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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Esure | LSE:ESUR | London | Ordinary Share | GB00B8KJH563 | ORD 1/12P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 279.60 | 279.40 | 279.80 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From May 2019 to May 2024
TIDMESUR
RNS Number : 9088G
esure Group plc
07 March 2018
7 March 2018
esure Group plc preliminary results for the year ended 31 December 2017
Delivering now; positioning for the future
Highlights
-- Gross written premiums up 25.2% to GBP820.2m (2016: GBP655.0m) -- In-force policies up 9.2% to 2.373 million (2016: 2.174 million) -- Profit before tax from continuing operations up 35.6% to GBP98.6m (2016: GBP72.7m) -- Combined operating ratio improved 2.1ppts to 96.7% (2016: 98.8%)
-- Full year dividend of 13.5p per share (2016: 13.5p per share) reflects a payout ratio of 70% of earnings per share, inclusive of a 20% special dividend; and is 31% higher after adjusting for the impact of Gocompare.com in 2016(1)
-- Solvency coverage(2) 3ppts higher at 155% (2016: 152%)
Sir Peter Wood, Chairman, said: "2017 has been a year of positive momentum for the Group as it delivered for its customers, colleagues and shareholders.
"The Board have declared a final dividend of 9.4 pence per share, inclusive of a special dividend, and the Group's capital coverage of 155% is ahead of its normal operating range. The strong capital position allows us to pursue both our current strategy and to position the business for the future, as we look to stay at the forefront of our industry in an increasingly digital and data driven world.
"esure is a great business today and I am excited about the many opportunities we have to ensure we continue to be a great business in the future."
Darren Ogden, Interim Chief Executive Officer, said: "During 2017, we increased in-force policies by 9% to 2.373 million and gross written premiums by 25% to GBP820m, as more customers were attracted to our excellent products at competitive prices. Our footprint expansion in Motor continues to build momentum and we now have over 300,000 in-force policies in these new segments.
"Our digital proposition continues to evolve as we deploy innovative technologies across the business to deliver for our customers. I am continually impressed by my colleagues' hard work, energy and dedication in making sure we provide a great service to all our customers.
"We continue to deliver profitable growth and remain on track for our three million in-force policy target by 2020."
For further information:
Chris Wensley Chris Barrie Head of Investor Relations Citigate Dewe Rogerson & Strategy t: 0207 638 9571 t: 01737 641324 e: esure@citigatedr.co.uk e: ir@esure.com
Note
1. The adjustment reflects the impact that the Group's share of Gocompare.com profits had on its 2016 full year dividend, assuming a consistent payout ratio of 70%
2. Group solvency coverage is estimated, unaudited and after allowing for the final dividend as at 31 December 2017. The 2016 solvency coverage is audited.
About esure Group plc
esure Group plc is an efficient, customer-focused personal lines insurer, founded in 2000 by Chairman, Sir Peter Wood, Britain's foremost general insurance entrepreneur. The Group is one of the UK's leading providers of Motor and Home insurance products through the esure and Sheilas' Wheels brands.
Cautionary statement
Certain statements made in this announcement are forward-looking statements. Such statements are based on current expectations and assumptions and are subject to a number of known and unknown risks and uncertainties that may cause actual events or results to differ materially from any expected future events or results expressed or implied in these forward-looking statements. Persons receiving this announcement should not place undue reliance on forward-looking statements. Unless otherwise required by applicable law, regulation or accounting standard, the Group does not undertake to update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise.
Disclaimer
This announcement contains inside information which is disclosed in accordance with the Market Abuse Regulation which came into effect on 3 July 2016.
The esure Group plc LEI number is 213800KOI3F5LM54PT80.
The person responsible for arranging the release of this announcement on behalf of the esure Group is Alice Rivers.
Chairman's statement
2017 has been a year of positive momentum for the Group. We have delivered for our customers, colleagues and shareholders, while positioning the business for the future.
Five years on from the Group's listing on the London Stock Exchange we are a bigger and better business. The Group has grown in this period to 2.4m in-force policies and delivered gross written premiums of over GBP800m in 2017. In addition, over a five year period we will have returned just under GBP300m to shareholders through dividends and created significant value for our shareholders through the acquisition and subsequent demerger of Gocompare.com. Customers have been at the centre of what we do throughout our history and it is encouraging to see our service metrics continue to improve and we were recently ranked the third most customer-friendly insurer by Insurance Times.
However, that is all in the past and we are focused on staying at the forefront of our industry to deliver for all our stakeholders in the near and long term.
In the near term, we remain on track to achieve our three million in-force policy target by 2020 through our footprint expansion programme in Motor, supported by our Home account.
As we look to the future, it is clear that the world is changing at an increasing pace, with advances in digital and data analytics, shaping customer expectations of all businesses.
The Board and Stuart Vann agreed that he would step down as Chief Executive Officer on 18 January 2018. This will allow new leadership, steeped in digital and data experience to take the business to the next level. Our search for a successor has commenced and we are looking for a leader with significant expertise and experience in a broad spectrum of customer facing businesses.
I worked closely with Stuart throughout his 17 years with the Group and he has been instrumental in helping to create the great business we have today and the value we have created for shareholders over the years. In the interim period, while we find a successor, Darren Ogden, CFO, will be Interim CEO, subject to regulatory approval, and I will be taking a more active role in the business. I have worked closely with Darren for many years and have no doubt that he is the right person to lead esure through this interim period, providing the continuity and experience we need to press on with our positive momentum.
The Board continue to demonstrate the value they add and with the addition of Alan Rubenstein and Peter Shaw in March 2017, the business has benefited from their wide breadth of skills and insight. Maria Dolores Dancausa will not be seeking re-election at the Annual General Meeting in May. I would like to thank Maria for her enormous contribution to the business in the four years she has been with the Group.
Today the Board has recommended a final dividend of 9.4 pence per share, taking the full year dividend to 13.5 pence per share. This represents a payout ratio of 70%, inclusive of a 20% special dividend. Excluding the contribution from Gocompare.com in 2016, this represents a year-on-year increase in the dividend of 31%, underpinned by a strong solvency coverage ratio of 155%. This demonstrates the Group's capital generative operations and the Board's commitment to returning excess capital to shareholders, while maintaining sufficient capital to fund its growth ambitions.
In summary, we have a great business today and I am excited about the many opportunities we have to ensure we have a great business in the future.
Sir Peter Wood
Chairman
Interim Chief Executive Officer's review
Introduction
In January 2018 it was an honour to be asked by Sir Peter Wood and the Board to lead the business in the interim period during the search for a new Chief Executive Officer.
We have a great business and our performance in 2017 demonstrates this. We exceeded our premium growth expectations for the year with an increase of 25.2% to GBP820.2m, we grew in-force policies by 9.2% to 2.373 million, and we increased profits by 35.6% to GBP98.6m. This is an outstanding achievement by all my colleagues, and I am continually impressed by their hard work, energy and dedication in making sure we provide a great service to all our customers.
Customers
During 2017 we increased in-force policies by almost 200,000 as customers were attracted to the Group through its strong brands, competitive pricing and excellent customer service. In Motor, we continue to build momentum in our new segments and have over 300,000 policies in these segments. It is encouraging to see more and more new customers choosing the Group for their Motor insurance alongside a significant proportion of customers choosing to stay with us year after year.
Customers are demanding more of businesses and I am pleased that our Net Promoter Score increased to 45 in 2017, demonstrating the customer centric approach we take. I was delighted to see that our Sheilas' Wheels brand ranked first for sales, renewals and service in a recent benchmarking exercise across insurance brands (source: ServiceTick Q4 2017).
It is important, however, that we do not stand still and continue to evolve our proposition and digital offering to meet and exceed our customers' expectations. As a Group, we have delivered digital sales for over a decade primarily through our focus on price comparison website distribution. During 2017 we implemented a number of changes to help customers administer their policy, such as live chat and self service forms, or to make a claim online. We are also in the process of finalising our new online customer portal that will be launched in 2018 making it even easier for customers to interact digitally with us.
Our moment of truth is when a customer makes a claim and in 2017 we settled over 270,000 claims and made payments totalling GBP450m. While many of our customers like to talk to us during a claim, we are piloting new technologies to provide an omni-channel approach for our customers. This will allow them to submit and assess claims electronically and through the use of artificial intelligence techniques the Group will be able to settle claims more quickly.
Colleagues
The Group has 1,851 colleagues who are the lifeblood of our business and we strive to make esure a great place to work. We continue to invest in our people agenda and it was encouraging to see the Group's engagement score improve to 72% in 2017 (2016: 65%). Through improved communications, better training and development and leadership courses, colleagues are well informed and possess the skills necessary to keep delivering for our customers. We are proud of the work and support we provide to our local communities in Glasgow, Manchester and Reigate.
Shareholders
The growth in premiums, policies and profits has been achieved all while positioning the business for the future. Through strong profitable growth, we are able to retain sufficient capital to continue our positive momentum, while paying a significant proportion of our profits to shareholders through strong dividends. As we move forward, we will remain disciplined in our capital management strategy, balancing growth with returns to shareholders.
Summary & Outlook
2017 has been a year of significant delivery and I look forward to 2018 with great confidence. In 2018, we are targeting a similar combined operating ratio to 2017, assuming normal weather, as we look to deliver a positive contribution and grow the business. We remain on track to achieve our three million in-force policy target by 2020.
Darren Ogden
Interim Chief Executive Officer
Financial Review - 2017
Group
Hot Features
Premium
2017 2016
Gross written premiums (GBPm) 820.2 655.0
In-force policies (millions) 2.373 2.174
Trading profit from continuing
operations (GBPm) 111.3 84.6
Profit before tax from continuing
operations (GBPm) 98.6 72.7
Earnings per share from continuing
operations (pence) 19.2 14.3
Dividend per share (pence) 13.5 13.5
Combined operating ratio (%) 96.7 98.8
Loss ratio (%) 72.3 74.2
Expense ratio (%) 24.4 24.6
Investment return - gross (%) 1.5 2.2
Solvency coverage (%)* 155 152
*The 2017 solvency coverage is estimated, unaudited and after allowing for the final dividend. The 2016 solvency coverage is audited.
Premiums, policies and profit
2017 2016
Gross written premiums (GBPm) 820.2 655.0
Motor (GBPm) 734.3 563.7
Home (GBPm) 85.9 91.3
In-force policies (millions) 2.373 2.174
Motor (millions) 1.895 1.606
Home (millions) 0.478 0.568
Profit before tax from continuing
operations (GBPm) 98.6 72.7
Gross written premiums increased 25.2% to GBP820.2m (2016: GBP655.0m) through strong growth in Motor in-force policies and higher average written premiums. In-force policies increased 9.2% to 2.373 million (2016: 2.174 million) as the Group delivered growth across all its Motor segments. Profit before tax from continuing operations increased 35.6% to GBP98.6m (2016: GBP72.7m) reflecting the Group's positive momentum in underwriting and non-underwritten additional services profit streams.
Motor
2017 2016
Gross written premiums (GBPm) 734.3 563.7
In-force policies (millions) 1.895 1.606
Combined operating ratio (%) 95.8 98.1
Loss ratio (%) 73.2 75.7
Expense ratio (%) 22.6 22.4
Trading profit (GBPm) 102.7 75.7
Underwriting (GBPm) 24.9 8.9
Non-underwritten additional services
(GBPm) 65.8 50.7
Investments (GBPm) 12.0 16.1
Gross written premiums increased 30.3% to GBP734.3m (2016: GBP563.7m) through a combination of in-force policy growth and market pricing. In-force policies increased by 18.0% to 1.895 million (2016: 1.606 million) with all customer segments growing year-on-year through the Group's footprint expansion programmes. In addition, the Group continues to retain a significant proportion of its customers.
Trading profit is 35.7% higher at GBP102.7m (2016: GBP75.7m). The underwriting performance of GBP24.9m (2016: GBP8.9m) reflects an improvement in the current accident year loss ratio of 5.0 percentage points to 76.9%, as the Group's positive rating actions earned through ahead of claims inflation, more than offsetting the reduction in favourable development of prior accident year reserves. Favourable development of prior accident year reserves of GBP22.2m equated to 3.7% of net earned premiums (2016: GBP29.4m; 6.2%).
Non-underwritten additional services increased 29.8% to GBP65.8m (2016: GBP50.7m) largely due to an increase in in-force policies.
The combined operating ratio improved by 2.3ppts to 95.8% (2016: 98.1%) and this was driven by an improvement in the loss ratio of 2.5ppts to 73.2% (2016: 75.7%), with the expense ratio broadly stable at 22.6% (2016: 22.4%).
2017 2016
Reported net loss ratio (%) 73.2 75.7
Prior year reserve releases (%) 3.7 6.2
Current accident year net loss
ratio (%) 76.9 81.9
Home
2017 2016
Gross written premiums (GBPm) 85.9 91.3
In-force policies (thousands) 478 568
Combined operating ratio (%) 102.8 102.9
Loss ratio (%) 65.6 66.0
Expense ratio (%) 37.2 36.9
Trading profit (GBPm) 8.6 8.9
Underwriting (GBPm) (2.3) (2.4)
Non-underwritten additional services
(GBPm) 9.9 9.3
Investments (GBPm) 1.0 2.0
Gross written premiums reduced 5.9% to GBP85.9m (2016: GBP91.3m) and in-force policies reduced 15.9% to 478 thousand (2016: 568 thousand) as a consequence of disciplined underwriting in soft market conditions. The Group implemented price increases ahead of the wider market during 2017 as it looked to mitigate against claims inflation and this impacted its competitiveness to attract and retain customers.
Trading profit is marginally lower than 2016 at GBP8.6m (2016: GBP8.9m). The Group's underwriting loss of GBP2.3m was similar to 2016 (loss of GBP2.4m), albeit 2017 has benefited from weather event costs that were lower than normal. Favourable development of prior accident year reserves of GBP4.7m equated to 5.8% of net earned premiums (2016: GBP9.3m; 11.0%).
Non-underwritten additional services increased by 6.5% to GBP9.9m (2016: GBP9.3m) aided by an improvement in non-underwritten additional insurance products.
The combined operating ratio was stable year-on-year at 102.8% (2016: 102.9%).
2017 2016
Reported net loss ratio (%) 65.6 66.0
Prior year reserve releases (%) 5.8 11.0
Current accident year net loss
ratio (%) 71.4 77.0
Additional services revenues
2017 2016
GBPm GBPm
Non-underwritten additional insurance
products 11.9 9.8
Policy administration fees and
other income 22.3 19.5
Claims income 7.8 7.6
Instalment income 48.5 37.6
Non-underwritten additional services 90.5 74.5
Underwritten additional insurance
products 34.8 32.0
Total income from additional services 125.3 106.5
Motor 114.4 96.1
Home 10.9 10.4
Non-underwritten additional services 90.5 74.5
Other operating expenses (14.8) (14.5)
------- -------
Non-underwritten additional services
trading profit 75.7 60.0
Motor 65.8 50.7
Home 9.9 9.3
ASR per IFP - Motor (GBP) 64.8 63.6
ASR per IFP - Home (GBP) 21.1 18.1
Total income from additional services increased 17.7% to GBP125.3m (2016: GBP106.5m) driven by a strong performance across all income lines. Non-underwritten additional services trading profit increased 26.2% to GBP75.7m (2016: GBP60.0m) ahead of the Group's in-force policy growth and leveraged the efficient expense base. Instalment income, where customers choose to pay monthly, has also benefited from an increase in both Motor and Home average written premiums in the year.
Investment return
2017 2016
GBPm GBPm
Investment income 12.9 14.3
Net gains on investments 1.0 3.8
Investment charges (4.1) (3.5)
Net investment return 9.8 14.6
Other income 3.2 3.5
Total investment return 13.0 18.1
Investment return - Gross (%) 1.5 2.2
Investment return - Net (%) 1.1 1.8
The Group's net investment return of GBP9.8m (2016: GBP14.6m) was aided by another year of strong equity returns, albeit to a lesser extent than that seen in 2016. In addition, increases in the shorter end of the UK Gilt Curve resulted in a reduction in the fair value for a number of fixed income positions, partly offsetting the one-off gain of GBP2.0m from the partial disposal of a long dated Gilt.
Other income reduced to GBP3.2m (2016: GBP3.5m) primarily as a result of lower income from the Group's investment in IMe Law Limited, operated by the Group's partner, Irwin Mitchell.
Trading profit
2017 2016
GBPm GBPm
Trading profit from continuing
operations 111.3 84.6
Motor 102.7 75.7
Home 8.6 8.9
Trading profit from discontinued
operations - 24.5
Gocompare.com - 24.5
Trading profit from continuing operations, being earnings before interest, tax, non-trading expenses and amortisation of acquired intangible assets, is management's measure of the overall profitability of the Group's operating activities. The Group's reportable segments are Motor and Home and these delivered a trading profit of GBP111.3m (2016: GBP84.6m).
The Group generated a trading profit from discontinued operations (Gocompare.com) of GBPnil (2016: GBP24.5m). Gocompare.com was demerged from the Group on 3 November 2016.
Reconciliation of trading profit from continuing operations to profit before tax from continuing operations
2017 2016
GBPm GBPm
Trading profit from continuing
operations 111.3 84.6
Non-trading costs (1.8) (0.9)
Finance costs (8.7) (8.7)
Amortisation of acquired intangible
assets (2.2) (2.3)
Profit before tax from continuing
operations 98.6 72.7
The Group incurred GBP8.7m in finance costs (2016: GBP8.7m) relating to the GBP125.0m of 6.75% ten year tier two Subordinated Notes issued on 19 December 2014 ("the Notes").
Profit after tax
Profit after tax from continuing operations
The Group's profit after tax from continuing operations increased 35.1% to GBP80.4m (2016: GBP59.5m) largely driven by an improvement in the underwriting and non-underwritten additional service revenues performance.
Profit after tax from discontinued operations
The Group generated profit after tax from discontinued operations (Gocompare.com) of GBPnil (2016: GBP209.7m). In 2016, the Group recognised a fair value gain on disposal of Gocompare.com of GBP213.6m. Gocompare.com was demerged from the Group on 3 November 2016.
Earnings per share
Earnings per share from continuing operations
Earnings per share from continuing operations increased by 34.3% to 19.2 pence (2016: 14.3 pence) broadly in line with the increase in profit after tax from continuing operations.
Earnings per share
Earnings per share decreased 70.3% to 19.2 pence (2016: 64.6 pence) as a consequence of the profit after tax on discontinued operations not recurring.
Dividend per share
The Board has proposed a final dividend of 9.4 pence per share, comprised of a base dividend and special dividend, which together with the interim dividend of 4.1 pence per share, takes the full year dividend to 13.5 pence per share. The full year dividend of 13.5 pence per share represents a payout ratio of 70% of the Group's earnings per share. Excluding the profit contribution from Gocompare.com in 2016, this represents a year-on-year increase in the dividend of 31%. The dividend has been set with reference to the Group's profit after tax and allows for the approximate proportion of one-third (interim dividend) and two-thirds (final dividend), respectively.
The ex-dividend date is 12 April 2018, the record date is 13 April 2018 and the payment date is 25 May 2018. These dates are in respect of both the base and special dividend.
Cash flow
2017 2016
GBPm GBPm
Profit after tax 80.4 269.2
Net cash generated from:
Operating activities 99.5 (3.8)
Investing activities (9.4) (25.7)
Financing activities (69.0) 23.1
Net increase / (decrease) in cash
and cash equivalents 21.1 (6.4)
Cash and cash equivalents at the
beginning of the year 25.5 31.9
Cash and cash equivalents at the
end of the period 46.6 25.5
The Group's cash and cash equivalents at the end of the period are GBP46.6m (2016: GBP25.5m).
Operating activities were a net inflow of GBP99.5m (2016: net outflow of GBP3.8m) largely driven by the Group's strong premium growth over the year ahead of the settlement of expected claims in the future. In 2016, the net outflow was largely driven by cash flows being invested into the Group's investment portfolio.
Investing activities were a net outflow of GBP9.4m (2016: net outflow of GBP25.7m) reflecting the Group's investment in property, plant, equipment and software. In 2016, investing activities included fees of GBP14.5m relating to the demerger of Gocompare.com that did not repeat in 2017.
Financing activities were a net outflow of GBP69.0m (2016: net inflow of GBP23.1m) of which GBP61.0m reflects the Group's 2016 final and 2017 interim dividends, and GBP8.4m relating to the interest payable on the Notes. In 2016, the financing activities included the Group's dividend payments of GBP42.9m, the inflow of cash from Gocompare.com of GBP73.1m prior to the demerger of Gocompare.com and the interest payable on the Notes.
The Group's cash flow statement can be found on page 18.
Investments
The Group manages its investment portfolio to maintain liquidity and preserve capital. Investments are held to meet the Group's cashflow requirements, pay customers' claims and seek a suitable return for an acceptable level of risk.
Strategic investment allocations
The Group's investment portfolio is in the process of transitioning towards the following strategic asset allocations and target returns. The Group's target allocations and target returns are outlined below:
Investment categories Target allocations Gross target
returns
Cash & Liquidity 5% 0.1%
Claims 65% 1.0%
Surplus 30% 3.5%
As a result of the Group's strategic asset allocation review in 2017, capital commitments of GBP150m to new asset classes are recognised within its surplus liquidity funds at year end, ahead of these commitments being invested in 2018.
As at the 31 December 2017 the Group held the following investments:
2017 2016
% GBPm GBPm
Total 100 975.9 862.9
Cash & Liquidity 8 76.6 45.5
Liquidity funds 30.0 20.0
Cash 46.6 25.5
Claims 63 613.5 551.8
Liquidity funds 149.7 46.2
Fixed income 463.8 505.6
Surplus 29 285.8 265.6
Liquidity funds 192.5 143.0
Equity 53.9 42.5
Fixed income 39.4 80.1
The Group's total assets under management are 13.1% higher at GBP975.9m (2016: GBP862.9m), driven by the growth in premiums.
The Cash & Liquidity portfolio continues to reflect accessible cash for operational activities and includes a buffer for adverse events. At 8%, the allocation is higher than the Group's target allocation due to the timing of certain contractual outflows payable in early January 2018. The target allocation of 5% is in line with the Board-approved liquidity risk appetite.
The Claims portfolio is constructed with reference to the expected future cost of the Group's technical liabilities as defined under Solvency II. The duration of the Group's assets and liabilities has remained broadly stable across the period at 3.7 years (2016: 3.6 years) and 2.9 years (2016: 3.4 years) respectively. The Group continues to designate newly acquired assets within this portfolio as available for sale ('AFS') to minimise the impact of interest rate changes on the Group's earnings. At 31 December 2017 the Group has designated GBP342.0m as AFS (2016: GBP192.6m) and GBP160.3m as fair value through profit and loss (2016: GBP359.2m).
The Surplus portfolio seeks to deliver returns in asset classes that are aligned with the Group's risk appetite, in particular with reference to its solvency capital requirements. The Group's strategic asset allocation review was finalised in 2017. This resulted in a divestment from its high yield fixed income assets and a subsequent commitment of GBP150.0m to infrastructure equity and direct lending. Commitments are expected to be invested during 2018.
The remaining surplus assets continue to be invested across a mixture of liquidity funds, equities and fixed income.
The Group's total investment duration was 2.2 years (2016: 2.6 years).
Claims portfolio - Fixed income
2017 2016
GBPm GBPm
Total 503.1 505.6
Corporate bonds 227.5 216.7
Government bonds 159.6 189.7
Floating rate notes 39.0 84.3
Covered bonds 37.6 14.9
Claims portfolio - Credit risk quality
2017 2016
% %
AAA 17 21
AA 36 37
A 26 22
BBB or below 21 17
The credit risk quality of the claims backed fixed income portfolio remains strong with 79% held in assets rated 'A' or above.
Reserving
The Group holds claims reserves, to cover the future cost of settling claims that have been incurred but not settled at the balance sheet date, whether already known to the Group or not yet reported, net of associated reinsurance recoveries.
For known periodic payment orders ("PPOs") and potential PPO awards, indexed cash flow projections are carried out in order to estimate an ultimate cost on a gross and net of reinsurance basis. The Group currently has 11 PPOs (2016: 11). The cash flow projections were undertaken on a discounted basis.
Due to the inherent uncertainties in reserving, the Group adopts a prudent approach to reserving through reserving in excess of the actuarial best estimate. Over time the inherent uncertainties in the actuarial best estimate reduce and the Group releases the margin above the best estimate. The Group's current reserve margin is comfortably in excess of its actuarial best estimate.
On 27 February 2017, the Lord Chancellor changed the Ogden discount rate from plus 2.5% to minus 0.75%, effective 20 March 2017. The impact of this change on the Group's 2017 performance was not material.
The Group benefited from favourable development of prior accident year reserves, with total prior year releases of GBP26.9m in 2017 (2016: GBP38.7m). The favourable development represents 4.0% of net earned premium (2016: 7.0%).
Reinsurance
The Group purchases reinsurance as a risk transfer mechanism to mitigate risks that are outside the Group's appetite for individual claim or event exposure and to reduce the volatility caused by large individual and accumulation losses. By doing so, the Group reduces the impact that an event can have on its capital position and its underwriting results in both Motor and Home.
Currently, the Group has in place excess of loss reinsurance programmes for its Motor and Home underwriting activities. The purpose of these programmes is to provide cover for both individual large losses, for Motor and Home, and accumulation losses arising from natural and other catastrophe events for Home. Motor and Home reinsurance treaties are in place covering all years in which the Group has underwritten policies in each line of business.
The Group's Motor reinsurance programme was renewed on 1 July 2017 and subsequently extended for six months to the end of 2018:
Layer Placement Placement Placement
1 January 2017 1 July 2017 1 July 2018
to 30 June 2017 to 30 June to 31 December
2018 2018
GBP1m x
GBP1m 100% 85% 100%
Unlimited
x GBP2m 100% 100% 100%
The like-for-like cost increase of the programme renewed on 1 July 2017 was 33%, equating to an increase of GBP10 per vehicle, as a consequence of the change in the Ogden discount rate in February 2017 from 2.5% to minus 0.75%. The Home reinsurance programme was renewed on 1 July 2017 with no material changes to the programme.
The Group's reinsurance programmes are reviewed on an annual basis and capital modelling is used to identify the most appropriate structure and risk retention profile, taking into account the Group's business objective of minimising volatility and the prevailing cost and the availability of reinsurance in the market.
The Group has no quota share reinsurance or co-insurance arrangements in place.
Capital
The Group seeks to manage its capital in order to maintain a level of capitalisation and solvency to ensure that regulatory requirements are met with an appropriate buffer and that there is sufficient capital available to fund profitable growth opportunities.
The solvency capital requirement ("SCR") is the level of capital the Group is required to hold to meet its obligations if a 1 in 200 year event were to occur in the next 12 months. The Group's normal operating range of coverage of its SCR is 130-150%. The capital surplus above the SCR provides an appropriate level of capital coverage and should enable the Group to continue to meet its regulatory capital requirements. The Group adopts the standard formula to calculate its capital requirements under Solvency II.
The Group's capital position, after allowing for the final dividend, is outlined below:
2017 2016
GBPm* GBPm
Own Funds 411 355
Tier 1 286 238
Tier 2 125 117
Solvency Capital Requirement 265 233
Coverage ratio 155% 152%
*The 2017 figures quoted are estimated, unaudited and after allowing for the final dividend. The 2016 solvency coverage is audited.
The Group's Own Funds have increased 15.8% to GBP411m (2016: GBP355m) reflecting the capital generative nature of its operations and the increase in qualifying Tier 2 capital, net of its foreseeable dividends. The SCR increased 13.7% to GBP265m (2016: GBP233m) as a consequence of the Group's strong growth in the year, albeit the SCR at year end has benefited from a timing difference of GBP7m as the Group transitions its investment portfolio towards its strategic asset allocation.
Own Funds comprise Tier 1 and Tier 2 qualifying capital. The Notes meet the qualifying criteria of a Tier 2 capital instrument and qualify up to a maximum of 50% of the SCR. The quality of the Group's capital remains strong with 70% in Tier 1 and 30% in Tier 2.
Solvency Capital Requirement
The Group's SCR allocation by risk type, based upon the undiversified capital requirement, can be seen below:
2017 2016
Underwriting risk 76% 72%
Market risk 14% 18%
Operational risk 8% 8%
Credit risk 2% 2%
The main risk driver is underwriting, consisting of premium, reserve and catastrophe risk, reflecting the capital requirements of the core business activities for the Group. The movement between Underwriting risk and Market risk is a timing difference as the Group transitions its investment portfolio towards its strategic asset allocation.
Sensitivities
The Group's capital structure is positioned to minimise the impact that adverse capital events have on its ability to meet its solvency capital requirements, were they to occur. The adverse capital events below are outlined to demonstrate the Group's capital resilience to such events.
Impact
on coverage*
Motor loss ratio 5ppts worse (10)ppts
Yield curve 50bps lower (0)ppt
Equities fall 25% (2)ppt
Credit spreads widen 50bps (2)ppt
1987 Hurricane (3)ppt
Ogden discount rate of +0.5% (1)ppt
* Capital coverage movements are stated after earnings, tax and dividend impact.
Dividend Policy
The Group's dividend policy is to target a base dividend of 50% of profit after tax and enhance the base dividend with a further special dividend, if the Group has excess capital and distributable reserves. In determining the level of special dividend at the interim and final stage the Board will consider a number of factors which include but are not limited to: the level of available distributable reserves; opportunities for growth; potential strategic opportunities; the outlook for future capital generation; and headroom required to absorb adverse capital events. The Board remains committed to returning excess capital to shareholders where it does not believe it can utilise the retained capital for further opportunities to enhance shareholder value. The interim dividend will be paid in October of the relevant financial year and the final dividend in May of the following financial year, in the approximate proportions of one-third and two-thirds, respectively.
esure Group plc, the parent company of the Group, is a non-trading holding company that derives its profits from dividends paid by its subsidiary companies. The Board reviews the level of distributable reserves at least bi-annually, to align with the proposed interim and final dividend declaration dates, and aims to maintain distributable reserves that provide sufficient cover for these dividends.
Segmental Reporting
In 2017, the Group changed its reportable segments to Motor and Home to reflect its contribution approach. In 2016, the Group's reportable segments were: Motor underwriting; Home underwriting; Non-underwritten additional services; Investments; and prior to the demerger of Gocompare.com, Price Comparison.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended Year ended
31 Dec 31 Dec
2017 2016
Note GBPm GBPm
Gross written premiums 820.2 655.0
=========== ===========
Gross earned premiums 734.0 598.0
Earned premiums, ceded to
reinsurers (56.2) (43.1)
----------- -----------
Earned premiums, net of reinsurance 677.8 554.9
Investment income and instalment
interest 61.5 55.7
Other income 5 42.0 36.9
----------- -----------
Total income 781.3 647.5
----------- -----------
Claims incurred and claims
handling expenses (592.5) (509.5)
Claims incurred recoverable
from reinsurers 77.8 74.4
----------- -----------
Claims incurred, net of reinsurance (514.7) (435.1)
Insurance expenses 6 (140.5) (113.3)
Other operating expenses 6 (18.8) (17.7)
----------- -----------
Total expenses (674.0) (566.1)
Finance costs (8.7) (8.7)
----------- -----------
Profit before tax 98.6 72.7
Taxation expense (18.2) (13.2)
----------- -----------
Profit from continuing operations,
net of tax 80.4 59.5
Profit from discontinued operations,
net of tax - 209.7
----------- -----------
Profit attributable to the
owners of the parent 80.4 269.2
----------- -----------
Other comprehensive income
Items that will not be reclassified
to profit or loss:
Revaluation of land and buildings 0.8 0.3
Tax relating to items that
will not be reclassified. 0.0 0.0
----------- -----------
0.8 0.3
Items that are or may be reclassified
to profit or loss:
Available-for-sale financial
assets - change in fair value 1.5 1.9
Tax relating to items that
are reclassified (0.1) (0.3)
----------- -----------
1.4 1.6
----------- -----------
Total comprehensive income
for the year attributable
to owners of the parent 82.6 271.1
----------- -----------
Earnings per share (pence
per share)
- ordinary shares, basic 8 19.2 64.6
- ordinary shares, diluted 8 19.0 64.3
Earnings per share from continuing
operations (pence per share)
- ordinary shares, basic 8 19.2 14.3
- ordinary shares, diluted 8 19.0 14.2
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at As at
31 Dec 2017 31 Dec 2016
Note GBPm GBPm
Assets
Goodwill and intangible
assets 10 16.6 12.7
Deferred acquisition
costs 44.9 37.8
Property, plant and
equipment 29.3 32.5
Financial investments 11 929.3 839.0
Reinsurance assets 12 370.2 291.7
Insurance and other
receivables 307.0 245.6
Cash and cash equivalents 46.6 25.5
------------- -------------
Total assets 1,743.9 1,484.8
------------- -------------
Equity and liabilities
Share capital 0.3 0.3
Share premium account 45.8 45.4
Capital redemption
reserve 44.9 44.9
Other reserves 5.1 2.9
Retained earnings 201.9 178.0
------------- -------------
Total equity 298.0 271.5
------------- -------------
Liabilities
Insurance contract
liabilities 12 1,214.5 1,002.3
Borrowings 11 123.1 122.8
Insurance and other
payables 96.7 77.3
Deferred tax liabilities 0.9 3.2
Derivative financial
liabilities 11 0.2 1.6
Current tax liabilities 10.5 6.1
------------- -------------
Total liabilities 1,445.9 1,213.3
------------- -------------
Total equity and liabilities 1,743.9 1,484.8
------------- -------------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Attributable to owners of the
parent
--------------- ----- --------- ---------------------------------------------------------------------
Year ended Share Share Capital Other Retained Total
31 December capital premium redemption reserves earnings equity
2017 reserve
---------------
Note GBPm GBPm GBPm GBPm GBPm GBPm
--------------- ----- --------- ----------- ----------- ------------------- ---------- ----------
At 1 January
2017 0.3 45.4 44.9 2.9 178.0 271.5
Profit for
the year - - - - 80.4 80.4
Other
comprehensive
income - - - 2.2 - 2.2
---------
Total
comprehensive
income for
the year - - - 2.2 80.4 82.6
Transactions
with owners:
Issue of share
capital 0.0 0.4 - - - 0.4
Share-based
payments - - - - 3.5 3.5
Deferred tax
on
share-based
payments - - - - 1.0 1.0
Dividends 7 - - - - (61.0) (61.0)
--------- ----------- ----------- ------------------- ---------- ----------
Total
transactions
with owners 0.0 0.4 - - (56.5) (56.1)
--------- ----------- ----------- ------------------- ---------- ----------
At 31 December
2017 0.3 45.8 44.9 5.1 201.9 298.0
========= =========== =========== =================== ========== ==========
Attributable to owners of the
parent
--------------- ----- --------- -------------------------------------------------------------------
Year ended Share Share Capital Available-for-sale Retained Total
31 December capital premium redemption reserve earnings equity
2016 account reserve
---------------
Note GBPm GBPm GBPm GBPm GBPm GBPm
--------------- ----- --------- ----------- ----------- ------------------- ---------- --------
At 1 January
2016 0.3 44.0 44.9 1.0 251.1 341.3
Profit for
the year - - - - 269.2 269.2
Other
comprehensive
income - - - 1.9 - 1.9
---------
Total
comprehensive
income for
the year - - - 1.9 269.2 271.1
Transactions
with owners:
Issue of share
capital 0.0 1.4 - - - 1.4
Share-based
payments - - - - 2.4 2.4
Deferred tax
on
share-based
payments - - - - (0.0) (0.0)
Demerger of
Gocompare.com - - - - (301.8) (301.8)
Dividends 7 - - - - (42.9) (42.9)
--------- ----------- ----------- ------------------- ---------- --------
Total
transactions
with owners 0.0 1.4 - - (342.3) (340.9)
--------- ----------- ----------- ------------------- ---------- --------
At 31 December
2016 0.3 45.4 44.9 2.9 178.0 271.5
--------- ----------- ----------- ------------------- ---------- --------
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Year
ended ended
31 Dec 31 Dec
2017 2016
Cash flows from operating activities Note GBPm GBPm
Profit after tax for the year 80.4 269.2
Adjustments to reconcile profit
after tax to net cash flows:
- Finance costs 8.7 8.7
- Depreciation and revaluation
of property, plant and equipment 4.8 3.8
- Amortisation of intangible
assets 10 4.6 15.2
- Share based payments 3.5 2.4
- Non-cash gain on demerger of
Gocompare.com - (213.6)
- Taxation expense 18.2 16.0
- Total investment return (13.0) (20.7)
- Instalment interest (48.5) (37.7)
- Loss on the sale of property,
plant and equipment 0.2 0.5
-------- --------
Operating cash flows before movements
in working capital, tax and interest
paid 58.9 43.8
Sales of financial investments 707.4 358.1
Purchases of financial investments (792.7) (465.2)
Interest, rent and dividends
received less investment management
expenses on financial investments 7.9 15.9
Instalment interest received 53.3 41.6
Changes in working capital:
- Increase in insurance liabilities
including reinsurance assets,
unearned premium reserves and
deferred acquisition costs 126.6 36.5
* Increase in insurance and other receivables (61.9) (49.3)
* Increase in trade and other payables including
insurance payables 15.3 31.8
Taxation paid (15.3) (17.0)
-------- --------
Net cash generated / (used) in
operating activities 99.5 (3.8)
-------- --------
Cash flows from investing activities
Purchase of property, plant and
equipment and software (9.4) (8.3)
Net cash outflow from the demerger
of Gocompare.com - (17.4)
-------- --------
Net cash used in investing activities (9.4) (25.7)
-------- --------
Cash flows from financing activities
Proceeds on issue of Ordinary
Shares 0.4 1.3
Interest paid on loans (8.4) (8.4)
Gocompare.com debt raise - 73.1
Dividends paid 7 (61.0) (42.9)
-------- --------
Net cash (used in) / generated
from financing activities (69.0) 23.1
-------- --------
Net increase / (decrease) in
cash and cash equivalents 21.1 (6.4)
-------- --------
Cash and cash equivalents at
the beginning of the year 25.5 31.9
-------- --------
Cash and cash equivalents at
the end of the year 46.6 25.5
-------- --------
NOTES TO THE FINANCIAL STATEMENTS
1. General information
esure Group plc is a Company incorporated in England and Wales. Its registered office is The Observatory, Reigate, Surrey RH2 0SG.
The nature of the Group's operations is the writing of general insurance for private cars and homes. The Company's principal activity is that of a holding company.
All of the Company's subsidiaries are located in the United Kingdom, except for esure S.L.U., which is incorporated in Spain.
2. Accounting policies
Basis of preparation
These financial statements present the esure Group plc group financial statements for the year ended 31 December 2017, comprising the consolidated statement of comprehensive income, consolidated statement of financial position, consolidated statement of changes in equity, consolidated statement of cash flows and related notes, as well as the comparatives.
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union.
At a General Meeting on 1 November 2016, the Company's shareholders approved the demerger of Gocompare.com plc and on 3 November 2016 the demerger was completed.
Under IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations the results and the cash flows of the Gocompare.com business are, in line with the prior year financial statements, presented as discontinued operations.
These consolidated financial statements have been prepared on a going concern basis. As detailed in the Strategic Report (2017 Annual Report), the Directors have assessed the Group's prospects and viability for the three year period to 31 December 2020. Based on this robust assessment, the Directors confirm that they have a reasonable expectation that the Group has adequate resources to continue in operational existence for at least the next 12 months.
These consolidated financial statements have been presented in Sterling and rounded to the nearest hundred thousand. Throughout these consolidated financial statements any amounts which are less than GBP0.05m are shown by 0.0, whereas a dash (-) represents that no balance exists.
The consolidated financial statements have been prepared on the historical cost basis except for certain financial assets and land and buildings that are measured at fair value at the reporting date. The principal accounting policies adopted are set out below.
New and amended accounting standards adopted with no significant impact on the Group
The Group has applied the following standards and amendments for the first time for its annual reporting period commencing 1 January 2016:
-- Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12) -- Disclosure Initiative (Amendments to IAS 7) -- Annual Improvements to IFRS Standards 2014-2016 Cycle - Amendments to IFRS 12
The adoption of these amendments did not have any impact on the current or prior periods.
New and amended accounting standards that have been issued but are not yet effective
The following standards have been issued and are effective for accounting periods ending on or after 31 December 2017 and are expected to have an impact on the Group financial statements.
IFRS 9 Financial Instruments
As an insurance Group, the Group is expecting to take the option to defer the effective date of the new standard to 1 January 2021, in line with IFRS 17. The standard includes requirements for recognition and measurement, impairment, derecognition of financial instruments and general hedge accounting. The Group's current analysis is that this will not have a material impact on our results.
IFRS 15 Revenue from Contracts with Customers
The new standard is effective for periods beginning on or after 1 January 2018. The standard specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The standard provides a single, principles based five-step model to be applied to all contracts with customers. The Group has evaluated the impact of the new standard and believe that this will not have a material impact on our results.
IFRS 16 Leases
The new standard is effective for periods beginning on or after 1 January 2019. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. This is in contrast to the current standard which differentiates between operating and finance leases. The Group has evaluated the impact of the new standard and believe that this will increase both fixed assets and leasing liabilities but will not have a material impact on our income statement.
IFRS 17 Insurance Contracts
The new standard is effective for periods beginning on or after 1 January 2021. The standard establishes principles for the recognition, measurement, presentation and disclosure of insurance and reinsurance contracts. The Group is currently evaluating the impact of the standard on our results.
Basis of consolidation
Subsidiaries are entities over which the Group has control. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiary companies are consolidated using the acquisition method.
Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtained control, and continue to be consolidated until the date when such control ceases.
In preparing these consolidated financial statements, any intra-group balances, unrealised gains and losses or income and expenses arising from intra-group trading are eliminated. Where accounting policies used in individual financial statements of a subsidiary company differ from Group policies, adjustments are made to bring these policies in line with Group policies.
3. Critical accounting judgements and estimates
The preparation of these consolidated financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates; however the consolidated financial statements presented are based on conditions that existed at the balance sheet date.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
Key sources of estimation uncertainty and critical judgements in applying the Group's accounting policies
Insurance contract liabilities
Estimates have to be made both for the expected ultimate cost of claims reported at the reporting date and for the expected ultimate cost of claims incurred but not reported ("IBNR") at the reporting date. It can take a significant period of time before ultimate claims cost can be established with certainty for some types of claims.
The ultimate cost of outstanding claims is estimated by carrying out standard actuarial projections in line with the Institute and Faculty of Actuaries Technical Actuarial Standards. These techniques use past claims information and development patterns of these claims to project the expected future claims cost both for notified and non-notified claims.
Similar judgements, estimates and assumptions are employed in the assessment of adequacy of provisions for unearned premium and hence whether there is a requirement for an unexpired risk provision.
4. Segmental information
Differences to the Group's 2016 annual report and accounts in the basis of segmentation
The Group makes decisions on customer acquisition and retention based on contribution. In addition to the underwriting contribution from Motor and Home, a diversified suite of additional insurance products and services provide opportunities to deliver enhanced customer contribution.
In order to facilitate the management of the Group and post the demerger of Gocompare.com the reporting to the Board of Directors has changed and the reportable segments under IFRS 8 Operating Segments reflect this change. The 2016 segments have been restated to reflect the new segmental reporting.
Operating segments
The Group has two operating segments as described below. These segments are also the Group's reportable segments and represent the manner in which the business is regularly reported to the Group's executive and Board of Directors.
Motor
This segment incorporates the revenues and expenses directly attributable to the Group's Motor insurance underwriting activities inclusive of additional insurance products underwritten by the Group and related non-underwritten additional services. Investment income is allocated to the segment on the basis of premium income.
Home
This segment incorporates the revenues and expenses directly attributable to the Group's Home insurance underwriting activities and related non-underwritten additional services. Investment income is allocated to the segment on the basis of premium income.
Segmental revenues, expenses and other information
An analysis of the Group's results by reportable segment is shown below:
Year ended
31 December 2017 Motor Home Total
GBPm GBPm GBPm
Gross written premiums 734.3 85.9 820.2
----------------------------- -------- ------- --------
Earned premiums, net of
reinsurance 596.3 81.5 677.8
Investment income 12.0 1.0 13.0
Instalment interest income 43.3 5.2 48.5
Other income 36.3 5.7 42.0
----------------------------- -------- ------- --------
Total income 687.9 93.4 781.3
Net incurred claims (436.5) (53.5) (490.0)
Claims handling costs (21.5) (3.2) (24.7)
Insurance expenses (113.4) (27.1) (140.5)
Other operating expenses (13.8) (1.0) (14.8)
----------------------------- -------- ------- --------
Total expenses (585.2) (84.8) (670.0)
----------------------------- -------- ------- --------
Trading profit 102.7 8.6 111.3
----------------------------- -------- ------- --------
Non-trading costs (1.8)
Amortisation of acquired
intangibles (2.2)
Finance costs (8.7)
--------
Profit before taxation
from continuing operations 98.6
Tax expense (18.2)
--------
Profit after taxation
from continuing operations 80.4
========
Net expense ratio 22.6% 37.2% 24.4%
Net loss ratio 73.2% 65.6% 72.3%
-------- ------- --------
Combined operating ratio 95.8% 102.8% 96.7%
The average number of in-force policies during the year ended 31 December 2017 was 2.28m.
Year ended
31 December 2016 (restated) Motor Home Total
GBPm GBPm GBPm
Gross written premiums 563.7 91.3 655.0
------------------------------ -------- ------- --------
Earned premiums, net of
reinsurance 470.6 84.3 554.9
Investment income 16.1 2.0 18.1
Instalment interest income 32.6 5.0 37.6
Other income 31.5 5.4 36.9
------------------------------ -------- ------- --------
Total income 550.8 96.7 647.5
Net incurred claims (356.4) (55.6) (412.0)
Claims handling costs (19.5) (3.6) (23.1)
Insurance expenses (85.8) (27.5) (113.3)
Other operating expenses (13.4) (1.1) (14.5)
------------------------------ -------- ------- --------
Total expenses (475.1) (87.8) (562.9)
------------------------------ -------- ------- --------
Trading profit 75.7 8.9 84.6
------------------------------ -------- ------- --------
Non-trading costs (0.9)
Amortisation of acquired
intangibles (2.3)
Finance costs (8.7)
--------
Profit before taxation
from continuing operations 72.7
Tax expense (13.2)
--------
Profit after taxation
from continuing operations 59.5
========
Net expense ratio 22.4% 36.9% 24.6%
Net loss ratio 75.7% 66.0% 74.2%
-------- ------- --------
Combined operating ratio 98.1% 102.9% 98.8%
The average number of in-force policies during the year ended 31 December 2016 was 2.08m.
There are no other material components of income and expense or non-cash items.
Trading profit from continuing operations, being earnings before interest, tax, non-trading expenses and amortisation of acquired intangible assets, is management's measure of the overall profitability of the Group's operating activities. The Group's segmental trading profit, comprising of Motor and Home is GBP111.3m (2016: GBP84.6m).
The Group's profit in respect of continuing operations after tax is GBP80.4m (2016: GBP59.5m).
The Group incurred non-trading costs of GBP1.8m in 2017 of which GBP1.7m related to share-based payments in respect one-off awards. The Group incurred non-trading costs of GBP0.9m in 2016 of which GBP0.4m related to share-based payments in respect of the long service and one-off awards and GBP0.2m related to stamp duty and legal fees in respect of a new lease.
In 2016 the Group generated a trading profit of GBP24.5m on its discontinued operation (Gocompare.com) prior to the demerger on 3 November 2016.
Segmental profit drivers
Motor
Trading profit is 35.7% higher at GBP102.7m (2016: GBP75.7m). The underwriting performance of GBP24.9m (2016: GBP8.9m) reflects an improvement in the Group's current accident year loss ratio in the year as higher pricing earned through ahead of claims inflation. Instalment and other income net of other operating expenses increased 29.8% to GBP65.8m (2016: GBP50.7m) largely due to an increase in in-force policies.
The combined operating ratio improved by 2.3ppts to 95.8% (2016: 98.1%) and this was largely driven by an improvement in the loss ratio of 2.5ppts to 73.2% (2016: 75.7%), with the expense ratio broadly stable at 22.6% (2016: 22.4%).
Home
Trading profit is marginally lower at GBP8.6m (2016: GBP8.9m). The Group's underwriting loss of GBP2.3m was similar to 2016 (loss of GBP2.4m), albeit 2017 has benefited from weather event costs that were lower than normal. Instalment and other income net of other operating expenses increased 6.5% to GBP9.9m (2016: GBP9.3m) aided by an improvement in non-underwritten additional insurance products.
The combined operating ratio was stable year-on-year at 102.8% (2016: 102.9%).
Statement of financial position
The assets and liabilities of the Group are reported on an aggregated consolidated basis. They are not allocated to reportable segments and are reported on the same basis as disclosed in the consolidated statement of financial position on page 16.
5. Other income
Year Year
ended ended
31 Dec 31 Dec
2017 2016
------------------------------ -------- --------
GBPm GBPm
------------------------------ -------- --------
Continuing operations
------------------------------ -------- --------
Fees for additional services 42.0 36.9
------------------------------ -------- --------
Total other income 42.0 36.9
------------------------------ -------- --------
6. Insurance and other operating expenses
Year Year
ended ended
31 Dec 31 Dec
2017 2016
-------------------------------------- -------- --------
GBPm GBPm
-------------------------------------- -------- --------
Continuing operations
-------------------------------------- -------- --------
Acquisition of insurance contracts 88.7 75.4
-------------------------------------- -------- --------
Change in deferred acquisition costs (7.1) (12.5)
-------------------------------------- -------- --------
Administration 58.9 50.4
-------------------------------------- -------- --------
Insurance expenses 140.5 113.3
-------------------------------------- -------- --------
Other operating expenses 18.8 17.7
-------------------------------------- -------- --------
During the year ended 31 December 2017, a reclassification of GBP0.1m is included within other operating expenses in relation to a revaluation of the Group's land and buildings (2016: GBP0.1m charge).
7. Dividends
A 2017 interim dividend per share of 4.1p (GBP17.1m) was declared by the Board of Directors in August 2017 (2016: interim dividend per share of 3.0p, GBP12.5m). Subsequent to the year end, a 2017 final dividend per share of 9.4p (GBP39.2m) was declared by the Board of Directors (2016: final dividend per share of 10.5p, GBP43.9m).
8. Earnings per share
Basic
Basic earnings per share is calculated by dividing the earnings attributable to the owners of the Group and the weighted average of Ordinary Shares in issue during the period, excluding Ordinary Shares held as employee trust shares. A calculation is also shown based on the earnings from continuing operations attributable to the owners of the Group.
Diluted
Diluted earnings per share is calculated by dividing the earnings attributable to the owners of the Group by the weighted average of Ordinary Shares in issue during the period adjusted for any dilutive potential Ordinary Shares. A calculation is also shown based on the earnings from continuing operations attributable to the owners of the Group.
The difference between the basic and diluted weighted average number of shares outstanding during the year, being 5,586,240 (2016: 2,009,742), relates to the dilutive potential of the share-based payment arrangements.
Basic and diluted earnings per Ordinary Share
Year ended Year ended
31 Dec 31 Dec
2017 2016
Profit after taxation (GBPm) 80.4 269.2
Weighted average number of Ordinary
shares (million) - basic 418.0 416.6
Earnings per share - basic (pence
per share) 19.2 64.6
Weighted average number of Ordinary
shares (million) - diluted 423.6 418.6
Earnings per share - diluted (pence
per share) 19.0 64.3
=========== ===========
Continuing operations earnings per share
Year ended Year ended
31 Dec 31 Dec
2017 2016
Profit from continuing operations,
net of tax (GBPm) 80.4 59.5
Weighted average number of Ordinary
shares (million) - basic 418.0 416.6
Earnings per share from continuing
operations - basic (pence per
share) 19.2 14.3
Weighted average number of Ordinary
shares (million) - diluted 423.6 418.6
Earnings per share from continuing
operations - diluted (pence per
share) 19.0 14.2
=========== ===========
Discontinued operations earnings per share
Year ended Year ended
31 Dec 31 Dec
2017 2016
Profit from discontinued operations,
net of tax (GBPm) - 209.7
Weighted average number of Ordinary
shares (million) - basic 418.0 416.6
Earnings per share from discontinued
operations - basic (pence per
share) - 50.3
Weighted average number of Ordinary
shares (million) - diluted 423.6 418.6
Earnings per share from discontinued
operations - diluted (pence per
share) - 50.1
=========== ===========
9. Taxation
The tax rate used for the calculations is the Corporation Tax rate of 19.25% (2016: 20.00%) payable by the corporate entities in the UK on taxable profits under tax law in that jurisdiction.
10. Goodwill and intangible assets
Acquired Customer
Goodwill Software brands relationships Total
GBPm GBPm GBPm GBPm GBPm
Cost
As at 1 January
2016 127.7 10.5 65.1 21.5 224.8
Additions in
the year - 5.2 - - 5.2
Disposals in
the year - (0.2) - - (0.2)
Demerger of Gocompare.com (127.7) (1.7) (40.9) (10.2) (180.5)
As at 31 December
2016 - 13.8 24.2 11.3 49.3
--------- --------- --------- --------------- --------
Additions in
the year - 8.7 - - 8.7
Disposals in
the year - (0.7) - - (0.7)
As at 31 December
2017 - 21.8 24.2 11.3 57.3
--------- --------- --------- --------------- --------
Accumulated amortisation
and impairment
As at 1 January
2016 - 4.7 23.5 15.1 43.3
Amortisation
for the year - 2.3 9.0 4.3 15.6
Disposals in
the year - (0.2) - - (0.2)
Demerger of Gocompare.com - (1.1) (12.9) (8.1) (22.1)
As at 31 December
2016 - 5.7 19.6 11.3 36.6
--------- --------- --------- --------------- --------
Amortisation
for the year - 2.4 2.2 - 4.6
Disposals in
the year - (0.5) - - (0.5)
As at 31 December
2017 - 7.6 21.8 11.3 40.7
--------- --------- --------- --------------- --------
Net book value
--------- --------- --------- --------------- --------
As at 31 December
2016 - 8.1 4.6 - 12.7
--------- --------- --------- --------------- --------
As at 31 December
2017 - 14.2 2.4 - 16.6
--------- --------- --------- --------------- --------
Goodwill of GBP127.7m as at 1 January 2016 relates to goodwill arising on the acquisition of Gocompare.com by the Group.
Included in acquired brands and customer relationships are the Gocompare.com brand and the Gocompare.com customer relationships recognised on application of IFRS 3 to the acquisition of the outstanding 50% of the ordinary share capital of Gocompare.com on 31 March 2015.
11. Financial assets and liabilities
11.1 Financial assets
As at As at
31 Dec 31 Dec
2017 2016
GBPm GBPm
Financial investments designated at
fair value through profit or loss:
Shares and other variable-yield securities
and units in unit trusts 49.8 39.3
Debt securities and other fixed income
securities 160.2 394.5
Deposits with credit institutions 372.1 209.3
Financial investments held for trading:
Derivative financial instruments 1.1 0.1
------- -------
Financial investments at fair value
through profit or loss 583.2 643.2
AFS financial assets:
Debt securities and other fixed income
securities 342.0 192.6
Shares in unquoted equity investments 4.1 3.2
------- -------
Total financial investments 929.3 839.0
Loans and receivables:
Insurance and other receivables 252.3 198.2
Cash and cash equivalents 46.6 25.5
Total financial assets 1,228.2 1,062.7
======= =======
As at As at
31 Dec 31 Dec
2017 2016
GBPm GBPm
Derivative financial instruments 1.1 0.1
Debt securities 502.2 587.1
Deposits with credit institutions 372.1 209.3
Cash and cash equivalents 46.6 25.5
Investments bearing credit risk and
cash and cash equivalents 922.0 822.0
AAA 427.7 300.9
AA 194.5 204.8
A 195.8 155.5
BBB 100.4 94.0
Below BBB or not rated 3.6 66.8
Investments bearing credit risk and
cash and cash equivalents 922.0 822.0
------- -------
Shares and other variable yield securities and units in unit trusts do not bear credit risk. Cash and cash equivalents are "A" rated
Available for sale financial assets
During 2017, the Group continued to refine and enhance its asset and liability matching for capital management purposes by designating some financial assets acquired during the year as available for sale. Any movements in fair value of these assets is accounted for in other comprehensive income, reducing volatility in the income statement. These assets continue to have a longer average duration of 4.1 years (2016: 2.6 years) which leads to an increased sensitivity to interest rate changes but are closely aligned to the Group's liability exposure.
Infrastructure equity and direct lending
As a result of the Group's strategic asset allocation review in 2017, capital commitments to new asset classes are recognised within its surplus liquidity funds at year end, ahead of these commitments being invested in 2018.
The Surplus portfolio seeks to deliver returns in asset classes that are aligned with the Group's risk appetite, in particular with reference to its solvency capital requirements. The Group's strategic asset allocation review was finalised in 2017. This resulted in a divestment from its high yield fixed income assets and a subsequent commitment to infrastructure equity and direct lending. Commitments are expected to be invested during 2018.
11.2 Financial liabilities
As at As at
31 Dec 31 Dec
2017 2016
GBPm GBPm
Financial liabilities held for trading:
Derivative financial instruments 0.2 1.6
Other financial liabilities:
Borrowings: 10 year Subordinated
Notes 123.1 122.8
Insurance and other payables 26.0 17.1
Total financial liabilities 149.3 141.5
The GBP125m 10 year Subordinated Notes were issued by esure Group plc on 19 December 2014 at the rate of 6.75% per annum, with payments made biannually.
The nominal GBP125m Subordinated Notes have a maturity date of 19 December 2024. The Notes are direct, unsecured and subordinated obligations of the Group, ranking pari passu and without preference amongst themselves, and will, in the event of the winding-up of the Group or in the event of an administrator of the Group being appointed and giving notice that it intends to declare and distribute a dividend, be subordinated to the claims of all Senior Creditors and policy holders of the Group.
11.3 Capital management and regulation
The Group maintains a capital structure consistent with the Group's risk profile and the regulatory market requirements of its business. The Group's objectives in managing its capital are:
- to match the profile of its assets and liabilities, taking account of the risk inherent in the business;
- to satisfy the requirements of its policyholders and regulators; - to maintain financial and capital strength to support growth; and
- to retain financial flexibility by maintaining strong liquidity and access to a range of capital markets.
Solvency II is the solvency framework implemented on 1 January 2016 as the capital adequacy regime for the European insurance industry. It established a set of EU-wide capital requirements and risk management standards with the aim of increasing protection for policyholders. The Group is regulated by the Prudential Regulation Authority ("PRA") on both a Group basis and, for the Group's principal underwriter, esure Insurance Limited, on a solo basis.
The esure Board has considered the risk appetite of the Group as part of the Own Risk and Solvency Assessment process under Solvency II. The esure Board believe an appropriate level of capital coverage of its Solvency Capital Requirement ("SCR") to be in the region of 130-150%. The capital surplus above the SCR provides sufficient headroom to absorb adverse capital events and should enable the Group to continue to meet its regulatory capital requirements. As expected the Group has operated in the middle to upper end of the range, providing flexibility to fund further profitable growth.
The Group's dividend policy is to target a base dividend of 50% of profit after tax and enhance the base dividend with a further special dividend, if the Group has sufficient capital and distributable reserves, after allowing for an appropriate level of capital coverage of the Group's SCR and future growth opportunities. The Board remains committed to returning excess capital to shareholders where it does not believe it can utilise retained capital for further profitable growth.
Refer to page 12 for further information about the Group's draft and unaudited 31 December 2017 Solvency II capital position.
11.4 Fair value estimation
In accordance with IFRS 13 Fair Value Measurement financial instruments reports at fair value and revalued properties have been categorised into a fair value measurement hierarchy as follows:
Quoted prices (unadjusted) in active markets for identical assets or liabilities - (Level 1)
Inputs to Level 1 fair values are quoted prices (unadjusted) in active markets for identical assets. An active market is a market in which transactions for the asset occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) - (Level 2)
Fair value measurements that are derived from inputs other than quoted prices included in Level 1, if all significant inputs required to fair value an instrument are observable, would result in the instrument being included in Level 2. The majority of assets classified as Level 2 are over-the-counter corporate bonds, where trades are less frequent owing to the nature of the assets. Inputs used in pricing the Group's level 2 assets include:
-- quoted prices for similar (i.e. not identical) assets in active markets;
-- quoted prices for identical or similar assets in markets that are not active, the prices are not current, or price quotations vary among market makers, or in which little information is released publicly;
-- inputs that are derived principally from, or corroborated by, observable market data by correlation; and
-- for forward exchange contracts, the use of observable forward exchange rates at the balance sheet date, with the resulting value discounted back to present value.
The Group's policy, should there be a change to the valuation techniques or level of activity in the market in which that asset is traded, is to transfer the asset between levels effective from the beginning of the reporting period. In line with the requirements of IFRS 13 Fair Value Measurement, the Group classifies all debt securities as Level 2 assets with the exception of Government backed securities which are classified as Level 1 unless they are illiquid.
Following a review the liquidity funds held by the Group have been reclassified from Level 2 to Level 1 in both the current year and the comparatives.
Inputs for the asset or liability that are not based on observable market data (unobservable inputs) - (Level 3)
Unobservable inputs have been used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset at the measurement date (or market information for the inputs to any valuation models). As such, unobservable inputs reflect assumptions about the inputs that market participants would use in pricing the asset.
If one or more of the significant inputs is not based on observable market data, the instrument is included in Level 3. The Group held Level 3 AFS financial assets of GBP4.1m as at 31 December 2017 (2016: GBP3.2m), representing an investment in an unquoted equity investment which has been valued using a discounted cash flow valuation model.
Under IFRS 13, land and buildings with a carrying value of GBP13.6m (2016: GBP12.9m) are classified as Level 3 assets. Owner-occupied properties are stated at their revalued amounts, as assessed by qualified external valuers annually, all with recent relevant experience. These values are assessed in accordance with the relevant parts of the current RICS Valuation Standards in the UK ("Red Book"). The valuer's opinion of fair value was primarily derived using comparable recent market transactions on arm's length terms. No sensitivity analysis has been performed due to the nature of the valuation.
The following table presents the Group's financial assets and liabilities measured at fair value:
At 31 December 2017 Total fair
Level 1 Level 2 Level 3 value
GBPm GBPm GBPm GBPm
Financial assets
Assets at FVTPL:
Derivative financial
instruments - 1.1 - 1.1
Equity securities 49.8 - - 49.8
Debt securities 63.2 97.0 - 160.2
Deposits with credit
institutions 372.1 - - 372.1
Total financial assets
at FVTPL 485.1 98.1 - 583.2
========= ========= ========= ==========
AFS financial assets:
Debt securities 141.3 200.7 - 342.0
Unquoted equity securities - - 4.1 4.1
--------- --------- --------- ----------
Total AFS financial
assets 141.3 200.7 4.1 346.1
========= ========= ========= ==========
Land and buildings - - 13.6 13.6
--------- --------- --------- ----------
Financial liabilities
Derivative financial
instruments - 0.2 - 0.2
--------- --------- --------- ----------
Total financial liabilities
at FVTPL - 0.2 - 0.2
========= ========= ========= ==========
Total fair
At 31 December 2016 Level 1 Level 2 Level 3 value
GBPm GBPm GBPm GBPm
Financial assets
Assets at FVTPL:
Derivative financial
instruments - 0.1 - 0.1
Equity securities 39.3 - - 39.3
Debt securities 106.9 287.6 - 394.5
Deposits with credit
institutions 209.3 - - 209.3
--------- --------- --------- ----------
Total financial assets
at fair value 355.5 287.7 - 643.2
========= ========= ========= ==========
AFS financial assets:
Debt securities 107.1 85.5 - 192.6
Unquoted equity securities - - 3.2 3.2
--------- --------- --------- ----------
107.1 85.5 3.2 195.8
========= ========= ========= ==========
Land and buildings
--------- --------- --------- ----------
- - 12.9 12.9
Financial liabilities
Derivative financial
instruments - 1.6 - 1.6
--------- --------- --------- ----------
Total financial liabilities
at fair value - 1.6 - 1.6
========= ========= ========= ==========
12. Reinsurance assets and insurance contract liabilities
12.1 Analysis of recognised amounts
As at As at
31 Dec 2017 31 Dec 2016
GBPm GBPm
Gross
Claims outstanding (before deduction
of salvage
and subrogation recoveries) and
claims handling expenses 798.9 672.9
Unearned premiums 415.6 329.4
Total insurance liabilities,
gross 1,214.5 1,002.3
------------- -------------
Recoverable from reinsurers
Claims outstanding 336.8 271.1
Unearned premiums 33.4 20.6
------------- -------------
Total reinsurers' share of insurance
liabilities 370.2 291.7
------------- -------------
Net
Claims outstanding (before deduction
of salvage and subrogation recoveries)
and claims handling expenses 462.1 401.8
Unearned premiums 382.2 308.8
Total insurance liabilities,
net 844.3 710.6
============= =============
Due within one year (gross) 590.8 546.4
Due in more than one year (gross) 623.7 455.9
Reinsurance Assets As at As at
31 Dec 2017 31 Dec 2016
GBPm GBPm
Reinsurers' share of insurance
liabilities 370.2 291.7
Total assets arising from reinsurance
contracts 370.2 291.7
------------- -------------
Expected to be recovered within
one year 67.1 39.0
Expected to be recovered in more
than one year 303.1 252.7
Amounts due from reinsurers in respect of claims already paid by the Group on the contracts that are reinsured are included in insurance and other receivables. No reinsurance assets have been impaired.
(a) Insurance claims - gross ultimate claims
Accident 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total
year
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Ultimate
gross
earned
premium 447.1 544.3 479.1 488.7 511.7 526.1 528.7 532.4 598.0 734.0 5,390.1
Estimate of ultimate
gross claims costs:
- At end of
reporting
year 399.1 540.2 475.3 392.7 442.0 439.5 456.1 457.2 534.6 640.4
- One year
later 398.2 535.3 416.8 355.7 399.8 386.9 442.4 446.1 481.5
- Two years
later 407.5 536.6 399.0 331.5 369.2 374.6 440.2 425.4
- Three
years
later 399.9 549.8 380.6 309.7 355.9 368.9 439.4
- Four
years
later 382.9 534.0 371.8 304.9 347.6 363.0
- Five
years
later 381.3 534.1 369.9 294.4 354.1
- Six years
later 379.7 523.8 369.3 292.6
- Seven
years
later 372.4 523.4 369.3
- Eight
years
later 370.8 520.8
- Nine
years
later 375.5
Current
estimate
of
cumulative
claims 375.5 520.8 369.3 292.6 354.1 363.0 439.4 425.4 481.5 640.4 4,262.0
Cumulative
payments
to date (365.3) (511.7) (368.3) (291.5) (331.2) (330.0) (362.1) (343.2) (355.2) (291.3) (3,549.8)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
Liability recognised
in the consolidated
statement of
financial position 712.2
Reserve in respect of
prior periods 27.4
Provision for claims
handling costs 11.6
Salvage and
subrogation 47.7
----------
Total reserve
included in the
consolidated
statement of
financial position 798.9
----------
(b) Insurance claims - net ultimate claims
Accident 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total
year
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Ultimate
gross
earned
premium 424.1 514.9 452.1 459.7 480.2 489.2 490.8 495.6 554.9 677.8 5,039.3
Estimate of ultimate
gross claims costs:
- At end of
reporting
year 374.5 510.3 446.8 360.1 401.0 404.7 423.8 423.1 450.8 516.8
- One year
later 373.8 495.0 392.5 317.3 356.7 357.9 394.8 396.3 435.2
- Two years
later 372.0 495.0 374.6 296.4 331.9 345.9 391.4 389.8
- Three
years
later 371.7 495.1 363.9 285.0 326.3 340.4 390.0
- Four
years
later 367.6 494.5 360.9 284.5 325.6 339.8
- Five
years
later 366.3 492.7 358.6 281.8 324.8
- Six years
later 364.7 489.5 358.6 281.6
- Seven
years
later 362.1 489.4 358.3
- Eight
years
later 361.0 489.2
- Nine
years
later 362.0
Current
estimate
of
cumulative
claims 362.0 489.2 358.3 281.6 324.8 339.8 390.0 389.8 435.2 516.8 3,887.5
Cumulative
payments
to date (360.9) (487.2) (357.2) (280.9) (321.9) (329.3) (360.1) (343.2) (355.0) (290.9) (3,486.6)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
Liability recognised
in the consolidated
statement of
financial position 400.9
Reserve in respect of
prior periods 1.9
Provision for claims
handling costs 11.6
Salvage and
subrogation 47.7
----------
Total net reserve
included in the
consolidated
statement of
financial position 462.1
----------
(c) Insurance claims - net loss ratio development
Accident year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 ---------------------------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Estimate of ultimate loss ratio: ---------------------------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- - At end of reporting year 88% 99% 99% 78% 84% 83% 86% 85% 81% 76% ---------------------------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- - One year later 88% 96% 87% 69% 74% 73% 80% 80% 78% ---------------------------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- - Two years later 88% 96% 83% 64% 69% 71% 80% 79% ---------------------------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- - Three years later 88% 96% 80% 62% 68% 70% 79% ---------------------------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- - Four years later 87% 96% 80% 62% 68% 69% ---------------------------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- - Five years later 86% 96% 79% 61% 68% ---------------------------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- - Six years later 86% 95% 79% 61% ---------------------------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- - Seven years later 85% 95% 79% ---------------------------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- - Eight years later 85% 95% ---------------------------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- - Nine years later 85% ---------------------------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
12.3 Movement in insurance liabilities and reinsurance assets
(a) Claims reported in the financial statements and claims handling expenses
The movements in claims reported, including claims handling expenses, both gross and net of reinsurance, are shown below:
2017 2016
------------------------------- -------------------------------
Gross Reinsurers Net Gross Reinsurers Net
share share
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 619.9 (271.1) 348.8 567.6 (209.3) 358.3
Cash paid
for claims
settled
in year (448.1) 12.2 (435.9) (434.3) 12.6 (421.7)
Change arising
from:
Current
year claims 640.4 (123.6) 516.8 534.6 (83.7) 450.9
Prior year
claims (72.6) 45.7 (26.9) (48.0) 9.3 (38.7)
Total at
end of year 739.6 (336.8) 402.8 619.9 (271.1) 348.8
Provision
for claims
handling
costs 11.6 - 11.6 12.5 - 12.5
Salvage
and subrogation 47.7 - 47.7 40.5 - 40.5
Total reserve
per statement
of financial
position 798.9 (336.8) 462.1 672.9 (271.1) 401.8
-------- ----------- -------- -------- ----------- --------
Claims incurred and claims handling expenses as disclosed in the consolidated statement of comprehensive income comprise:
Year ended 31 Dec Year ended 31 Dec
2017 2016
Gross Reinsurers Net Gross Reinsurers Net
share share
GBPm GBPm GBPm GBPm GBPm GBPm
Claims incurred 567.8 (77.8) 490.0 486.6 (74.4) 412.2
Claims handling
expenses 24.7 - 24.7 22.9 - 22.9
Claims incurred
and claims
handling expenses 592.5 (77.8) 514.7 509.5 (74.4) 435.1
------ ----------- ------ ------ ----------- ------
During 2017, the Group continued to experience favourable development of prior accident year reserves (GBP26.9m reduction in prior year claims reserves in the year ended 31 December 2017), but to a lesser extent than during the year ended 31 December 2016 (GBP38.7m reduction in prior year claims reserves in the year ended 31 December 2016).
(b) Provisions for unearned premiums
The movements for the year, both gross and net of reinsurance, are summarised below:
2017 2016
Gross Reinsurers Net Gross Reinsurers Net
share share
GBPm GBPm GBPm GBPm GBPm GBPm
Unearned premium provision
At beginning
of the year 329.4 (20.6) 308.8 272.4 (15.9) 256.5
Premiums written
in the year 820.2 (69.0) 751.2 655.0 (47.8) 607.2
Premiums earned
in the year (734.0) 56.2 (677.8) (598.0) 43.1 (554.9)
At end of year 415.6 (33.4) 382.2 329.4 (20.6) 308.8
-------- ----------- -------- -------- ----------- --------
13. Related party transactions
The following transactions took place with related parties during the year:
a) Transactions with shareholders
The following transactions took place with shareholders and entities under common control:
-- One of the Directors has a beneficial part ownership interest in a company which leased office space from the Group. The company also charged the Group for travel expenses incurred by employees of the Group.
-- Eight of the Directors hold shares in Gocompare.com post demerger which pays commissions and charges fees for introducing insurance business.
-- One of the Directors had a beneficial part ownership interest in a restaurant which has been used by the Group for corporate events and entertaining purposes.
Year ended Year ended
31 Dec 31 Dec
2017 2016
GBPm GBPm
Value of income / (expense) for
the year:
Lease of office space net of
travel expenses charged 0.1 0.2
Net fees charged by Gompare.com (10.2) (1.6)
Restaurants (0.0) (0.1)
Total expense for the year (10.1) (1.5)
----------- -----------
Amount receivable / (payable) at
the year end:
Lease of office space net of
travel expenses charged - 0.1
Net fees payable to Gompare.com (0.4) (0.7)
Restaurants - (0.0)
Total amount payable at the
year end (0.4) (0.6)
----------- -----------
b) Compensation of key management personnel
The key management personnel are considered to be the Directors. Please refer to the Directors remuneration report for more details.
14. Risk management
The Board is responsible for prudent oversight of the Group, ensuring that it is conducted in accordance with sound business principles and within applicable law and regulation. This encompasses responsibility to set and monitor adherence to strategic risk objectives and risk appetite statements. The Board also ensures that measures are in place to provide effective monitoring, identification, control and acceptance of risk.
Principal risks and uncertainties
Underwriting Risk
---------------------------------------------------------------------------------------
Key elements Mitigation
---------------------------- ------------------------- ------------------------------
Definition Pricing Risk There is strong
Underwriting risk and regular monitoring
is the most material Reserving Risk in place of the
risk for the Group. external environment
It represents the Catastrophe Risk to understand and
uncertainty in react to the changing
the profitability market, ensuring
of the business that we are well
written due to placed to benefit
variability in from any developments.
the value and timing
of claims and premium There is a strong
rates - this can claims management
impact historic process that ensures
(reserve risk) that there is strong
as well as future customer service,
exposures (pricing management of claims
and catastrophe). costs and management
information to
Current risk profile understand claims
There is some future trends.
uncertainty within
the market in terms There is a robust
of the future rating monitoring process
environment and in place that tests
potential legal the key variables
changes through affecting loss
the government performance, including
consultation on loss ratios, risk
Ogden discount mix, pricing, quote
rate and whiplash conversion, renewal
reforms. retention ratios,
claims costs, claims
frequency and the
adequacy of reserves.
There is use of
external data to
support our analysis
of risk exposure
for underwriting
and catastrophe
risk.
There is a prudent
approach to reserving
risk with a risk
appetite to hold
a margin above
the actuarial best
estimate.
The Group's Actuarial
function analyses
and projects historical
claims development
data and uses a
number of actuarial
techniques to both
test and forecast
claims provisions.
In addition, independent
external actuaries
assess the adequacy
of the Group's
reserves.
There is reinsurance
in place to protect
the business from
large losses and
catastrophe events.
---------------------------- ------------------------- ------------------------------
Market Risk
---------------------------------------------------------------------------------------
Key elements Mitigation
---------------------------- ------------------------- ------------------------------
Definition Interest rate Risk The investment
Market risk represents strategy is set
the uncertainty Equity Risk with consideration
in the financial to the
position due to Spread Risk overall market
fluctuations in risk of the portfolio.
the level and in Concentration Risk Oversight of the
the volatility Group's
of market prices investment strategy
of assets and liabilities. is undertaken by
the management
The Group policy Investment Committee
concerning market and overall financial
risk ensures compliance risks by the
with SII 'Prudent Financial Risk
Person Principle' Committee, both
requirements. chaired by the
Chief Finance
Current risk profile Officer.
There continues
to be uncertainty Market risk is
in the Ogden discount managed through
rate which impacts regular monitoring,
the cash flows including the drivers
relating to large of investment return
claims and frequency and value at risk
of Periodical Payment measures, counterparty
Orders, and this exposures and interest
affects the ability rate sensitivities
to match assets of our assets and
to these liabilities. liabilities.
In addition, there
is volatility in Asset liability
UK based assets management is a
due to Brexit. key area of focus
within the investment
strategy, with
continuous monitoring
and actions taken
against the risk
appetites set.
The Group manages
the level of investment
counterparty credit
risk it accepts
by placing limits
on its exposure
to a single counterparty
or groups of counterparties,
and on geographical
counterparties,
geographical segments
and sectors. Investment
manager mandates
limit concentration
risk, ensuring
diversification
in such a way as
to avoid excessive
accumulation of
risk in the portfolio.
Such risks are
subject to regular
review within the
Investment Committee.
Our investment
strategy does not
expose the Group
to material currency
risk or the risks
arising from active
trading of derivatives.
Derivative instruments
are only used as
a risk mitigation
technique.
---------------------------- ------------------------- ------------------------------
Credit Risk
---------------------------------------------------------------------------------------
Key elements Mitigation
---------------------------- ------------------------- ------------------------------
Definition Reinsurance counterparty There are risk
Credit risk is Risk appetite metrics
the loss or adverse set against the
change in the financial Supplier debtor creditworthiness
situation, resulting Risk of reinsurers and
from fluctuations concentration risk
in the credit standing - these are monitored
of counterparties prior to finalisation
and any debtors of any contract
to which the Group and on an ongoing
is exposed. basis to ensure
that it remains
Current risk profile in line with our
There are no specific risk appetite.
concerns currently.
As part of our
supplier management
process, credit
exposures to third
parties are regularly
monitored and controlled.
---------------------------- ------------------------- ------------------------------
Liquidity Risk
---------------------------------------------------------------------------------------
Key elements Mitigation
---------------------------- ------------------------- ------------------------------
Definition Liquidity Risk The Group continues
Liquidity risk to monitor its
is the risk that liquidity risk
the Group is unable by considering
to realise investments the Group's operating
and other assets cash flows, stressed
in order to settle for catastrophe
financial obligations scenarios, dividend
when they fall payouts, liquidity
due. strains and investment
strategy to mitigate
Current risk profile this risk.
The Group's risk
appetite is aligned Oversight of liquidity
to a 1-in-200 year risk is undertaken
liquidity stress, by the Financial
which is assessed Risk Committee.
by the capital
model, and as such
no additional capital
is held from the
Group's own assessment
of risk and solvency
requirements for
liquidity risk.
---------------------------- ------------------------- ------------------------------
Operational Risk
---------------------------------------------------------------------------------------
Key elements Mitigation
---------------------------- ------------------------- ------------------------------
Definition Business process The Group has a
Operational Risk Risk robust governance
is the loss or and risk framework
adverse impact IT systems and in place which
due to failures disaster recovery provides an effective
with processes, Risk structure within
people or systems which operational
- either within Data Security and risks are identified,
the Group or within Cyber Risk measured and managed.
material partners. It ensures that
Infrastructure there is clear
Current risk profile risk and business ownership for risks
Whilst there are continuity Risk with effective
strong controls reporting and escalation
in place, there Financial Crime mechanisms, supporting
are currently material and Fraud Risk management oversight
external cyber and decision-making.
threats that could Outsourcing Risk
impact the business. There are specialist
Distribution Risk teams that reside
within the business
functions that
provide expertise
and support, including
for business continuity,
IT disaster recovery,
fraud and financial
crime and cyber
risk.
Oversight, support
and challenge are
provided by the
second line Risk
function which
works closely with
the first line
business and specialist
functions.
---------------------------- ------------------------- ------------------------------
Conduct Risk
---------------------------------------------------------------------------------------
Key elements Mitigation
---------------------------- ------------------------- ------------------------------
Definition Legal and Political There is a low
Conduct Risk is Risk appetite for this
a risk of reputational risk and this is
or financial damage Conduct and Compliance reflected in management
driven by regulatory Risk decision making,
or legal intervention. with our culture
Regulatory Risk and tone from the
Current risk profile top ensures the
Whilst we are on interests of our
track to deliver customers and their
on these projects fair treatment
there is a significant is paramount.
level of change
from regulation We have a strong
including General governance framework
Data Protection and our Conduct
Regulation, Insurance Risk and Customer
Distribution Directive Committee reviews
and the extension all aspects of
of the Senior Managers our customer service.
Regime.
Board oversight
is ensured by upward
reporting of a
suite of customer
and conduct risk
appetite statements
and measures.
The Group continues
to monitor legal
and regulatory
developments in
the UK and Europe,
through our close
relationship with
our regulators
(the FCA and PRA)
and other official
bodies and the
use of proactive
risk management
tools and processes
to mitigate our
exposure to regulatory
risk.
---------------------------- ------------------------- ------------------------------
17. Statutory information
The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2017 or 2016 but is derived from those accounts. Statutory accounts for 2016 have been delivered to the registrar of companies, and those for 2017 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.
Glossary of terms
The definitions set out below apply throughout this document, unless the context requires otherwise.
"Board" means the board of Directors of the Company from time to time.
"Business" means the business of the Group.
"Company" means esure Group plc, a company incorporated in England and Wales with registered number 7064312 whose registered office is The Observatory, Castlefield Road, Reigate, Surrey RH2
0SG.
"Defaqto" is a leading independent financial research company in the UK.
"Flood Re" is a not-for-profit flood reinsurance fund, owned and managed by the insurance industry.
"Footprint expansion" means the Group's underwriting initiative to quote competitively for more customers
"Fraud savings" are the estimated cost savings that the Group has made from initiatives undertaken to deter and identify fraudulent activity. This measure demonstrates the operational savings and claims indemnity cost benefits the Group has delivered in the period.
"Gocompare.com" is a company incorporated in England and Wales with registered number 6062003 whose registered office is Unit 6, Imperial Courtyard, Newport, Gwent NP10 8UL.
"Group" or "esure Group" means the Company and its subsidiaries.
"IFRS" means International Financial Reporting Standards.
"Lifetime Customer Value" the Group looks to deliver a positive return across the period that a customer chooses to stay with the business.
"Ogden Rate" is the discount rate set by the Lord Chancellor and used by UK courts to calculate lump sum settlements.
"Ordinary Shares" means the ordinary shares with a nominal value of 1 12 pence each in the capital of the Company.
"ORSA" means Own Risk and Solvency Assessment and aims to assess the overall solvency needs of an insurance company.
"Periodic Payment Orders" ("PPOs") are claims payments used to settle large personal injury claims. In addition to providing a lump sum, PPOs provide regular index-linked payments for some or all of the future financial loss suffered.
"Prudent Person Principle" is a Solvency II rule requiring insurers to only make investments that a "prudent person" would make. It does not require that those charged with governance should always makes correct decisions; but requires them to make decisions that will be generally accepted as sound by an average person, such decisions should be made as if they were managing their own affairs.
"Reinsurance" is an arrangement whereby the Group transfers part of the accepted insurance risk to a panel of insurers. This allows the Group to mitigate its risk of losses from claims.
"SFCR" means Solvency and Financial Condition Report.
"Solvency II" is an EU legislative programme implemented in all 28 Member States on 1 January 2016. Primarily it concerns the amount of capital that EU insurance companies must hold to reduce the risk of insolvency.
"the Notes" means the GBP125 million 6.75% ten year tier two Subordinated Notes issued on 19 December 2014.
"Underwriting" is the receipt of premium in return for the provision of insurance to a policyholder. The underwriting year refers to the financial year in which the policy begins.
Alternative performance metrics
Throughout this report, the Group uses a number of Alternative Performance Measures ("APMs"). The Group prepares its financial statements under IFRS and by definition these measures are not IFRS metrics.
These APMs are used by the Group, alongside IFRS measures, for both internal performance analysis and to help shareholders and other users of the Annual Report and financial statements to understand the Group's performance better.
Additional Services Revenue ("ASR")
(1) "Non-underwritten additional insurance products" is the commission margins for the Group generated from sales of such products.
(2) "Policy administration fees and other income" is the income received as a result of administration charges, e.g. as a result of mid-term alterations to policy details by the policy holder and cancellation charges. Other income includes introduction fees where the Group does not have a continuing relationship with the customer.
(3) "Claims income" is the income generated by the Group from the appointment of firms used during the claims process, including car hire and medical suppliers. This also includes legal panel membership fees from Scotland.
(4) "Non-underwritten additional services" is the total income from the Group's non-underwritten additional services and products.
(5) "Underwritten additional insurance products" is the revenue calculated by deducting the Group's claims costs associated with is underwritten additional insurance products from the gross written premiums relating to these products in a particular period.
(6) "Non-underwritten additional services trading profit" is the total non-underwritten additional services income less the total associated expenses.
"ASR per IFP" is the income derived from additional services revenues divided by the average number of in-force policies in the year. This measure demonstrates that the Group is able to generate additional revenue alongside the core insurance premium.
"Combined operating ratio" is a metric for assessing the performance of a general insurance firm, calculated as the loss ratio plus the expense ratio.
"Contribution" means the trading profit/(loss) generated from underwriting, non-underwritten additional services revenues and investments
"Cost per policy" is the total expenses incurred by the Group (excluding claims indemnity costs) divided by the average number of in-force policies in the year.
"Expense ratio" means net insurance expenses plus claims handling costs as a percentage of earned premiums, net of reinsurance.
"Loss ratio" means claims incurred net of reinsurance as a percentage of earned premiums, net of reinsurance.
"In-force policies" means the number of live policies as at 31 December.
"Net Promoter Score(TM) " is an index that measures the willingness of customers to recommend a company's products or services to others.
"Non-trading costs" means costs incurred by the business that do not relate to the on-going operations of the Group.
"Total Shareholder Return" is a performance measure which compares share price movement with reinvested dividends as a percentage of the share price at the beginning of the period.
"Trading profit" is earnings before interest, tax, non-trading expenses and amortisation of acquired intangible assets.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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(END) Dow Jones Newswires
March 07, 2018 02:01 ET (07:01 GMT)
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