05 August 2016

esure Group plc interim results for the six months ended 30 June 2016

 

Growing top line across insurance and price comparison

 

Highlights

 

·           Gross written premiums up 16.3% to £320.4m (1H 2015: £275.5m)

 

·           In-force policies up 3.7% to 2.076 million in the first half of 2016 (FY 2015: 2.001 million, 1H 2015: 1.995 million)

 

·           Combined operating ratio 3.4ppts higher at 99.2% (1H 2015: 95.8%) largely driven by adverse weather events in the first half of 2016

 

·           Underlying profit before tax¹ down 1.9% to £45.6m (1H 2015: £46.5m) impacted by adverse weather events in the first half of 2016

 

·           Interim dividend per share of 3.0p (1H 2015: 4.2p), reflecting the Board's decision to retain capital to fund growth

 

·           Solvency II Group coverage ratio of 126% (FY 2015: 123%), post dividend; and

Solvency II Solo coverage ratio of 136% (FY 2015: 138%)

 

·           Gocompare² revenue up 22.3% to £72.9m; operating profit up 9.0% to £14.5m (1H 2015: Revenue of £59.6m; operating profit of £13.3m)

                                                                                                

 

Sir Peter Wood, Chairman of esure Group plc, said: "The management team is delivering on its strategic objective to grow both our insurance and price comparison businesses.

 

"On 7 June, we announced a strategic review of Gocompare.com to ensure we continue to focus on maximising shareholder value and the review is ongoing.

 

"We remain well capitalised under Solvency II and I am pleased to declare a dividend of 3.0 pence per share reflecting the Board's decision to retain capital as we look to take advantage of favourable motor market conditions."

 

 

Stuart Vann, Chief Executive Officer of esure Group plc, said: "We are reporting strong growth figures, with customer numbers and premiums up across the board. Motor premium growth of 18% is particularly strong, driven by a combination of our underwriting and rating initiatives as we look to capitalise on growth opportunities in a favourable market. 

 

"It is also pleasing to be reporting an underlying profit before tax of £45.6 million, despite the adverse weather events in the first half of the year.

 

"In Gocompare.com we have delivered excellent revenue growth of 22% and continue to drive the business forward through improved marketing, a strengthened management team and focus on a wider product offering.

 

"We are well placed for further profitable growth across both businesses in the second half of the year."

 

 

 

Notes

1.  The Group believes its underlying profit before tax, as disclosed in the highlights section on page 1, best reflects its performance for the period. The reported profit before tax of £37.7m (1H 2015: £105.4m) is adjusted for the Group's joint venture deemed disposal gain (non-cash) (1H 2016: £nil; 1H 2015: £63.8m; FY 2015: £63.8m) and amortisation of acquired intangibles (1H 2016: £7.9m; 1H 2015: £4.9m; FY 2015: £12.7m).

2.  Gocompare means Gocompare.com Holdings Limited, a company incorporated in England and Wales with registered number 6062003 whose registered office is Unit 6, Imperial Courtyard, Newport, Gwent NP10 8UL. The Group acquired full ownership of Gocompare on 31 March 2015. Figures are disclosed on a 100% standalone basis, prior to any Group consolidation adjustment or ownership structure changes in 2015.

 

 

For further information:

 

Nick Wrighton Deputy Chief Finance Officer t: 01737 235164 e: investor.relations@esuregroup.com	Chris Wensley Head of Investor Relations and Corporate Strategy t: 01737 641324 e: investor.relations@esuregroup.com
Emma Banks Head of Corporate Communications t: 01737 235107 e: emma.banks@esure.com	Chris Barrie/Grant Ringshaw  Citigate Dewe Rogerson t: 0207 638 9571 e: esure@citigatedr.co.uk

 

 

 

 

 

 

About esure Group plc

 

The Group is an efficient, customer focused personal lines insurer, founded in 2000 by Chairman, 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 and owns the price comparison website, Gocompare. 

 

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.

 

 

 

Finance review

		1H 2016	1H 2015	FY 2015	1H 2016 v 1H 2015
Gross written premiums (£m)		320.4	275.5	550.3	16.3%
Motor (£m)		275.7	233.3	461.0	18.2%
Home (£m)		44.7	42.2	89.3	5.9%
Trading profit (£m)		50.3	51.8	92.3	(2.9)%
Motor underwriting (£m)		4.5	3.3	6.7	36.4%
Home underwriting (£m)		(2.3)	7.1	4.2	(132.4)%
Non-underwritten additional services (£m)		28.1	26.9	55.1	4.5%
Investments (excluding share of joint venture) (£m)		6.8	3.9	6.1	74.4%
Share of joint venture (50% until 31 March 2015) (1) (£m)		-	3.5	3.5	-
Price comparison (100% from 1 April 2015) (1) (£m)		13.2	7.1	16.7	85.9%
Profit before tax (£m)		37.7	105.4	134.0	(64.2)%
Underlying profit before tax (£m)		45.6	46.5	82.9	(1.9)%
Profit after tax (£m)		30.7	97.6	121.9	(68.5)%
Underlying profit after tax (£m)		37.0	37.7	68.2	(1.9)%
Combined operating ratio (%)		99.2	95.8	97.8	(3.4)ppts
Loss ratio (%)		74.9	72.4	74.0	(2.5)ppts
Expense ratio (%)		24.3	23.4	23.8	(0.9)ppts
In-force policies (millions)		2.076	1.995	2.001	3.7%(2)
Motor (millions)		1.495	1.426	1.435	4.2%(2)
Home (millions)		0.581	0.569	0.566	2.7%(2)
Additional Services Revenues (£m)		51.5	51.0	102.9	1.0%
Underlying earnings per share (pence)		8.9	9.0	16.4	(1.1)%
Dividend per share (pence)		3.0	4.2	11.5	(28.6)%

 

 ⁽¹⁾ Gocompare's contribution to Group trading profit for the six months ended 30 June 2016 is £13.2m and net of £1.3m consolidation adjustments. Gocompare's £10.6m contribution to the Group's trading profit for the six months ended 30 June 2015 comprised £3.5m for the three month period under 50% ownership (including an adjustment of £0.4m required under the equity method of accounting that would not have been reported were Gocompare under full ownership) and £7.1m for the three month period subsequent to the acquisition of the outstanding 50% of the ordinary shares of Gocompare on 31 March 2015.

 

 ⁽²⁾ In-force policy movements have been calculated against the FY 2015 position.

 

Gross written premiums and in-force policies

 

Gross written premiums increased 16.3% to £320.4m (1H 2015: £275.5m) through an increase in in-force policies of 3.7% to 2.076 million (FY 2015: 2.001 million) and the Group's positive rating actions in Motor.

 

In Motor, gross written premiums increased 18.2% to £275.7m (1H 2015: £233.3m) largely as a result of growth in in-force policies of 4.2% to 1.495 million (FY 2015: 1.435 million) and positive rating increases compared to the first half of 2015. In addition, the Group's footprint expansion initiatives continue to build momentum and the retention rate remains strong at 77% (1H 2015: 80%).

 

In Home, gross written premiums increased 5.9% to £44.7m (1H 2015: £42.2m) due to in-force policy growth of 2.7% to 0.581 million (FY 2015: 0.566 million) and the Group's footprint expansion initiatives that are typically at a higher average premium. The Home retention rate remains strong at 81% (1H 2015: 81%).

 

 

Trading profit

 

Motor

 

		1H   2016 £m	1H  2015 £m	FY 2015 £m	1H 2016 v 1H 2015
Trading profit		4.5	3.3	6.7	36.4%
Combined operating ratio		97.9	98.4	98.4	0.5ppts
Loss ratio		76.4	76.6	76.3	0.2ppts
Expense ratio		21.5	21.8	22.1	0.3ppts

 

Motor underwriting trading profit of £4.5m (1H 2015: £3.3m) has benefited from the Group's positive rating actions in 2015 earning through ahead of claims inflation, albeit the improvement in the current year performance has been offset by a lower level of favourable development of prior accident year reserves (1H 2016: £13.0m; 1H 2015: £30.4m).

 

Home

 

		1H   2016 £m	1H  2015 £m	FY 2015 £m	1H 2016 v 1H 2015
Trading (loss) / profit		(2.3)	7.1	4.2	(132.4)%
Combined operating ratio		105.5	82.7	94.9	(22.8)ppts
Loss ratio		66.8	51.9	62.2	(14.9)ppts
Expense ratio		38.7	30.8	32.7	(7.9)ppts

 

Home underwriting trading loss of £2.3m (1H 2015: profit of £7.1m) has been impacted by the severe weather events in June, with weather events in the first half £3.3m ahead of expectation, compared to a benign period in the first half of 2015. Favourable development of prior accident year reserves of £7.5m (1H 2015: £5.8m) reflects the positive run-off of reserves from storms Desmond, Eva and Frank in late 2015. The expense ratio has been impacted by costs associated with the Flood Re levy (Flood Re is a Government backed initiative to help those households who live in a flood risk area find affordable home insurance).

 

Additional services revenues

 

		1H   2016 £m	1H  2015 £m	FY 2015 £m	1H 2016 v 1H 2015
Non-underwritten additional insurance products		4.8	4.5	9.5	6.7%
Policy administration fees and other income		9.6	10.4	21.1	(7.7)%
Claims income		3.0	4.3	7.5	(30.2)%
Instalment income		17.8	14.3	30.2	24.5%
Non-underwritten additional services		35.2	33.5	68.3	5.1%
Underwritten additional insurance products		16.3	17.5	34.6	(6.9)%
Total income from additional services		51.5	51.0	102.9	1.0%
Non-underwritten additional services trading profit		28.1	26.9	55.1	4.5%

 

Additional services revenues are broadly flat at £51.5m (1H 2015: £51.0m). Instalment income is benefitting from an increased number of customers choosing to pay monthly and higher average premiums. Non-underwritten additional services trading profit increased 4.5% to £28.1m (1H 2015: £26.9m) and this is marginally ahead of the year-on-year in-force policy growth.

 

 

 

Investment income
		1H 2016 £m	1H 2015 £m	FY 2015 £m	1H 2016     v 1H 2015
Investment income		7.1	6.3	14.1	12.7%
Investment charges		(1.5)	(1.6)	(3.3)	6.3%
Net gains / (losses) on investments		0.5	(1.4)	(7.7)	135.7%
Net investment return		6.1	3.3	3.1	84.8%
Investment return - net (%)		0.8(1)	0.4(1)	0.4	0.4ppts
Other income		0.7	0.6	3.0	16.7%
Total investment return		6.8	3.9	6.1	74.4%
Movements in AFS Reserve		3.9	1.2	1.0	225.0%

 

⁽¹⁾ Non-annualised

 

The Group achieved a total investment return of £6.8m in the first half of 2016. The impact of the UK referendum vote had a limited impact on the Group's investment return in the period. The Group's fixed income and equity portfolios have delivered a good performance with interest and dividend income of £7.1m in the first half of the year (1H 2015: £6.3m).

 

The Group acquired a long dated asset in the first half of the year to improve the matching of its asset and liability durations, and movements in the asset valuation will be accounted for under the available for sale accounting policy. In the first half of 2016 a gain of £3.9m on the asset has been recognised through other comprehensive income, rather than being recognised in the Group's profit before tax.   

 

Gocompare.com

income and expenses on a 100% standalone ownership basis

		1H 2016 £m	1H 2015 £m	FY 2015 £m	1H 2016     v 1H 2015
Revenue		72.9	59.6	118.9	22.3%
Expenses		(58.4)	(46.3)	(95.7)	26.1%
Operating profit		14.5	13.3	23.2	9.0%
Other income		0.0	0.1	0.1	-
Profit before tax		14.5	13.4	23.3	8.2%
Operating margin		19.9%	22.3%	19.6%	(2.4)ppts
Contribution to Group trading profit		13.2	10.6	20.2	24.5%

 

Note: Gocompare.com's £10.6m contribution to the Group's trading profit for the six months ended 30 June 2015 comprised £3.5m for the three month period under 50% ownership and £7.1m for the three month period subsequent to the acquisition of the outstanding 50% of the ordinary shares of Gocompare.com on 31 March 2015.   

 

Gocompare.com revenue has increased 22.3% to £72.9m (1H 2015: £59.6m) as the reinvigorated marketing campaigns, featuring Gio Compario, drive improved brand awareness and transactions. Expenses increased 26.1% to £58.4m (1H 2015: £46.3m) as the improved brand awareness increased online marketing spend and the Group continued to invest in Gocompare.com for medium term growth. As a consequence, operating profit increased 9.0% to £14.5m (1H 2015: £13.3m) and the Group remains on track to increase operating profit by 20-30% in 2016.

 

Gocompare.com's contribution to the Group's trading profit increased to £13.2m (1H 2015: £10.6m) largely as a consequence of a full year's ownership compared to 2015, when the Group held a 50% ownership in the first quarter of 2015 prior to taking full ownership of the business from April 2015.

 

 

 

Reconciliation of trading profit to profit before tax

 

		1H 2016 £m	1H 2015 £m	FY 2015 £m	1H 2016 v 1H 2015
Trading profit		50.3	51.8	92.3	(2.9)%
Non-trading costs		(0.4)	(0.9)	(0.2)	55.6%
Finance costs		(4.3)	(4.0)	(8.7)	(7.5)%
Amortisation of acquired intangibles		(7.9)	(4.9)	(12.7)	(61.2)%
Share of tax of joint venture		-	(0.4)	(0.5)	-
Joint venture deemed disposal gain (non-cash)		-	63.8	63.8	-
Profit before tax		37.7	105.4	134.0	(64.2)%

 

Reconciliation of profit before tax to underlying profit before tax

 

		1H 2016 £m	1H 2015 £m	FY 2015 £m
Profit before tax		37.7	105.4	134.0
Joint venture deemed disposal gain (non-cash)		-	(63.8)	(63.8)
Amortisation of acquired intangibles		7.9	4.9	12.7
Underlying profit before tax		45.6	46.5	82.9

 

 

The Group's profit before tax decreased 64.2% to £37.7m (1H 2015: £105.4m) as a consequence of the Group's 50% interest in Gocompare being remeasured to fair value at 31 March 2015 (the acquisition date). The resulting gain of £63.8m was recognised as the Group's joint venture deemed disposal gain (non-cash) and this did not repeat in 2016.

 

The acquisition of Gocompare resulted in additional acquired intangible assets and this has increased the amortisation charge per annum. Further information can be found in note 8 to the financial statements on page 22.

 

The Group incurred £4.3m in finance costs (1H 2015: £4.0m) relating to the interest due on the £125.0m of 6.75% ten year tier two Subordinated Notes issued on 19 December 2014.

 

In order to reflect better the Group's performance for the period and its dividend paying capacity the Group has disclosed its underlying profit before tax. The reported profit before tax for each period is adjusted for the Group's joint venture deemed disposal gain (1H 2016: £nil; 1H 2015: £63.8m; FY 2015: £63.8m) and amortisation of acquired intangibles (1H 2016: £7.9m; 1H 2015: £4.9m; FY 2015: £12.7m).

 

Profit after tax

 

Profit after tax decreased to £30.7m (1H 2015: £97.6m) as a consequence of the Group's joint venture deemed disposal gain recognised in 2015 not repeating in 2016. The UK Corporation tax rate was 20% with effect from 1 April 2016 and the Group incurred an effective tax rate of 18.6% (1H 2015: 7.4%). The 2015 effective tax rate was impacted by the tax treatment of the joint venture deemed disposal gain.

 

Underlying profit after tax is broadly flat at £37.0m (1H 2015: £37.7m) and reflects the Group's net of tax position after adjusting for the Group's joint venture deemed disposal gain and amortisation of acquired intangibles.

 

Earnings per share

 

Earnings per share decreased to 7.4 pence (1H 2015: 23.4 pence) as a consequence of the Group's joint venture deemed disposal gain recognised in 2015 not repeating in 2016.

 

Underlying earnings per share are broadly flat at 8.9 pence (1H 2015: 9.0 pence) after adjusting for the Group's joint venture deemed disposal gain and amortisation of acquired intangibles.

 

Dividend per share

 

An interim dividend of 3.0 pence per share (1H 2015: 4.2 pence per share) has been declared and approved by the Board. The dividend has been set with reference to the Group's underlying profit after tax. 

 

When considering a special dividend, the Board considers the Group's capital resource requirements, prospective premium growth expectations and retains a prudent margin for contingencies. The Board remains committed to returning excess capital to shareholders, where it does not believe it can utilise retained capital for further growth.

 

The ex-dividend date is 8 September 2016, the record date is 9 September 2016 and the payment date is 21 October 2016.

 

Investments       

 

Asset allocation

		As at 30 June 2016 £m	As at 30 June 2015 £m	As at 31 December 2015 £m	1H 2016 v FY 2015
Total		778.5	754.2	757.0	(2.8)%
Fixed income		524.7	549.2	494.6	6.1%
Cash and liquidity funds		210.4	161.5	220.7	(4.7)%
Equities		43.4	43.5	41.7	4.1%

 

 

The Group's asset allocation remains weighted towards cash and liquidity, albeit the Group has acquired a long dated asset to improve the matching of its asset and liability durations. As a consequence the duration of the investment portfolio has increased to 2.9 years (FY 2015: 0.9 years). The improved matching of asset and liability durations reduces capital volatility and sensitivity to movements in the yield curve. The Group will continue to look at opportunities to align its asset and liability duration.

 

Solvency II

 

		Group				Solo
		As at 30 June 2016 £m	As at 31 December 2015 £m			As at 30 June 2016 £m	As at 31 December 2015 £m
Own Funds		280	264			305	300
- Tier 1		169	157			305	300
- Tier 2		111	107			-	-
Solvency Capital Requirement		222	214			224	217
Capital surplus above Solvency Capital Requirement		58	50			81	83
Coverage ratio (post dividend)		126%	123%			136%	138%

 

The Group is required to calculate its solvency capital requirement ("SCR") and capital resources ("Own Funds") under the Solvency II Directive. The 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 is well capitalised under Solvency II and its capital coverage ratio is 126%, after allowing for the interim dividend. The Group coverage ratio is largely unchanged from 31 December 2015 and includes an increase in the SCR as a consequence of the growth in premiums in the first half of the year and outlook for the remainder of 2016. Own Funds have also increased as the Group retains capital to fund profitable growth. 

 

Outlook

 

The Group now expects gross written premium growth of 13-18% and in-force policy growth of 6-9% in 2016, assuming current market conditions in Motor prevail. The full year combined operating ratio, inclusive of the adverse weather costs in the first half of the year, is expected to be in the region of 98-99%, assuming normal weather for the remainder of the year. Gocompare.com's operating profit is on track to increase by 20-30% in 2016 and at least double its 2014 EBITDA to £50m by 2019.

 

UK Referendum

 

The Group is a UK based business underwriting insurance risks in the UK. The UK Referendum result is expected to have limited impact on the Group's operations.

 

Principal risks and uncertainties

 

To the best of the directors' knowledge the principal risks and uncertainties of the Group for the remaining six months of the year are outlined in note 13 to the financial statements.  

 

 

 

 

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

		Reviewed	Reviewed	Audited
		6 months ended	6 months ended	Year  ended
		30 June 2016	30 June 2015	31 Dec 2015
	Note	£m	£m	£m
Gross written premiums		320.4	275.5	550.3
Gross earned premiums		284.6	260.2	532.4
Earned premiums, ceded to reinsurers		(20.2)	(17.2)	(36.8)
Earned premiums, net of reinsurance		264.4	243.0	495.6
Investment income and instalment interest		24.6	18.2	36.3
Fees for additional services		84.2	47.2	122.2
Total income		373.2	308.4	654.1
Claims incurred and claims handling expenses		(221.0)	(208.6)	(409.9)
Claims incurred recoverable from reinsurers		11.7	22.2	22.3
Claims incurred, net of reinsurance	11	(209.3)	(186.4)	(387.6)
Insurance expenses		(52.9)	(46.1)	(97.1)
Other operating expenses		(69.0)	(32.9)	(93.1)
Total expenses		(331.2)	(265.4)	(577.8)
Joint venture deemed disposal gain		-	63.8	63.8
Share of profit after tax of joint venture		-	2.6	2.6
Finance costs		(4.3)	(4.0)	(8.7)
Profit before tax		37.7	105.4	134.0
Taxation expense		(7.0)	(7.8)	(12.1)
Profit attributable to the owners of the parent		30.7	97.6	121.9
Items that are or may be reclassified to profit or loss:
Available-for-sale financial  assets - change in fair value		4.6	1.2	1.0
Tax on available-for-sale financial assets		(0.7)	-	-
Total comprehensive income for the period attributable to owners of the parent		34.6	98.8	122.9
Earnings per share (pence per share)
- ordinary shares, basic	6	7.4	23.5	29.3
- ordinary shares, diluted	6	7.4	23.4	29.3
-          underlying earnings per ordinary share	6	8.9	9.0	16.4
Notes on pages 14 to 31 form part of the financial statements

 

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

 

		Reviewed	Reviewed	Audited
		As at	As at	As at
		30 June 2016	30 June 2015	31 Dec 2015
	Note	£m	£m	£m
Assets
Goodwill and intangible assets	8	176.6	190.6	181.5
Deferred acquisition costs		35.1	24.9	25.3
Property, plant and equipment	9	35.2	29.7	34.8
Investment in joint venture		-	-	-
Financial investments	10	760.8	707.0	728.5
Reinsurance assets	11	230.0	230.0	225.2
Insurance and other receivables		248.0	198.3	216.7
Cash and cash equivalents		28.9	47.5	31.9
Total assets		1,514.6	1,428.0	1,443.9
Equity and liabilities
Share capital		0.3	0.3	0.3
Share premium account		44.0	44.0	44.0
Capital redemption reserve		44.9	44.9	44.9
Other reserves		4.9	1.2	1.0
Retained earnings		252.4	242.9	251.1
Total equity		346.5	333.3	341.3
Liabilities
Insurance contract liabilities	11	914.7	876.4	886.6
Borrowings	10	122.7	122.2	122.6
Insurance and other payables		100.7	73.6	72.2
Deferred tax liabilities		10.2	12.7	11.6
Derivative financial liabilities		11.1	0.3	3.3
Current tax liabilities		8.7	9.5	6.3
Total liabilities		1,168.1	1,094.7	1,102.6
Total equity and liabilities		1,514.6	1,428.0	1,443.9

  

 

 

 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

			Attributable to owners of the parent
		Share capital	Share premium account	Capital redemption reserve	Available-for-sale reserve	Retained earnings	Total equity
	Note	£m	£m	£m	£m	£m	£m
6 months ended                30 June 2016
At 1 January 2016		0.3	44.0	44.9	1.0	251.1	341.3
Profit for the period		-	-	-	-	30.7	30.7
Other comprehensive income		-	-	-	3.9	-	3.9
Total comprehensive income for the period		-	-	-	3.9	30.7	34.6
Transactions with owners:
Issue of share capital		-	-	-	-	-	-
Share-based payments		-	-	-	-	0.9	0.9
Deferred tax on share-based payments		-	-	-	-	0.1	0.1
Dividends	5	-	-	-	-	(30.4)	(30.4)
Total transactions with owners		-	-	-	-	(29.4)	(29.4)
At 30 June 2016		0.3	44.0	44.9	4.9	252.4	346.5
6 months ended                30 June 2015
At 1 January 2015		0.3	44.0	44.9	0.0	193.0	282.2
Profit for the period		-	-	-	-	97.6	97.6
Other comprehensive income		-	-	-	1.2	-	1.2
Total comprehensive income for the period		-	-	-	1.2	97.6	98.8
Transactions with owners:
Issue of share capital		0.0	0.0	-	-	-	0.0
Share-based payments		-	-	-	-	0.9	0.9
Deferred tax on share-based payments		-	-	-	-	0.0	0.0
Dividends	5	-	-	-	-	(48.6)	(48.6)
Total transactions with owners		0.0	0.0	-	-	(47.7)	(47.7)
At 30 June 2015		0.3	44.0	44.9	1.2	242.9	333.3

 

 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)

 

				Attributable to owners of the parent
		Share capital		Share premium account		Capital redemption reserve		Available-for-sale reserve	Retained earnings	Total equity
	Note	£m		£m		£m		£m	£m	£m
Year ended                31 December 2015
At 1 January 2015		0.3		44.0		44.9		0.0	193.0	282.2
Profit for the year		-		-		-		-	121.9	121.9
Other comprehensive income		-		-		-		1.0	-	1.0
Total comprehensive income for the period		-		-		-		1.0	121.9	122.9
Transactions with owners:
Issue of share capital		0.0		0.0		-		-	-	0.0
Share-based payments		-		-		-		-	2.2	2.2
Deferred tax on share-based payments		-		-		-		-	0.1	0.1
Dividends	5	-		-		-		-	(66.1)	(66.1)
Total transactions with owners		0.0		0.0		-		-	(63.8)	(63.8)
At 31 December 2015		0.3		44.0		44.9		1.0	251.1	341.3

  

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

		Reviewed	Reviewed	Audited
		6 months ended 30 June 2016	6 months ended 30 June 2015	Year ended     31 Dec  2015
Cash flows from operating activities	Note	£m	£m	£m
Profit after tax for the period		30.7	97.6	121.9
Adjustments to reconcile profit after tax to net cash flows:
- Finance costs		4.3	4.0	8.7
- Depreciation and revaluation of property, plant and equipment	9	1.0	0.7	(0.1)
- Amortisation of intangible assets	8	8.7	5.0	13.6
- Unrealised investment losses / (gains)		(7.5)	5.5	4.3
- Share scheme charges		0.9	0.9	2.2
- Share of profit after tax of joint venture		-	(2.6)	(2.6)
- Joint venture deemed disposal gain		-	(63.8)	(63.8)
- Taxation expense		7.0	7.8	12.1
- Interest and dividends receivable on financial investments		(0.5)	(10.8)	(12.9)
- Instalment interest receivable		(17.8)	(14.3)	(30.2)
Operating cash flows before movements in working capital, tax and interest paid		26.8	30.0	53.2
Sales of financial investments		157.7	253.7	387.7
Purchases of financial investments		(176.7)	(150.9)	(308.9)
Interest and dividends received on financial investments		6.2	6.5	15.2
Instalment interest received		20.7	15.7	31.3
Changes in working capital:
- (Increase) / decrease in insurance and other receivables		(38.3)	(8.2)	(19.2)
- Increase / (decrease) in insurance contract liabilities and insurance and other payables		47.1	7.1	13.2
Taxation paid		(6.7)	(9.0)	(17.7)
Net cash generated / (used) in operating activities		36.8	144.9	154.8
Cash flows from investing activities
Acquisition of subsidiary, net of cash acquired		-	(75.1)	(75.1)
Dividends received from joint venture		-	10.0	10.0
Purchase of property, plant and equipment and software		(5.2)	(4.6)	(8.4)
Net cash used in investing activities		(5.2)	(69.7)	(73.5)
Cash flows used in financing activities
Proceeds on issue of Ordinary Shares		0.0	0.0	0.0
Interest paid on loans	10	(4.2)	(4.2)	(8.4)
Dividends paid	5	(30.3)	(48.6)	(66.1)
Net cash (used in) / from financing activities		(34.5)	(52.8)	(74.5)
Net increase / (decrease) increase  in cash and cash equivalents		(2.9)	22.4	6.8
Cash and cash equivalents at the beginning of the period		31.9	25.1	25.1
Cash and cash equivalents at the end of the period		28.9	47.5	31.9

 

 

NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 30 June 2016

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 and, price comparison services. 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 condensed consolidated interim financial statements present the Group's financial information for the six months ended 30 June 2016 and have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union (EU). They do not include all of the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements of the Group as at the year ended 31 December 2015 which are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU.

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

As required by the FCA's Disclosure and Transparency Rules, the condensed set of financial statements has been prepared applying the accounting policies and presentation that were applied in the preparation of the Group's published consolidated financial statements for the year ended 31 December 2015, with the exception of an asset acquired in the six months ended 30 June 2016 which was classified as an "available for sale" (AFS) financial asset.

These condensed consolidated interim financial statements have been prepared on a going concern basis. The Group has a strong financial position with robust reserves, a conservative investment portfolio and capital significantly in excess of the minimum regulatory requirement. In addition, the Board has reviewed the Group's projections for the next twelve months and beyond, including cash flow forecasts and regulatory capital surpluses. The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for at least twelve months.

The financial information contained in these interim results does not constitute statutory accounts of esure Group plc within the meaning of Section 435 of the Companies Act 2006. Statutory accounts for esure Group plc for the year ended 31 December 2015 have been delivered to the Registrar of Companies. The auditors have reported on the accounts, their report was:

(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 constitute a statement under Section 498 (2) or (3) of the Companies Act 2006.

 

Available for sale financial assets

In the six months ended 30 June 2016 the group acquired an asset, which upon recognition, was classified as available for sale. This instrument was initially recognised at fair value with subsequent fair value gains or losses being recognised directly in other reserves. Interest income is recognised as investment income through the profit and loss and is calculated based on amortised cost using the effective interest method.

 

 

 

NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 30 June 2016

2.         Accounting policies (continued)

 Available for sale financial assets (continued)

If the financial asset is sold, unrealised gains or losses recognised in other reserves will be recognised in the profit or loss under investment income. Should the asset be impaired, impairment losses are recognised by reclassifying the losses accumulated in the available for sale reserve to profit or loss. The amount reclassified is the difference between the value on initial recognition and the current fair value, less any impairment loss previously recognised in profit or loss.

 

3.         Critical accounting judgements and estimates

The Group's 2015 Annual Report and Accounts provide details of significant judgements and estimates used in the application of the Group's accounting policies. There have been no significant changes to the judgements and estimates during the interim period.

Key source of estimation uncertainty 

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 and 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

 

On 31 March 2015, the Group acquired the outstanding 50% of the ordinary shares of GoCompare. Following the acquisition, the Group's basis of segmentation has changed such that the contribution of Gocompare to the Group's consolidated income and expenses, other than the amortisation of the Gocompare brand and customer relationships, are reported under a new segment "Price comparison".

 

The amortisation of acquired intangible assets relating to the Gocompare brand and partner relationships recognised on application of IFRS 3 is presented in amortisation of acquired intangibles (see note 8 for more detail). The joint venture deemed disposal gain recognised on application of IFRS 3 to the acquisition is presented as a separate item. Gocompare's tax expense for the period following acquisition is presented in the Group's tax expense.

 

The share of joint venture profit received until 31 March 2015 is recognised under the investments segment in the same way as the Group's share of joint venture profit is presented in the segmental information provided for the year ended 31 December 2015.

  

 

NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 30 June 2016

4.         Segmental information (continued)

Segmental revenues, expenses and other information

 

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

 

Reviewed Six months ended 30 June 2016	Motor underwriting	Home underwriting	Non-underwritten additional services	Price comparison	Investments	Total
	£m	£m	£m	£m	£m	£m
Gross written premiums	275.7	44.7	-	-	-	320.4
Earned premiums, net of reinsurance	222.5	41.9	-	-	-	264.4
Investment income	-	-	-	-	6.8	6.8
Instalment interest income	-	-	17.8	-	-	17.8
Fees for additional services	-	-	17.4	66.8	-	84.2
Total income	222.5	41.9	35.2	66.8	6.8	373.2
Net incurred claims	(170.1)	(28.0)	-	-	-	(198.1)
Claims handling costs	(9.4)	(1.8)	-	-	-	(11.2)
Insurance expenses	(38.5)	(14.4)	-	-	-	(52.9)
Other operating expenses (excl. amortisation of intangibles)	-	-	(7.1)	(53.6)	-	(60.7)
Total Expenses	(218.0)	(44.2)	(7.1)	(53.6)	-	(322.9)
Share of joint venture profit (gross of tax and amortisation)	-	-	-	-	-	-
Trading profit /(loss)	4.5	(2.3)	28.1	13.2	6.8	50.3
Non-trading costs						(0.4)
Amortisation of acquired intangibles						(7.9)
Joint venture deemed disposal gain						-
Finance costs						(4.3)
Profit before taxation						37.7
Tax expense						(7.0)
Profit after taxation						30.7
Net expense ratio	21.5%	38.7%				24.3%
Net loss ratio	76.4%	66.8%				74.9%
Combined operating ratio	97.9%	105.5%				99.2%

 

 

 

 

 

NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 30 June 2016

4.         Segmental information (continued)

 

Reviewed Six months ended 30 June 2015	Motor underwriting	Home underwriting	Non-underwritten additional services	Price comparison (from 1/4/2015)(1)	Investments	Total
	£m	£m	£m	£m	£m	£m
Gross written premiums	233.3	42.2	-	-	-	275.5
Earned premiums, net of reinsurance	201.8	41.2	-	-	-	243.0
Investment income	-	-	-	-	3.9	3.9
Instalment interest income	-	-	14.3	-	-	14.3
Fees for additional services	-	-	19.2	28.0	-	47.2
Total income	201.8	41.2	33.5	28.0	3.9	308.4
Net incurred claims	(154.5)	(21.4)	-	-	-	(175.9)
Claims handling costs	(9.1)	(1.5)	-	-	-	(10.6)
Insurance expenses	(34.9)	(11.2)	-	-	-	(46.1)
Other operating expenses (excl. amortisation of intangibles)	-	-	(6.6)	(20.9)	-	(27.5)
Total Expenses	(198.5)	(34.1)	(6.6)	(20.9)	-	(260.1)
Share of joint venture profit (gross of tax and amortisation)	-	-	-	-	3.5	3.5
Trading profit	3.3	7.1	26.9	7.1	7.4	51.8
Non-trading costs						(0.9)
Amortisation of acquired intangibles						(4.9)
Joint venture deemed disposal gain						63.8
Finance costs						(4.0)
Profit before taxation						105.8
Tax expense						(8.2)
Profit after taxation						97.6
Net expense ratio	21.8%	30.8%				23.4%
Net loss ratio	76.6%	51.9%				72.4%
Combined operating ratio	98.4%	82.7%				95.8%

 

 

⁽¹⁾ The Price Comparison segment reports Gocompare's contribution to the Group's trading profit subsequent to the acquisition of the outstanding 50% of the ordinary shares of Gocompare on 31 March 2015. The Group's 50% share of Gocompare's profit up until the date of acquisition is reported as share of joint venture profit.  

 

 

 

NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 30 June 2016

4.         Segmental information (continued)

 

Reviewed Year ended 31 December 2015	Motor underwriting	Home underwriting	Non-underwritten additional services	Price comparison (from 1/4/2015)(1)	Investments	Total
	£m	£m	£m	£m	£m	£m
Gross written premiums	461.0	89.3	-	-	-	550.3
Earned premiums, net of reinsurance	413.0	82.6	-	-	-	495.6
Investment income	-	-	-	-	6.1	6.1
Instalment interest income	-	-	30.2	-	-	30.2
Fees for additional services	-	-	38.1	84.1	-	122.2
Total income	413.0	82.6	68.3	84.1	6.1	654.1
Net incurred claims	(315.1)	(51.4)	-	-	-	(366.5)
Claims handling costs	(18.0)	(3.1)	-	-	-	(21.1)
Insurance expenses	(73.2)	(23.9)	-	-	-	(97.1)
Other operating expenses (excl. amortisation of intangibles)	-	-	(13.2)	(67.4)	-	(80.6)
Total Expenses	(406.3)	(78.4)	(13.2)	(67.4)	-	(565.3)
Share of joint venture profit (gross of tax and amortisation)	-	-	-	-	3.5	3.5
Trading profit	6.7	4.2	55.1	16.7	9.6	92.3
Non-trading costs						(0.2)
Amortisation of acquired intangibles						(12.7)
Joint venture deemed disposal gain						63.8
Finance costs						(8.7)
Profit before taxation						134.5
Tax expense						(12.6)
Profit after taxation						121.9
Net expense ratio	22.1%	32.7%				23.8%
Net loss ratio	76.3%	62.2%				74.0%
Combined operating ratio	98.4%	94.9%				97.8%

 

 

⁽¹⁾ The Price Comparison segment reports Gocompare's contribution to the Group's trading profit subsequent to the acquisition of the outstanding 50% of the ordinary shares of Gocompare on 31 March 2015. The Group's 50% share of Gocompare's profit up until the date of acquisition is reported as share of joint venture profit.  

 

 

 

 

NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 30 June 2016

4.         Segmental information (continued)

Reconciliation of segmental information to IFRSs statement of comprehensive income

 

The Group incurred non-trading costs of £0.4m in the six months ended 30 June 2016 which mainly relates to share-based payments in respect of the long service and one-off awards issued at the time of the Group's Admission to the London Stock Exchange in 2013 (30 June 2015: £0.9m relating only to long service and one-off awards).

 

The Group's segmental information presents non-trading costs and the amortisation of acquired intangibles separately from other operating expenses.

 

Additionally, the Group's share of joint venture profit until the date of acquisition of Gocompare is presented before tax and amortisation. These items, which are presented within share of profit after tax of joint venture in the condensed consolidated income statement are presented within amortisation of acquired intangibles and tax expense in the segmental information.

 

5. Dividends

During the six months ended 30 June 2016, a dividend per share of 7.3p (£30.4m) was declared by the Board of Directors as a final dividend for the year ended 31 December 2015. The esure Employee Benefit Trust waived their right to a dividend and a dividend of £30.4m was paid by the Group.  Subsequent to 30 June 2016, an interim dividend per share of 3.0p (£12.5m) has been declared by the Board of Directors (2015: interim dividend per share of 4.2p, £17.5m).

6.        Earnings per share

 

Basic

 

Basic earnings per share is calculated by dividing the earnings attributable to the owners of esure Group plc and the weighted average of Ordinary Shares in issue during the period, excluding Ordinary Shares held as employee trust shares.

 

Diluted

 

Diluted earnings per share is calculated by dividing the earnings attributable to the owners of esure Group plc by the weighted average of Ordinary Shares in issue during the period adjusted for any dilutive potential Ordinary Shares.

 

The difference between the basic and diluted weighted average number of shares outstanding during the period, being 1,370,598 (31 December 2015: 1,202,953; 30 June 2015: 993,493), relates to the dilutive potential of the share-based payment arrangements. 

 

 

NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 30 June 2016

6.        Earnings per share (continued)

Basic and diluted earnings per Ordinary Share

	Reviewed   Six months ended 30 June 2016	Reviewed   Six months ended 30 June 2015	Audited   Year ended 31 Dec 2015
Profit after taxation (£m)	30.7	97.6	121.9
Weighted average number of shares (million) - basic	416.1	415.5	415.3
Earnings per share - basic (pence per share)	7.38	23.49	29.34
Weighted average number of shares (million) - diluted	417.5	416.5	416.7
Earnings per share - diluted (pence per share)	7.35	23.44	29.25

 

The IAS 33 earnings per share calculation is disclosed above and is based on a weighted average number of shares in issue for the six months ended 30 June 2016.

Underlying earnings per Ordinary Share

 

As a result of the acquisition of the outstanding 50% of the share capital of Gocompare on 31 March 2015, the Group has recognised a joint venture deemed disposal gain and amortisation relating to the intangible assets arising on the application of IFRS 3. In order to reflect better the Group's performance for the period and its dividend paying capacity, an additional underlying earnings per share calculation is presented below. The reported profit after tax for each period is adjusted for the Group's joint venture deemed disposal gain (30 June 2016: £nil, 30 June 2015: £63.8; 31 December 2015: £63.8m) and amortisation of acquired intangibles, as disclosed in the segmental information in note 4, net of the deferred tax credit associated with the amortisation (30 June 2016: £6.3m; 30 June 2015: £3.9m; 31 December 2015: £10.1m). The number of shares is set at the number of Ordinary Shares in issue as at the reporting date.  

	Reviewed   Six months ended 30 June 2016	Reviewed   Six months ended 30 June 2015	Audited   Year ended 31 Dec 2015
Profit after taxation (£m)	30.7	97.6	121.9
Adjustments net of taxation (£m)	6.3	(59.9)	(53.7)
Underlying profit after tax (£m)	37.0	37.7	68.2
Number of shares (million) - basic	416.9	416.8	416.9
Underlying earnings per share (pence per share)	8.9	9.0	16.4

 

 

 

NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 30 June 2016

7.         Taxation

The Group incurred an effective tax rate of 18.6% in the six months ended 30 June 2016 (30 June 2015: 18.7%; 31 December 2015: 17.3%, excludes the effects of the deemed disposal gain on acquiring outstanding 50% shares of Gocompare 31 March 2015). 

 

8.         Goodwill and intangible assets

	Goodwill		Software		Acquired brands		Customer relationships		Total
	£m		£m		£m		£m		£m
Cost
As at 1 January 2015	-		7.5		24.2		11.3		43.0
Acquisition through business combination	127.7		1.2		40.9		10.2		180.0
Additions in the year	-		1.8		-		-		1.8
As at 31 December 2015	127.7		10.5		65.1		21.5		224.8
Additions in the period	-		3.8		-		-		3.8
As at 30 June 2016	127.7		14.3		65.1		21.5		228.6
Accumulated depreciation
As at 1 January 2015	-		3.5		15.1		11.1		29.7
Charge for the year	-		1.2		8.4		4.0		13.6
As at 31 December 2015	-		4.7		23.5		15.1		43.3
Charge for the period	-		0.9		5.2		2.6		8.7
As at 30 June 2016	-		5.6		28.7		17.7		52.0
Carrying amount
As at 31 December 2015	127.7		5.8		41.6		6.4		181.5
As at 30 June 2016	127.7		8.7		36.4		3.8		176.6

 

 

 

NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 30 June 2016

8.         Goodwill and intangible assets (continued)

Goodwill of £127.7m as at 30 June 2016 relates to goodwill arising on the acquisition of Gocompare by the Group. Included in acquired brands and customer relationships are the Gocompare brand and the Gocompare customer relationships recognised on acquisition of Gocompare.  The Gocompare brand had an estimated fair value at the date of acquisition of £40.9m and is being amortised on a straight-line basis over its estimated useful economic life of five years. The Gocompare customer relationships had an estimated fair value at the date of acquisition of £10.2m and is being amortised on a straight-line basis over its estimated useful economic life of two years.

Included in software as at 30 June 2016 is £2.1m of development costs that have been capitalised. Included in software as at 31 December 2015 £2.8m (30 June 2015:£3.2m) relating to assets which were not yet available for use in the manner intended by management. These assets are now being used by the business and deprecation is being charged accordingly.

 

9.         Property, plant and equipment

 

		Land and buildings		Fixtures, fittings and equipment		Total
		£m		£m		£m
Cost
As at 1 January 2015		11.6		20.5		32.1
Additions in the year		-		6.6		6.6
Acquisition through business combination		-		1.4		1.4
Revaluation of land and buildings		1.3		-		1.3
As at 31 December 2015		12.9		28.5		41.4
Additions in the period		-		1.4		1.4
As at 30 June 2016		12.9		29.9		42.8
Accumulated depreciation
As at 1 January 2015		-		5.4		5.4
Charge for the year		0.1		1.2		1.3
Revaluation of land and buildings		(0.1)		-		(0.1)
As at 31 December 2015		0.0		6.6		6.6
Charge for the period		0.0		1.0		1.0
As at 30 June 2016		0.0		7.6		7.6
Carrying amount
As at 31 December 2015		12.9		21.9		34.8
As at 30 June 2016		12.9		22.3		35.2

Included in property, plant and equipment as at 31 December 2015 was £18.8m (30 June 2015:£14.6m) relating to computer hardware assets that were not yet available for use in the manner intended by management. These assets are now being used by the business and deprecation is being charged accordingly.

NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 30 June 2016

10.       Financial assets and liabilities

10.1    Financial assets

 

		Reviewed As at 30 June 2016		Reviewed As at 30 June 2015		Audited As at 31 Dec 2015
		£m		£m		£m
	Financial investments designated as fair value through profit or loss:
	Shares and other variable‑yield securities and units in unit trusts	39.7		41.5		39.3
	Debt securities and other fixed income securities	491.3		549.1		497.9
	Deposits with credit institutions	181.6		114.0		188.8
	Financial investments held for trading:
	Derivative financial instruments	0.0		0.4		0.1
	Financial investments at fair value through profit or loss	712.6		705.0		726.1
	Available for sale financial assets:
	Shares in unquoted equity investments	3.7		2.0		2.4
	Government bonds	44.5		-		-
	Loans and receivables:
	Insurance and other receivables	197.7		165.8		174.1
	Cash and cash equivalents	28.9		47.5		31.9
	Total financial assets	987.4		920.3		934.5

Of the financial investments and cash above, £273.2m have a credit rating of AAA as at 30 June 2016 (30 June 2015: £214.5m, 31 December 2015: £297.0m), £185.4m have a credit rating of AA (30 June 2015: £202.5m, 31 December 2015: £132.1m), £154.1m have a credit rating of A (30 June 2015: £179.6m, 31 December 2015: £173.9m) and £114.6m have a credit rating of BBB or below, or are not rated (30 June 2015: £114.4m, 31 December 2015: £115.7m). The shares and other variable yield securities, units in unit trusts and derivative financial instruments as shown above are not subject to credit rating. During the year, the Group acquired an asset, which upon recognition was classified as an "available for sale" financial asset.

 

10.2     Financial liabilities

	Reviewed As at 30 June 2016	Reviewed As at 30 June 2015	Audited As at 31 Dec 2015
	£m	£m	£m
Financial liabilities held for trading:
Derivative financial instruments	11.1	0.3	3.3
Other financial liabilities:
Borrowings: 10 year Subordinated Notes	122.7	122.2	122.6
Insurance and other payables	24.8	18.6	15.2
Total financial liabilities	158.6	141.1	141.1

 

 

NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 30 June 2016

10.3      Fair value estimation

The Group's financial instruments are measured at fair value by reference to a fair value measurement hierarchy which is presented within the Group's financial statements for the year ended 31 December 2015.

 

In accordance with IFRS 13 Fair Value Measurement financial instruments held at fair value through profit or loss ("FVTPL") 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 are derived from inputs other than quoted prices included in Level 1, if all

significant inputs required to fair value an instrument are observable, the instrument is 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

  publically;

 

• Inputs that are derived principally from, or corroborated by, observable market data by

  correlation;

 

• For forward foreign exchange contracts, the use of observable forward exchange rates at the

  reporting date, with the resulting value discounted back to present value; and

 

• Other techniques, such as discounted cash flow analysis, which consider on a prudent basis the

  likely realisable value.

 

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.

 

NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 30 June 2016

 

10.3      Fair value estimation (continued)

 

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

At 30 June 2016	Level 1	Level 2	Level 3	Total fair value
	£m	£m	£m	£m
Financial assets
Assets at FVTPL:
Derivative financial instruments	-	-	-	-
Equity securities	39.7		-	39.7
Debt securities	109.1	382.2	-	491.3
Deposits with credit institutions	-	181.6	-	181.6
Total financial assets at FVTPL	148.8	563.8	-	712.6
AFS financial assets:
Unquoted equity securities	-	-	3.7	3.7
Government Bonds	44.5	-	-	44.5
	44.5	-	3.7	48.2
Land and Buildings	-	-	12.9	12.9
Financial liabilities
Derivative financial instruments	-	11.1	-	11.1
Total financial liabilities at FVTPL	-	11.1	-	11.1

 

At 30 June 2015	Level 1	Level 2	Level 3	Total fair value
	£m	£m	£m	£m
Financial assets
Assets at FVTPL:
Derivative financial instruments	-	0.4	-	0.4
Equity securities	41.5	-	-	41.5
Debt securities	141.9	407.2	-	549.1
Deposits with credit institutions	-	114.0	-	114.0
Total financial assets at FVTPL	183.4	521.6	-	705.0
AFS financial assets:
Unquoted equity securities	-	-	2.0	2.0
Land and Buildings	-	-	11.6	11.6
Financial liabilities
Derivative financial instruments	-	0.3	-	0.3
Total financial liabilities at FVTPL	-	0.3	-	0.3

 

 

NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 30 June 2016

 

10.3      Fair value estimation (continued)

 

At 31 December 2015	Level 1	Level 2	Level 3	Total fair value
	£m	£m	£m	£m
Financial assets
Assets at FVTPL:
Derivative financial instruments	-	0.1	-	0.1
Equity securities	39.3	-	-	39.3
Debt securities	87.4	410.5	-	497.9
Deposits with credit institutions	-	188.8	-	188.8
Total financial assets at fair value	126.7	599.4	-	726.1
AFS financial assets:
Unquoted equity securities	-	-	2.4	2.4
Land and buildings	-	-	12.9	12.9
Financial liabilities
Derivative financial instruments	-	3.3	-	3.3
Total financial liabilities at fair value	-	3.3	-	3.3

 

The classification of each asset within the fair value hierarchy is determined by valuation techniques used in pricing each asset and the level of liquidity, as described in the Group's annual financial statements as at 31 December 2015. There are no changes to the fair value valuation techniques or measurement methods in the interim period. 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. There were no transfers of financial assets or financial liabilities between levels during the six months ended 30 June 2016.

The Group held level 3 AFS financial assets of £3.7m as at 30 June 2016 (31 December 2015: £2.4m; 30 June 2015: £2.0)and recognised a gain through other comprehensive income of £0.8m (1H 2015: £1.2m). The level 3 AFS financial asset is an investment in an unquoted equity investment which has been valued using a discounted cash flow valuation model. In addition, under IFRS 13, land and buildings with a carrying value of £12.9m (31 December 2015: £12.9m, 30 June 2015: £11.6m) are classified as Level 3 assets. As stated in the Group's 2015 consolidated financial statements, owner-occupied properties are stated at their revalued amounts annually, as assessed by qualified external valuers, 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"). More frequent revaluations are performed by management to assess that the carrying amount does not materially differ from its fair value.

 

NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 30 June 2016

11.       Reinsurance assets and insurance contract liabilities

 

11.1    Analysis of recognised amounts

 

	Reviewed As at 30 June 2016 £m	Reviewed As at 30 June 2015 £m	Audited As at 31 Dec 2015 £m
Gross
Claims outstanding (before deduction of salvage    and subrogation) and claims handling expenses	606.4	606.6	614.2
Unearned premiums	308.3	269.8	272.4
Total insurance liabilities, gross	914.7	876.4	886.6
Recoverable from reinsurers
Claims outstanding	211.0	214.0	209.3
Unearned premiums	19.0	16.0	15.9
Total reinsurers' share of insurance liabilities	230.0	230.0	225.2
Net
Claims outstanding (before deduction of salvage and subrogation) and claims handling expenses	395.3	392.6	404.9
Unearned premiums	289.3	253.8	256.5
Total insurance liabilities, net	684.6	646.4	661.4

 

11.2    Claims development

              

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

	Reviewed As at 30 June 2016	Reviewed As at 30 June 2015	Audited As at 31 Dec 2015
	£m	£m	£m
Net claims reserve
At beginning of period	358.3	368.3	368.3
Cash paid for claims settled in period/year	(207.6)	(186.8)	(376.4)
Change arising from:
Current year claims	218.5	211.9	423.1
Prior year claims	(20.5)	(36.2)	(56.7)
At end of period/year	348.7	357.2	358.3
Provision for claims handling costs	12.6	12.7	12.6
Salvage and subrogation	34.0	22.7	34.0
At end of period/year	395.3	392.6	404.9

 

 

 

 

NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 30 June 2016

11.2    Claims development (continued)

 

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

 

	Reviewed As at 30 June 2016	Reviewed As at 30 June 2015	Audited As at 31 Dec 2015
	£m	£m	£m
Net claims incurred	198.1	175.8	366.5
Claims handling expenses	11.2	10.6	21.1
Claims incurred and claims handling expenses	209.3	186.4	387.6

 

12.       Related party transactions

 

Related party transactions during the six months ended 30 June 2016 were consistent in nature and scope with those disclosed in the Group's annual report and accounts for the year ended 31 December 2015.

 

13.       Risk management and principal risks and uncertainties

 

The Board is responsible for prudent oversight of the Group's business and financial operations, ensuring that they are conducted in accordance with sound business principles and with applicable law and regulation. The Group's 2015 Annual Report and Accounts provide details of the Group's risk management framework, organised around the core elements of Risk Strategy and Appetite, Risk Governance and the associated Risk Reporting.

 

The Group's risk management framework is dynamic and continues to be enhanced and developed to ensure it continues to meet the needs of the Group.

 

Principal risks and uncertainties

 

The Directors consider that the material risks and uncertainties facing the Group are:

 

Insurance Risk

 

Key elements

·      Pricing and underwriting

·      Reserve

·      Catastrophe

·      Reinsurance

 

Definition

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

 

There is some future uncertainty within the market in terms of the future rating environment and potential legal changes through the Chancellor of the Exchequer's "Spending Review and Autumn Statement 2015" that is considering whiplash claims reform and increasing the small claims track limit.

 

Mitigation

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

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

 

NOTES TO THE FINANCIAL STATEMENTS

 

13.       Risk management and principal risks and uncertainties (continued)

 

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

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

·      There is a prudent approach to reserving risk with a risk appetite to hold a margin above the actuarial best estimate. The Group's actuarial function analyses and projects historical claims development data and uses a number of actuarial techniques to both test and forecast claims provisions. In addition, independent external actuaries assess the adequacy of the Group's reserves.

·      There is reinsurance in place to protect the business from large losses and Catastrophe events; there are risk appetite metrics set against the level of coverage as well as the creditworthiness of reinsurers and concentration risk - these are monitored prior to finalisation of any contract and on an ongoing basis to ensure that it remains in line with our risk appetite.

 

Market Risk

 

Key elements

·      Interest Rate

·      Spread

·      Equity

·      Default

·      Liquidity

 

Definition

There are moderate levels of Market risk taken by the Group, it represents the uncertainty in the financial position due to fluctuations in the level and in the volatility of market prices of assets and liabilities.

 

There is some increased uncertainty within the market following Brexit, making this risk currently heightened.

 

Mitigation

·      Market risk is managed through regular monitoring, including the drivers of investment return and value at risk measures, counterparty exposures and interest rate sensitivities of our assets and liabilities. As part of this the Group considers the matching of the investment portfolio with its insurance liabilities to mitigate and manage this risk.

·      Oversight of the Group's investment strategy and the associated liquidity risk is undertaken by the Management Investment Committee.

·      Our investment strategy does not expose the Group to material currency risk or the risks arising from active trading of derivatives.

·      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 and geographical segments. Such risks are subject to regular review within the Management Investment Committee. At 30 June 2016, the Group had no direct exposure to peripheral Eurozone countries sovereign debt.

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

 

Financial and Solvency Risk

 

Key elements

·      Financial Reporting

·      Solvency position

 

Definition

The risk that inaccurate financial estimates or judgements could misrepresent our financial or solvency position and change key strategic decisions. The preparation of financial information requires management to make judgements, estimates and assumptions where the actual outcome may differ from these estimates.

NOTES TO THE FINANCIAL STATEMENTS

 

13.       Risk management and principal risks and uncertainties (continued)

 

Mitigation

·      The Group reviews financial estimates and underlying assumptions on an ongoing basis taking into account changes in underwriting conditions, changes in legislation or regulation, and market movements.

·      The Group has strong governance in place to provide oversight of the financial estimates and judgements as well as the Solvency position being monitored on a regular basis.

·      In addition, independent external actuaries assess the adequacy of the Group's technical provisions at least annually. Ultimately, the oversight of the Group's material financial estimates and judgements resides with the Audit Committee.

 

Operational Risk

 

Key elements

·      Business processes

·      IT systems and disaster recovery

·      Data Security and Cyber Risk

·      Infrastructure risk and business continuity

·      Financial Crime and Fraud

·      Outsourcing

·      Distribution

 

Definition

The risk that there is a financial loss or reputational damage due to inadequate or failures with processes, people or systems - either within the Group or within material partners.

 

Mitigation

·      Ownership of operational risks sits with the first line business functions however they are supported by a strong second line Risk function which provides support, challenge and oversight.

·      Operational risk identification, assessment and management are embedded within management processes. This is further supported by an annual risk and control self assessment which is facilitated by the Risk function.

·      The Group has a robust Governance and Risk Framework in place that ensures that there is an appropriate range of preventative, monitoring and detective controls in place to mitigate the operational risks within the business.

·      The monitoring and mitigation of financial crime and fraud is managed by the Group's financial crime team supported by the rest of the business.

·      The Group has robust systems in place to mitigate such risks, including perimeter firewalls and intrusion detection systems, anti-virus protection, laptop encryption, logical and physical access restrictions, rigorous vetting of new and existing staff and a clear desk policy. The Group carries out training and these controls are rigorously enforced.

·      A key element to the prevention of this risk is a robust change management programme which is subject to rigorous project management disciplines from programme development through to deployment.

 

Legal, Regulatory and Conduct Risk

 

Key elements

·      Legal and Political Risk

·      Conduct and Compliance Risk

·      Regulatory Risk

 

Definition

The Group operates in a regulated environment therefore there is a risk of reputational or financial damage driven by regulatory or legal intervention or breach of existing legislation or regulation.

 

Mitigation

·      There is a low appetite for this risk and this is reflected in management decision making, with close monitoring of key risk indicators

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

NOTES TO THE FINANCIAL STATEMENTS

 

13.       Risk management and principal risks and uncertainties (continued)

 

·      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.

·      Our culture and tone from the top ensures the interests of our customers and their fair treatment is paramount.

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

 

 

 

 

 

 

DIRECTORS' RESPONSIBILITY STATEMENT

 

We confirm that to the best of our knowledge:

The condensed consolidated financial statements for the six months ended 30 June 2016 have been prepared in accordance with International Accounting Standard 34 ("IAS 34") as adopted by the EU.

The interim management report includes a fair review of the information as required by:

·      DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of the important events that have occurred during the first six months of the current financial year and their impact on the condensed set of consolidated financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

·      DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially impacted the financial position or performance of the Group during the period; and any changes in the related party transactions from the Group's consolidated financial statements for the year ended 31 December 2015 that could do so.

 

 

 

 

 

Stuart Vann                                                                 Darren Ogden

 

Chief Executive Officer                                                   Chief Finance Officer     

 

 

Signed on behalf of the Board on 4 August 2016