the registered office at Beaufort House, Brunswick Road, Gloucester GL1 1JZ.

The following information is included in this announcement in compliance with the Disclosure and Transparency Rules and has been extracted from the full financial statements for 2019.

Insurance Risk

Through its general and life insurance operations, the Group is exposed to a number of risks, as summarised in the Risk Management section of this announcement. The risk under any one insurance contract is the possibility that the insured event occurs and the uncertainty of the amount and timing of the resulting claim. Factors such as the business and product mix, the external environment including market competition and reinsurance capacity all may vary from year to year, along with the actual frequency, severity and ultimate cost of claims and benefits. This subjects the Group to underwriting and pricing risk (the risk of failing to ensure disciplined risk selection and to obtain the appropriate premium), claims reserving risk (the risk of actual claims payments exceeding the amount we are holding in reserves) and reinsurance risk (the risk of failing to access and manage reinsurance capacity at a reasonable price).

(a) Risk mitigation

Statistics demonstrate that the larger and more diversified the portfolio of insurance contracts, the smaller the relative variability in the expected outcome will be. The Group's underwriting strategy is designed to ensure that the underwritten risks are well diversified in terms of type and amount of risk and geographical spread. In all operations pricing controls are in place, underpinned by sound statistical analysis, market expertise and appropriate external consultant advice. Gross and net underwriting exposure is protected through the use of a comprehensive programme of reinsurance using both proportional and non-proportional reinsurance, supported by proactive claims handling. The overall reinsurance structure is regularly reviewed and modelled to ensure that it remains optimum to the Group's needs. The optimum reinsurance structure provides the Group with sustainable, long-term capacity to support its specialist business strategy, with effective balance sheet and profit and loss protection at a reasonable cost.

Catastrophe protection is purchased following an extensive annual modelling exercise of gross and net (of proportional reinsurance) exposures. In conjunction with reinsurance brokers the Group utilises the full range of proprietary catastrophe models and continues to develop bespoke modelling options that better reflect the specialist nature of the portfolio. Reinsurance is purchased in line with the Group's risk appetite.

(b) Concentrations of risk

The core business of the Group is general insurance, with the principal classes of business written being property and liability. The miscellaneous financial loss class of business covers personal accident, fidelity guarantee and loss of money, income and licence. The other class of business includes cover of legal expenses and also a small portfolio of motor policies, but this has been in run-off in the United Kingdom since November 2012. The Group's whole-of-life insurance policies support funeral planning products.

The table below summarises written premiums for the financial year, before and after reinsurance, by territory and by class of business:

 
 
 2019                                     General insurance                 Life insurance 
                           ----------------------------------------------  --------------- 
                                                   Miscellaneous 
                                                       financial 
                            Property   Liability            loss    Other          Funeral      Total 
                                                                                     plans 
                              GBP000      GBP000          GBP000   GBP000           GBP000     GBP000 
 Territory 
 United Kingdom    Gross     185,567      56,323          15,534    3,227             (13)    260,638 
 and Ireland       Net       100,233      53,773           9,147      622             (13)    163,762 
 Australia         Gross      42,331      24,412           1,245      869                -     68,857 
  Net                          5,083      21,053           1,198      170                -     27,504 
 Canada            Gross      44,079      20,378               -        -                -     64,457 
  Net                         30,902      18,898               -        -                -     49,800 
 Total             Gross     271,977     101,113          16,779    4,096             (13)    393,952 
                           ---------  ----------  --------------  -------  ---------------  --------- 
  Net                        136,218      93,724          10,345      792             (13)    241,066 
                           ---------  ----------  --------------  -------  ---------------  --------- 
 
 
 
 
 
 2018                                     General insurance                 Life insurance 
                           ----------------------------------------------  --------------- 
                                                   Miscellaneous 
                                                       financial 
                            Property   Liability            loss    Other          Funeral      Total 
                                                                                     plans 
                              GBP000      GBP000          GBP000   GBP000           GBP000     GBP000 
 Territory 
 United Kingdom    Gross     172,191      53,949          16,922    2,784               21    245,867 
 and Ireland       Net        92,337      51,490          10,657      645               21    155,150 
 Australia         Gross      34,681      20,141           1,115    1,009                -     56,946 
  Net                          3,550      17,289           1,073      169                -     22,081 
 Canada            Gross      36,560      17,598               -        -                -     54,158 
  Net                         25,854      16,246               -        -                -     42,100 
 Total             Gross     243,432      91,688          18,037    3,793               21    356,971 
                           ---------  ----------  --------------  -------  ---------------  --------- 
  Net                        121,741      85,025          11,730      814               21    219,331 
                           ---------  ----------  --------------  -------  ---------------  --------- 
 
   (c)   General insurance risks 

Property classes

Property cover mainly compensates the policyholder for damage suffered to their property or for the value of property lost. Property insurance may also include cover for pecuniary loss through the inability to use damaged insured commercial properties.

For property insurance contracts, there can be variability in the nature, number and size of claims made in each period.

The nature of claims may include fire, business interruption, weather damage, escape of water, explosion (after fire), riot and malicious damage, subsidence, accidental damage and theft. Subsidence claims are particularly difficult to predict because the damage is often not apparent for some time. The ultimate settlements can be small or large with a risk of a settled claim being reopened at a later date.

The number of claims made can be affected in particular by weather events, changes in climate, economic environment, and crime rates. Climate change may give rise to more frequent and extreme weather events, such as river flooding, hurricanes and drought, and their consequences, for example, subsidence claims. If a weather event happens near the end of the financial year, the uncertainty about ultimate claims cost in the financial statements is much higher because there is insufficient time for adequate data to be received to assess the final cost of claims.

Individual claims can vary in amount since the risks insured are diverse in both size and nature. The cost of repairing property varies according to the extent of damage, cost of materials and labour charges.

Contracts are underwritten on a reinstatement basis or repair and restoration basis as appropriate. Costs of rebuilding properties, of replacement or indemnity for contents and time taken to bring business operations back to pre-loss levels for business interruption are the key factors that influence the cost of claims. Individual large claims are more likely to arise from fire, storm or flood damage. The greatest likelihood of an aggregation of claims arises from earthquake, weather or major spreading fire events.

Claims payment, on average, occurs within a year of the event that gives rise to the claim. However, there is variability around this average with larger claims typically taking longer to settle and business interruption claims taking much longer depending on the length of the indemnity period involved.

Liability classes

The main exposures are in respect of liability insurance contracts which protect policyholders from the liability to compensate injured employees (employers' liability) and third parties (public liability).

Claims that may arise from the liability portfolios include damage to property, physical injury, disease and psychological trauma. The Group has a different exposure profile to most other commercial lines insurance companies as it has lower exposure to industrial risks. Therefore, claims for industrial diseases are less common for the Group than injury claims such as slips, trips and back injuries.

The frequency and severity of claims arising on liability insurance contracts can be affected by several factors. Most significant are the increasing level of awards for damages suffered, legal costs and the potential for periodic payment awards.

The severity of bodily injury claims can be influenced particularly by the value of loss of earnings and the future cost of care. The settlement value of claims arising under public and employers' liability is particularly difficult to predict. There is often uncertainty as to the extent and type of injury, whether any payments will be made and, if they are, the amount and timing of the payments, including the discount rate applied for assessing lump sums. Key factors driving the high levels of uncertainty include the late notification of possible claim events and the legal process.

Late notification of possible claims necessitates the holding of provisions for incurred claims that may only emerge some years into the future. In particular, the effect of inflation over such a long period can be considerable and is uncertain. A lack of comparable past experience may make it difficult to quantify the number of claims and, for certain types of claims, the amounts for which they will ultimately settle. The legal and legislative framework continues to evolve, which has a consequent impact on the uncertainty as to the length of the claims settlement process and the ultimate settlement amounts.

Claims payment, on average, occurs about three to four years after the event that gives rise to the claim. However, there is significant variability around this average.

Provisions for latent claims

The public and employers' liability classes can give rise to very late reported claims, which are often referred to as latent claims. These can vary in nature and are difficult to predict. They typically emerge slowly over many years, during which time there can be particular uncertainty as to the number of future potential claims and their cost. The Group has reflected this uncertainty and believes that it holds adequate reserves for latent claims that may result from exposure periods up to the reporting date.

Note 28 to the full financial statements presents the development of the estimate of ultimate claim cost for public and employers' liability claims occurring in a given year. This gives an indication of the accuracy of the estimation technique for incurred claims.

(d) Life insurance risks

The Group provides whole-of-life insurance policies to support funeral planning products, for most of which the future benefits are linked to inflation and backed by index-linked assets. Although assets are well matched to liabilities, there is a risk that returns on assets held to back liabilities are insufficient to meet future claims payments, particularly if the timing of claims is different from that assumed. This is not one of the Group's principal risks and new policies are no longer being written in the life fund, with only minimal premiums now being received each year.

Uncertainty in the estimation of the timing of future claims arises from the unpredictability of long-term changes in overall levels of mortality. The Group bases these estimates on standard industry and national mortality tables and its own experience. The most significant factors that could alter the expected mortality rates profile are epidemics, widespread changes in lifestyle and continued improvement in medical science and social conditions. The primary risk on these contracts is the level of future investment returns on the assets backing the liabilities over the life of the policyholders. The interest rate and inflation risk within this has been largely mitigated by holding index-linked assets of a similar term to the expected liabilities profile. The main residual risk is the spread risk attached to corporate bonds held to match the liabilities. The small mortality risk is retained by the Group.

Financial risk and capital management

The Group is exposed to financial risk through its financial assets, financial liabilities, reinsurance assets and insurance liabilities. In particular, the key financial risk is that the proceeds from its financial assets are not sufficient to fund the obligations arising from its insurance contracts. The most important components of financial risk are interest rate risk, credit risk, equity price risk and currency risk.

There has been no change from the prior period in the nature of the financial risks to which the Group is exposed. Brexit has continued to result in greater uncertainty in relation to the economic risks to which the Group is exposed, including equity price volatility, movements in exchange rates and long-term UK growth prospects. The Group's management and measurement of financial risks is informed by either stochastic modelling or stress testing techniques.

(a) Categories of financial instruments

(i) Categories applying IAS 39

 
 
                                 Financial assets                   Financial liabilities 
                -------------------------------------------------  ----------------------- 
                                                                                                   Other 
                                 Held                       Hedge      Held                       assets 
                 Designated       for     Loans and     accounted       for      Financial           and 
                    at fair   trading   receivables   derivatives   trading   Liabilities*   liabilities          Total 
                      value 
                     GBP000    GBP000        GBP000        GBP000    GBP000         GBP000        GBP000         GBP000 
 
 At 31 
 December 
 2019 
 Financial 
  investments       848,573     3,061         5,770           509         -              -             -        857,913 
 Other assets             -         -       173,996             -         -              -         4,362        178,358 
 Cash and 
  cash 
  equivalents             -         -        74,775             -         -              -             -         74,775 
 Finance lease 
  obligations             -         -             -             -         -       (12,923)             -       (12,923) 
 Other 
  liabilities             -         -             -             -         -       (65,634)      (11,318)       (76,952) 
 Net other                -         -             -             -         -              -     (413,636)      (413,636) 
                                                     ------------  -------- 
 Total              848,573     3,061       254,541           509         -       (78,557)     (420,592)        607,535 
                -----------  --------  ------------  ------------  --------  -------------  ------------  ------------- 
 
 At 31 
 December 
 2018 
 Financial 
  investments       782,976     5,331         9,930           737         -              -             -        798,974 
 Other assets             -         -       149,119             -         -              -         4,511        153,630 
 Cash and 
  cash 
  equivalents             -         -       109,417             -         -              -             -        109,417 
 Finance lease 
  obligations             -         -             -             -         -        (1,379)             -        (1,379) 
 Other 
  liabilities             -         -             -             -   (2,306)       (60,969)       (8,644)       (71,919) 
 Net other                -         -             -             -         -              -     (402,719)      (402,719) 
                                                     ------------  -------- 
 Total              782,976     5,331       268,466           737   (2,306)       (62,348)     (406,852)        586,004 
                -----------  --------  ------------  ------------  --------  -------------  ------------  ------------- 
 
 
 
 

*Financial liabilities are held at amortised cost.

The carrying value of those financial assets and liabilities not carried at fair value in the financial statements is considered to approximate to their fair value.

(ii) Categories of financial assets applying IFRS 9

As disclosed in the accounting policies, the Group has chosen to defer application of IFRS 9 and classifies and measures financial instruments using IAS 39. To facilitate comparison with entities applying IFRS 9, the table below sets out the Group's financial assets at the balance sheet date, split between those which have contractual cash flows that are solely payments of principal and interest on the principal outstanding (SPPI), other than those which are held for trading or whose performance is evaluated on a fair value basis, and all other financial assets.

 
                                           2019                                            2018 
                       SPPI financial        Other   Total financial   SPPI financial        Other   Total financial 
                               assets    financial            assets           assets    financial            assets 
                                            assets                                          assets 
                               GBP000       GBP000            GBP000           GBP000       GBP000            GBP000 
 
 Financial 
  investments                   5,770      852,143           857,913            9,930      789,044           798,974 
 Cash and cash 
  equivalents                  74,775            -            74,775          109,417            -           109,417 
 Other financial 
  assets                      173,996            -           173,996          149,119            -           149,119 
 Total fair value             254,541      852,143         1,106,684          268,466      789,044         1,057,510 
                      ---------------  -----------  ----------------  ---------------  -----------  ---------------- 
 

There has been a GBP13,925,000 decrease (2018: GBP19,269,000 increase) in the fair value of SPPI financial assets of the Group, and a GBP63,099,000 increase (2018: GBP60,766,000 decrease) in the fair value of other financial assets of the Group during the reporting period.

(b) Fair value hierarchy

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

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

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

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

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

 
 Analysis of fair value measurement bases          Fair value measurement 
                                                            at the 
                                                    end of the reporting 
                                                       period based on 
                                                ---------------------------- 
                                                    Level    Level     Level      Total 
                                                        1        2         3 
                                                   GBP000   GBP000    GBP000     GBP000 
 At 31 December 2019 
 Financial assets at fair value through 
  profit or loss 
 Financial investments 
   Equity securities                              289,165      190    66,703    356,058 
   Debt securities                                490,911    1,200       404    492,515 
   Derivatives                                          -    3,061         -      3,061 
                                                  780,076    4,451    67,107    851,634 
 Financial assets at fair value through 
  other comprehensive income 
 Financial investments 
   Derivatives                                          -      509         -        509 
 Total financial assets at fair value             780,076    4,960    67,107    852,143 
                                                ---------  -------  --------  --------- 
 
 At 31 December 2018 
 Financial assets at fair value through 
  profit or loss 
 Financial investments 
   Equity securities                              241,115      246    44,773    286,134 
   Debt securities                                495,348    1,233       261    496,842 
   Derivatives                                          -    5,331         -      5,331 
                                                  736,463    6,810    45,034    788,307 
 Financial assets at fair value through 
  other comprehensive income 
 Financial investments 
   Derivatives                                          -      737         -        737 
 Total financial assets at fair value             736,463    7,547    45,034    789,044 
                                                ---------  -------  --------  --------- 
 
 

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

Fair value measurements based on level 3

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

 
                                                           Financial assets at fair 
                                                                     value 
                                                            through profit and loss 
                                                      ---------------------------------- 
                                                           Equity         Debt 
                                                       securities   securities     Total 
                                                           GBP000       GBP000    GBP000 
 At 31 December 2019 
 Opening balance                                           44,773          261    45,034 
 Total gains recognised in profit or loss                   7,538          143     7,681 
 Purchases                                                 14,392            -    14,392 
 Closing balance                                           66,703          404    67,107 
                                                      -----------  -----------  -------- 
 Total gains for the period included in profit 
 or loss for assets 
 held at the end of the reporting period                    7,539          143     7,682 
                                                      -----------  -----------  -------- 
 
 At 31 December 2018 
 Opening balance                                           42,279          125    42,404 
 Total gains recognised in profit or loss                   2,628            5     2,633 
 Transfers                                                  (134)          134         - 
 Disposal proceeds                                              -          (3)       (3) 
 Closing balance                                           44,773          261    45,034 
                                                      -----------  -----------  -------- 
 Total gains for the period included in profit 
 or loss for assets 
 held at the end of the reporting period                    2,656            5     2,661 
                                                      -----------  -----------  -------- 
 
 

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

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

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

These financial assets are valued using third-party pricing information that is regularly reviewed and internally calibrated based on management's knowledge of the markets.

Non exchange-traded derivative contracts (level 2)

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

Unlisted equity securities (level 3)

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

The valuation is most sensitive to the level of underlying net assets, the Euro exchange rate, the price-to-book ratio chosen, an illiquidity discount and a credit rating discount applied to the valuation to account for the risks associated with holding the asset. If the illiquidity discount or credit rating discount applied changes by +/-10%, the value of unlisted equity securities could move by +/-GBP7m (2018: +/-GBP5m).

Unlisted debt (level 3)

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

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

(c) Interest rate risk

The Group's exposure to interest rate risk arises primarily from movements on financial investments that are measured at fair value and have fixed interest rates, which represent a significant proportion of the Group's assets, and from those insurance liabilities for which discounting is applied at a market interest rate. The Group's investment strategy is set in order to control the impact of interest rate risk on anticipated cash flows and asset and liability values. The fair value of the Group's investment portfolio of fixed income securities reduces as market interest rates rise as does the present value of discounted insurance liabilities, and vice versa.

Interest rate risk concentration is reduced by adopting asset-liability duration matching principles where appropriate. Excluding assets held to back the life business, the average duration of the Group's fixed income portfolio is three years (2018: two years), reflecting the relatively short-term average duration of its general insurance liabilities. The mean term of discounted general insurance liabilities is disclosed in note 28(a)(iv) to the full financial statements.

For the Group's life business, consisting of policies to support funeral planning products, benefits payable to policyholders are independent of the returns generated by interest-bearing assets. Therefore, the interest rate risk on the invested assets supporting these liabilities is borne by the Group. This risk is mitigated by purchasing fixed interest investments with durations that match the profile of the liabilities. For funeral plan policies, benefits are linked to the Retail Prices Index (RPI). Assets backing these liabilities are also linked to the RPI, and include index-linked gilts and corporate bonds. For practical purposes it is not possible to exactly match the durations due to the uncertain profile of liabilities (e.g. mortality risk) and the availability of suitable assets, therefore some interest rate risk will persist. The Group monitors its exposure by comparing projected cash flows for these assets and liabilities and making appropriate adjustments to its investment portfolio.

The table below summarises the maturities of life business assets and liabilities that are exposed to interest rate risk.

 
                                         Maturity 
                               --------------------------- 
                                Within   Between     After 
                                1 year     1 & 5   5 years      Total 
 Group life business                       years 
                                GBP000    GBP000    GBP000     GBP000 
 At 31 December 2019 
 Assets 
 Debt securities                 6,066    28,732    65,093     99,891 
 Cash and cash equivalents       2,584         -         -      2,584 
                                 8,650    28,732    65,093    102,475 
                               -------  --------  --------  --------- 
 Liabilities (discounted) 
 Life business provision         5,517    19,223    54,472     79,212 
 
 At 31 December 2018 
 Assets 
 Debt securities                 4,380    26,428    67,630     98,438 
 Cash and cash equivalents       4,527         -         -      4,527 
                                 8,907    26,428    67,630    102,965 
                               -------  --------  --------  --------- 
 Liabilities (discounted) 
 Life business provision         5,728    19,988    56,248     81,964 
 
 

Group financial investments with variable interest rates, including cash and cash equivalents, and insurance instalment receivables are subject to cash flow interest rate risk. This risk is not significant to the Group.

(d) Credit risk

The Group has exposure to credit risk, which is the risk of non-payment of their obligations by counterparties and financial markets borrowers. Areas where the Group is exposed to credit risk are:

-- counterparty default on loans and debt securities;

-- deposits held with banks;

-- reinsurers' share of insurance liabilities (excluding provision for unearned premiums) and amounts due from reinsurers in respect of claims already paid; and

-- amounts due from insurance intermediaries and policyholders.

The Group is exposed to minimal credit risk in relation to all other financial assets.

The carrying amount of financial and reinsurance assets represents the Group's maximum exposure to credit risk. The Group structures the levels of credit risk it accepts by placing limits on its exposure to a single counterparty. Limits on the level of credit risk are regularly reviewed. Where available the Group also manages its exposure to credit risk in relation to credit risk ratings. Investment grade financial assets are classified within the range of AAA to BBB ratings, where AAA is the highest possible rating. Financial assets which fall outside this range are classified as sub-investment grade. 'Not rated' assets capture assets not rated by external ratings agencies.

The following table provides information regarding the credit risk exposure of financial assets with external credit ratings from Standard & Poors or an equivalent rating from a similar agency. This includes financial assets that meet the definition of 'solely payments of principal and interest' (SPPI).

 
                                                  SPPI                                    Non-SPPI 
                   -----------------------------------------------------------------  ---------------- 
                               Cash and   Reinsurance   Other financial 
                      cash equivalents*       debtors            assets   Total SPPI   Debt securities 
                                 GBP000        GBP000            GBP000       GBP000            GBP000 
 At 31 December 
  2019 
 AAA                                  -             -                 -            -           113,359 
 AA                              19,760         1,286                 -       21,046           138,341 
 A                               17,269         8,856                 -       26,125           132,419 
 BBB                             42,713             3                 -       42,716            89,563 
 Below BBB                            -             -                 -            -             9,537 
 Not rated                            7         1,032           163,615      164,654             9,296 
                                                                         -----------  ---------------- 
                                 79,749        11,177           163,615      254,541           492,515 
                   --------------------  ------------  ----------------  -----------  ---------------- 
 
 
 
 At 31 December 
  2018 
 AAA                       -         -          -          -    126,227 
 AA                   23,316     2,788          -     26,104    142,426 
 A                    55,090     8,058          -     63,148    115,026 
 BBB                  40,826         3          -     40,829     91,471 
 Below BBB                91         -          -         91     12,197 
 Not rated                 7       763    137,524    138,294      9,495 
                                                   ---------  --------- 
                     119,330    11,612    137,524    268,466    496,842 
                   ---------  --------  ---------  ---------  --------- 
 

*Cash includes amounts held on deposit classified within financial investments and disclosed in note 22 to the full financial statements. Cash balances which are not rated relate to cash amounts in hand.

For financial assets meeting the SPPI test that do not have low credit risk, the carrying amount disclosed above is an approximation of their fair value.

Group cash balances are regularly reviewed to identify the quality of the counterparty bank and to monitor and limit concentrations of risk.

The debt securities portfolio consists of a range of mainly fixed interest instruments including government securities, local authority issues, corporate loans and bonds, overseas bonds, preference shares and other interest-bearing securities. Limits are imposed on the credit ratings of the corporate bond portfolio and exposures regularly monitored. Group investments in unlisted securities represent less than 1% of this category in the current and prior year.

The Group's exposure to counterparty default on debt securities is spread across a variety of geographical and economic territories, as follows:

 
                    2019       2018 
                  GBP000     GBP000 
 
  UK             301,225    317,137 
  Australia       84,726     82,901 
  Canada          86,293     72,301 
  Europe          20,271     24,503 
  Total          492,515    496,842 
               ---------  --------- 
 

Reinsurance is used to manage insurance risk. This does not, however, discharge the Group's liability as primary insurer. If a reinsurer fails to pay a claim for any reason, the Group remains liable for the payment to the policyholder. The creditworthiness of reinsurers is considered on a regular basis through the year by reviewing their financial strength. The Group Reinsurance Security Committee assesses, monitors and approves the creditworthiness of all reinsurers, reviewing relevant credit ratings provided by the recognised credit rating agencies, as well as other publicly available data and market information. The Group Reinsurance Security Committee also monitors the balances outstanding from reinsurers and maintains an approved list of reinsurers.

The Group's credit risk policy details prescriptive methods for the collection of premiums and control of intermediary and policyholder debtor balances. The level and age of debtor balances are regularly assessed via monthly credit management reports. These reports are scrutinised to assess exposure by geographical region and counterparty of aged or outstanding balances. Any such balances are likely to be major international brokers that are in turn monitored via credit reference agencies and considered to pose minimal risk of default. The Group has no material concentration of credit risk in respect of amounts due from insurance intermediaries and policyholders.

(e) Equity price risk

The Group is exposed to equity price risk because of financial investments held by the Group which are stated at fair value through profit or loss. The Group mitigates this risk by holding a diversified portfolio across geographical regions and market sectors, and through the use of derivative contracts from time to time which would limit losses in the event of a fall in equity markets.

The concentration of equity price risk by geographical listing, before the mitigating effect of derivatives, to which the Group is exposed is as follows:

 
                    2019                   2018 
                  GBP000                 GBP000 
                       - 
           UK    289,566          UK    241,116 
       Europe     66,302      Europe     44,821 
    Hong Kong        190   Hong Kong        197 
        Total    356,058       Total    286,134 
               ---------              --------- 
 

(f) Currency risk

The Group operates internationally and its main exposures to foreign exchange risk are noted below. The Group's foreign operations generally invest in assets and purchase reinsurance denominated in the same currencies as their insurance liabilities, which mitigates the foreign currency exchange rate risk for these operations. As a result, foreign exchange risk arises from recognised assets and liabilities denominated in other currencies and net investments in foreign operations. The Group mitigates this risk through the use of derivatives when considered necessary.

The Group exposure to foreign currency risk within the investment portfolios arises from purchased investments that are denominated in currencies other than sterling.

The Group's foreign operations create two sources of foreign currency risk:

-- the operating results of the Group's foreign branches and subsidiaries in the Group financial statements are translated at the average exchange rates prevailing during the period; and

-- the equity investment in foreign branches and subsidiaries is translated into sterling using the exchange rate at the year-end date.

The forward foreign currency risk arising on translation of these foreign operations is hedged by the derivatives which are detailed in the derivative financial instruments note to this announcement. The Group has designated certain derivatives as a hedge of its net investments in Canada and Australia, which have Canadian and Australian dollars respectively as their functional currency.

The largest currency exposures, before the mitigating effect of derivatives, with reference to net assets/liabilities are shown below, representing effective diversification of resources.

 
              2019              2018 
            GBP000            GBP000 
 
    Euro    65,305   Aus $    47,838 
   Aus $    41,912    Euro    42,538 
   Can $    33,722   Can $    31,024 
   USD $     2,028    NZ $     1,043 
   HKD $       176   USD $     1,004 
 

The figures in the table above, for the current and prior years, do not include currency risk that the Group is exposed to on a 'look through' basis in respect of collective investment schemes denominated in sterling. The Group enters into derivatives to hedge currency exposure, including exposures on a 'look through' basis. The open derivatives held by the Group at the year end to hedge currency exposure are detailed in the derivative financial instruments note to this announcement.

(g) Liquidity risk

Liquidity risk is the risk that funds may not be available to pay obligations when due. The Group is exposed to daily calls on its available cash resources mainly from claims arising from insurance contracts. An estimate of the timing of the net cash outflows resulting from insurance contracts is provided in note 28 to the full financial statements. The Group has robust processes in place to manage liquidity risk and has available cash balances, other readily marketable assets and access to funding in case of exceptional need. This is not considered to be a significant risk to the Group.

Non-derivative financial liabilities consist of lease liabilities, for which a maturity analysis is included in note 32 to the full financial statements, and other liabilities for which a maturity analysis is included in note 31 to the full financial statements.

(h) Market risk sensitivity analysis

The sensitivity of profit and other equity reserves to movements on market risk variables (comprising interest rate, currency and equity price risk), each considered in isolation and before the mitigating effect of derivatives, is shown in the table below. This table does not include the impact of variables on retirement benefit schemes. Financial risk sensitivities for retirement benefit schemes are disclosed separately in note 19 to the full financial statements.

 
 Group                                     Potential increase / (decrease) in    Potential increase / (decrease) in 
                                                         profit                         other equity reserves 
 
                              Change in 
 Variable                      variable               2019                2018               2019               2018 
                                                    GBP000              GBP000             GBP000             GBP000 
 
 Interest rate risk   -100 basis points            (6,724)             (4,730)               (25)                  - 
                      +100 basis points              4,133               2,799                 37                (3) 
 Currency risk                     -10%              6,330               4,772              7,628              7,613 
                                   +10%            (5,179)             (3,904)            (6,241)            (6,229) 
 Equity price risk               +/-10%             28,841              23,177                  -                  - 
 

The following assumptions have been made in preparing the above sensitivity analysis:

-- the value of fixed income investments will vary inversely with changes in interest rates, and all territories experience the same interest rate movement;

-- currency gains and losses will arise from a change in the value of sterling against all other currencies moving in parallel;

-- equity prices will move by the same percentage across all territories; and

-- change in profit is stated net of tax at the standard rate applicable in each of the Group's territories.

(i) Capital management

The Group's primary objectives when managing capital are to:

-- comply with the regulators' capital requirements of the markets in which the Group operates; and

-- safeguard the Group's ability to continue to meet stakeholders' expectations in accordance with its corporate mission, vision and values.

The Group is subject to insurance solvency regulations in all the territories in which it issues insurance and investment contracts, and capital is managed and evaluated on the basis of both regulatory and economic capital.

In the UK, the Group and its UK regulated entities are required to comply with rules issued by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).

Capital is assessed at both individual regulated entity and group level. The PRA expects a firm, at all times, to hold Solvency II Own Funds in excess of its calculated Solvency Capital Requirement (SCR). Group solvency is assessed at the level of Ecclesiastical Insurance Office plc (EIO)'s parent, Ecclesiastical lnsurance Group plc (EIG). Consequently, there is no directly comparable solvency measure for EIO group. Both quarterly and annual quantitative returns are submitted to the PRA, in addition to an annual narrative report, the Solvency and Financial Condition Report (SFCR) which is also published on the company's website. A further report, the Regular Supervisory Report (RSR) is periodically submitted to the PRA.

The current year figures in the table below are unaudited and based on the latest information provided to management. The prior year figures in the table below are as disclosed in the Company's SFCRs, available on the Group's website. These differ from the figures reported last year as they were estimated based on information available to management at the time the accounts were signed.

EIO's Solvency II Own Funds will be subject to a separate independent audit, as part of the Group's process for Solvency II reporting to the PRA. EIO's SCR is not subject to audit as it is calculated using an internal model which has been approved for use by the PRA. ELL's figures are not subject to an independent audit due to the company falling below the threshold calculation detailed in the PRA policy statement PS25/18 (Solvency II: External audit of the public disclosure requirement). The Group's regulated entities, EIO and ELL, expect to meet the deadline for submission to the PRA of 7 April 2020 and their respective SFCRs will be made available on the Group's website shortly thereafter. EIG is also expected to meet its deadline for submission to the PRA of 19 May 2020, with its SFCR also being made available on the Group's website shortly after.

 
                                                                  2019                              2018 
                                                               (unaudited)                      (unaudited)* 
                                                     Ecclesiastical                    Ecclesiastical 
                                                          Insurance                         Insurance 
                                                         Office plc   Ecclesiastical       Office plc   Ecclesiastical 
                                                             Parent     Life Limited           Parent     Life Limited 
                                                             GBP000           GBP000           GBP000           GBP000 
 
 Solvency II Own Funds                                      570,083           49,120          551,857           52,583 
 Solvency Capital Requirement                             (264,251)         (15,976)        (256,898)         (15,879) 
 Own Funds in excess of Solvency Capital 
  Requirement                                               305,832           33,144          294,959           36,704 
                                                    ---------------  ---------------  ---------------  --------------- 
 
 Solvency II Capital Cover                                     216%             307%             215%             331% 
 

*Unaudited with the exception of EIO Parent's Solvency II Own Funds.

Economic capital is the Group's own internal view of the level of capital required, and this measure is an integral part of the Own Risk and Solvency Assessment Report (ORSA) which is a private, internal forward-looking assessment of own risk, as required as part of the Solvency II regime. Risk appetite is set such that the target level of economic capital is always higher than the regulatory SCR.

Derivative financial instruments

The Group utilises derivatives to mitigate equity price risk arising from investments held at fair value, foreign exchange risk arising from investments denominated in foreign currencies, and foreign exchange risk arising from investments denominated in Sterling that contain underlying foreign currency exposure. These 'non-hedge' derivatives either do not qualify for hedge accounting or the option to hedge account has not been taken.

The Group has also formally designated certain derivatives as a hedge of its net investments in Australia and Canada. A gain of GBP640,000 (2018: gain of GBP1,692,000) in respect of these 'hedge' derivatives has been recognised in the hedging reserve within shareholders' equity, as disclosed in the Translation and Hedging Reserve note to this announcement. The Group has formally assessed and documented the effectiveness of derivatives that qualify for hedge accounting in accordance with IAS 39, Financial Instruments: Recognition and Measurement.

 
                                          2019                           2018 
                                 Contract/                Contract/ 
                                  notional   Fair value    notional   Fair value   Fair value 
                                    amount        asset      amount        asset    liability 
                                    GBP000       GBP000      GBP000       GBP000       GBP000 
 Non-hedge derivatives 
 Equity/Index contracts 
 Options                            58,588        1,562      63,077        5,331            - 
 
 Foreign exchange contracts 
 Forwards (Euro)                   116,603        1,499      87,514            -        2,306 
 
 Hedge derivatives 
 Foreign exchange contracts 
 Forwards (Australian dollar)       45,411          250      57,264          492            - 
 Forwards (Canadian dollar)         30,456          259      27,157          245            - 
                                   251,058        3,570     235,012        6,068        2,306 
                                ----------  -----------  ----------  -----------  ----------- 
 

Included with Equity/Index contracts are options with a contract/notional value of GBP17,997,000 (2018: GBP22,493,000), and fair value asset of GBP734,000 (2018: GBP2,348,000), which expire in greater than one year. All other derivatives in the current and prior period expire within one year.

All contracts designated as hedging instruments were fully effective in the current and prior year.

The notional amounts above reflect the aggregate of individual derivative positions on a gross basis and so give an indication of the overall scale of the derivative transactions. They do not reflect current market values of the open positions.

Derivative fair value assets are recognised within financial investments and derivative fair value liabilities are recognised within other liabilities.

Translation and hedging reserve

 
                                                    Translation   Hedging 
                                                        reserve   reserve     Total 
                                                         GBP000    GBP000    GBP000 
 
 At 1 January 2019                                       14,940     4,131    19,071 
 Losses on currency translation differences             (1,368)         -   (1,368) 
 Gains on net investment hedges                               -       640       640 
 Attributable tax                                             -      (19)      (19) 
 At 31 December 2019                                     13,572     4,752    18,324 
                                                   ------------  --------  -------- 
 
                                                         18,022     2,626    20,648 
 At 1 January 2018                                      (3,082)         -   (3,082) 
 Losses on currency translation differences                   -     1,692     1,692 
 Gains on net investment hedges                               -     (187)     (187) 
 Attributable tax                                        14,940     4,131    19,071 
                                                   ------------  --------  -------- 
 
 
 

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

 
 Segment information 
 (a) Operating segments 
 The Group segments its business activities on the basis of differences in the products and 
 services offered and, for general insurance, the underwriting territory. Expenses relating 
 to Group management activities are included within 'Corporate costs'. This reflects the management 
 and internal Group reporting structure. 
 The activities of each operating segment are described below. 
 - General business 
     United Kingdom and Ireland 
     The Group's principal general insurance business operation is in the UK, where it operates 
      under the Ecclesiastical and Ansvar brands. The Group also operates an Ecclesiastical branch 
      in the Republic of Ireland underwriting general business across the whole of Ireland. 
 
     Australia 
     The Group has a wholly-owned subsidiary in Australia underwriting general insurance business 
      under the Ansvar brand. 
 
     Canada 
     The Group operates a general insurance Ecclesiastical branch in Canada. 
 
     Other insurance operations 
     This includes the Group's internal reinsurance function, adverse development cover and operations 
      that are in run-off or not reportable due to their immateriality. 
 
 - Investment management 
     The Group provides investment management services both internally and to third parties through 
      EdenTree Investment Management Limited. 
 
 - Broking and Advisory 
     The Group provides insurance broking through South Essex Insurance Brokers Limited, financial 
      advisory services through Ecclesiastical Financial Advisory Services Limited and risk advisory 
      services through Ansvar Risk Management Services Pty Limited which operates in Australia. 
 
 - Life business 
     Ecclesiastical Life Limited provides long-term insurance policies to support funeral planning 
      products. It is closed to new business. 
 
 - Corporate costs 
     This includes costs associated with Group management activities. 
 
 
 

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

The accounting policies of the operating segments are the same as the Group's accounting policies described in note 1 to the full financial statements, with the exception of the investment management and broking and advisory segments. These segments do not qualify for the temporary exemption from IFRS 9 available to insurers and as a result have adopted IFRS 9. Consequently, their accounting policies for financial instruments may differ, but all other accounting policies are the same as the Group.

Segment revenue

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

Revenue is attributed to the geographical region in which the customer is based.

 
                                              2019                              2018 
                                    Gross        Non-                 Gross        Non- 
                                  written   insurance               written   insurance 
                                 premiums    services      Total   premiums    services      Total 
                                   GBP000      GBP000     GBP000     GBP000      GBP000     GBP000 
 General business 
   United Kingdom and Ireland     257,135           -    257,135    242,339           -    242,339 
   Australia                       68,857           -     68,857     56,946           -     56,946 
   Canada                          64,457           -     64,457     54,158           -     54,158 
   Other insurance operations       3,516           -      3,516      3,507           -      3,507 
 Total                            393,965           -    393,965    356,950           -    356,950 
 Life business                       (13)           -       (13)         21           -         21 
 Investment management                  -      12,795     12,795          -      12,601     12,601 
 Broking and Advisory                   -       9,078      9,078          -       9,049      9,049 
 Group revenue                    393,952      21,873    415,825    356,971      21,650    378,621 
                                ---------  ----------  ---------  ---------  ----------  --------- 
 
 Group revenues are not materially concentrated on any single external customer. 
 

Segment result

General business segment results comprise the insurance underwriting profit or loss, investment activities and other expenses of each underwriting territory. The Group uses the industry standard net combined operating ratio (COR) as a measure of underwriting efficiency. The COR expresses the total of net claims costs, commission and underwriting expenses as a percentage of net earned premiums. Further details on the underwriting profit or loss and COR, which are alternative performance measures that are not defined under IFRS, are detailed in the reconciliation of Alternative Performance Measures note to this announcement.

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

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

 
 2019                             Combined 
                                 operating   Insurance   Investments      Other      Total 
                                     ratio      GBP000        GBP000     GBP000     GBP000 
 General business 
   United Kingdom and Ireland        86.8%      20,412        59,433      (292)     79,553 
   Australia                        114.1%     (3,246)         1,815       (65)    (1,496) 
   Canada                            95.1%       2,218         1,805      (174)      3,849 
   Other insurance operations                      634             -          -        634 
                                     91.1%      20,018        63,053      (531)     82,540 
 Life business                                     335         6,486          -      6,821 
 Investment management                               -             -      (310)      (310) 
 Broking and Advisory                                -             -      2,062      2,062 
 Corporate costs                                     -             -   (17,850)   (17,850) 
 Profit/(loss) before tax                       20,353        69,539   (16,629)     73,263 
                                            ----------  ------------  ---------  --------- 
 
 
 2018                             Combined 
                                 operating   Insurance   Investments      Other      Total 
                                     ratio      GBP000        GBP000     GBP000     GBP000 
 General business 
   United Kingdom and Ireland        80.2%      29,426       (1,836)      (252)     27,338 
   Australia                         93.7%       1,400         2,073       (77)      3,396 
   Canada                           106.5%     (2,599)         1,655          -      (944) 
   Other insurance operations                      963             -          -        963 
                                     86.4%      29,190         1,892      (329)     30,753 
 Life business                                   1,642       (3,181)          -    (1,539) 
 Investment management                               -             -        941        941 
 Broking and Advisory                                -             -      2,045      2,045 
 Corporate costs                                     -             -   (16,829)   (16,829) 
 Profit/(loss) before tax                       30,832       (1,289)   (14,172)     15,371 
                                            ----------  ------------  ---------  --------- 
 

(b) Geographical information

Gross written premiums from external customers and non-current assets, as attributed to individual countries in which the Group operates, are as follows:

 
                                        2019                     2018 
                                  Gross                    Gross 
                                written   Non-current    written   Non-current 
                               premiums        assets   premiums        assets 
                                 GBP000        GBP000     GBP000        GBP000 
 
 United Kingdom and Ireland     260,638       235,859    245,867       218,119 
 Australia                       68,857         4,348     56,946         1,279 
 Canada                          64,457         8,272     54,158         4,018 
                                393,952       248,479    356,971       223,416 
                              ---------  ------------  ---------  ------------ 
 
 

Gross written premiums are allocated based on the country in which the insurance contracts are issued. Non-current assets exclude rights arising under insurance contracts, deferred tax assets, pension assets and financial instruments and are allocated based on where the assets are located.

Reconciliation of Alternative Performance Measures

The Group uses alternative performance measures (APM) in addition to the figures which are prepared in accordance with IFRS. The financial measures included in our key performance indicators: regulatory capital, combined operating ratio (COR), net expense ratio (NER) and net inflows are APM. These measures are commonly used in the industries the Group operates in and are considered to provide useful information and enhance the understanding of the results.

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

In line with the European Securities and Markets Authority guidelines, we provide a reconciliation of the COR and NER to its most directly reconcilable line item in the financial statements. Regulatory capital and net inflows to funds managed by Ecclesiastical Insurance Office plc's subsidiary, EdenTree Investment Management Limited, do not have an IFRS equivalent. Net inflows are the difference between the funds invested (gross inflows) less funds withdrawn (redemptions) during the year by third parties in a range of funds EdenTree Investment Management Limited offers. Regulatory capital is covered in more detail in section (i) of the Financial Risk and Capital Management note to this announcement.

 
 
 
                                                                   2019 
                                                                          Broking 
                                                    Inv'mnt    Inv'mnt        and      Corporate 
                                   Insurance         return       mngt   Advisory          costs       Total 
                              ------------------- 
                                 General     Life 
                                  GBP000   GBP000    GBP000     GBP000     GBP000         GBP000      GBP000 
 Revenue 
 Gross written 
  premiums                       393,965     (13)         -          -          -              -     393,952 
 Outward reinsurance 
  premiums                     (152,886)        -         -          -          -              -   (152,886) 
 Net change in 
  provision for 
  unearned premiums             (15,080)        -         -          -          -              -    (15,080) 
 Net earned premiums     [1]     225,999     (13)         -          -          -              -     225,986 
                              ----------  -------  --------  ---------  ---------  -------------  ---------- 
 
 Fee and commission 
  income                 [2]      49,368        -         -     12,795      9,077              -      71,240 
 Other operating 
  income                             544        -         -          -          -              -         544 
 Net investment 
  return                               -      989    72,596         19        834              -      74,438 
 Total revenue                   275,911      976    72,596     12,814      9,911              -     372,208 
                              ----------  -------  --------  ---------  ---------  -------------  ---------- 
 
 
 Expenses 
 Claims and change in 
  insurance 
  liabilities                  (157,481)    (327)         -          -          -              -   (157,808) 
 Reinsurance 
  recoveries                      52,800        -         -          -          -              -      52,800 
 Fees, commissions 
  and other 
  acquisition costs      [3]    (72,383)     (14)         -      (819)        476              -    (72,740) 
 Other operating and 
  administrative 
  expenses               [4]    (78,829)    (300)   (3,057)   (12,305)    (8,236)   [5] (17,850)   (120,577) 
 Total operating 
  expenses                     (255,893)    (641)   (3,057)   (13,124)    (7,760)       (17,850)   (298,325) 
                              ----------  -------  --------  ---------  ---------  -------------  ---------- 
 
 
 Operating profit        [6]      20,018      335    69,539      (310)      2,151       (17,850)      73,883 
 Finance costs                     (531)        -         -          -       (89)              -       (620) 
 Profit before tax                19,487      335    69,539      (310)      2,062       (17,850)      73,263 
                              ----------  -------  --------  ---------  ---------  -------------  ---------- 
 
 
 Underwriting profit     [6]      20,018 
 
 Combined operating 
  ratio                            91.1% 
 
 Net expenses ( = [2] 
  + [3] + [4] + [5] )    [7]   (119,694) 
 
 Net expense ratio                   53% 
 

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

The Group uses the industry standard net COR as a measure of underwriting efficiency. The COR expresses the total of net claims costs, commission and underwriting expenses as a percentage of net earned premiums. It is calculated as ( [1] - [6] ) / [1] ).

The NER expresses total underwriting and corporate expenses as a proportion of net earned premiums. It is calculated as - [7] / [1].

 
 
 
                                                                    2018 
                                                                           Broking 
                                                     Inv'mnt    Inv'mnt        and      Corporate 
                                   Insurance          return       mngt   Advisory          costs       Total 
                              ------------------- 
                                 General     Life 
                                  GBP000   GBP000     GBP000     GBP000     GBP000         GBP000      GBP000 
 Revenue 
 Gross written 
  premiums                       356,950       21          -          -          -              -     356,971 
 Outward reinsurance 
  premiums                     (137,640)        -          -          -          -              -   (137,640) 
 Net change in 
  provision for 
  unearned premiums              (5,241)        -          -          -          -              -     (5,241) 
                                                                                    ------------- 
 Net earned premiums     [1]     214,069       21          -          -          -              -     214,090 
                              ----------  -------  ---------  ---------  ---------  -------------  ---------- 
                                                -          -          -          -              - 
 Fee and commission 
  income                 [2]      41,346        -          -     12,601      9,049              -      62,996 
 Other operating 
  income                           1,039        -          -          -          -              -       1,039 
 Net investment 
  return                               -    1,573      1,600         13        808              -       3,994 
                              ----------  -------  ---------  ---------  ---------  -------------  ---------- 
 Total revenue                   256,454    1,594      1,600     12,614      9,857              -     282,119 
                              ----------  -------  ---------  ---------  ---------  -------------  ---------- 
                                                -          -                     - 
 
 Expenses 
 Claims and change 
  in insurance 
  liabilities                  (112,222)      349          -          -          -              -   (111,873) 
 Reinsurance 
  recoveries                      26,188        -          -          -          -              -      26,188 
 Fees, commissions 
  and other 
  acquisition costs      [3]    (65,687)     (15)          -      (943)        299              -    (66,346) 
 Other operating and 
  administrative 
  expenses               [4]    (75,543)    (286)    (2,889)   (10,730)    (8,111)   [5] (16,829)   (114,388) 
                                                                                    ------------- 
 Total operating 
  expenses                     (227,264)       48    (2,889)   (11,673)    (7,812)       (16,829)   (266,419) 
                              ----------  -------  ---------  ---------  ---------  -------------  ---------- 
 
 
 Operating profit        [6]      29,190    1,642    (1,289)        941      2,045       (16,829)      15,700 
 Finance costs                     (329)        -          -          -          -              -       (329) 
 Profit before tax                28,861    1,642    (1,289)        941      2,045       (16,829)      15,371 
                              ----------  -------  ---------  ---------  ---------  -------------  ---------- 
 
 
 Underwriting profit     [6]      29,190 
 
 Combined operating 
  ratio                            86.4% 
 
 Net expenses ( = 
  [2] + [3] + [4] + 
  [5] )                  [7]   (116,713) 
 
 Net expense ratio                   55% 
 
 

Related party transactions

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

Charitable grants paid to the ultimate parent undertaking are disclosed in the consolidated statement of changes in equity and note 15 to the full financial statements.

Full disclosure of related party transactions is included in note 35 to the full financial statements.

Events after the balance sheet date

In early 2020, the existence of a new coronavirus, COVID-19, was confirmed. This virus has since spread across the globe and is now characterised by the World Health Organization as a pandemic. COVID-19 has caused disruption to businesses and economic activity which has been reflected in recent fluctuations in UK and global stock markets. The Group considers the emergence and spread of COVID-19 to be a non-adjusting post balance sheet event. The Group has plans in place to support continued operation of business activity and has capital resources that can withstand significant temporary market disruption. The Group does not consider there to be any significant exposure from insurance policies underwritten by the Group. Given the inherent uncertainties, it is not practicable at this time to determine the impact of COVID-19 on the Group or to provide a quantitative estimate of the impact.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

END

FR SFLESWESSEDD

(END) Dow Jones Newswires

March 18, 2020 03:00 ET (07:00 GMT)

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