2015 Preliminary Results

8 March 2016

esure Group plc preliminary results for the year ended 31 December 2015

Good progress in 2015 and esure Group well placed to deliver on strategic plans in 2016

Highlights

· Gross written premiums up 6.3% to £550.3m (2014: £517.8m)

· In-force policies up 2.8% to 2.001 million (2014: 1.946 million)

· Combined operating ratio 5.9ppts higher at 97.8% (2014: 91.9%)

· Profit before tax up 29.7% to £134.0m (2014: £103.3m)

· Underlying profit before tax1 down 22.7% to £82.9m (2014: £107.2m)

· Final dividend of 7.3 pence per share, which together with the interim dividend of 4.2 pence per share, takes the full year dividend to 11.5 pence per share. This reflects a payout ratio2 of 70% of underlying earnings per share, inclusive of a 20% special dividend

· Gocompare.com3 income up 5.0% to £119.0m (2014: £113.3m); profit before tax down 9.0% to £23.3m (2014: 25.6m) as the Group invests in its strategic objectives

· Well capitalised under Solvency II with Group coverage at 123% (137% prior to Group final dividend) and Solo coverage at 138%

Peter Wood, esure Group Chairman, said: "The management team made good progress on our strategic plans in 2015. The Group continued its disciplined approach and is in a strong position to capitalise on growth opportunities. The motor rating environment is now conducive for this and we are also looking at opportunities in Home. Furthermore, I am delighted that we completed the acquisition of the remaining 50% of Gocompare.com and under our strategic direction we are already seeing benefits as we reinvigorate the brand, increase the product range and invest for the future.

"The Board has declared a full year dividend of 11.5 pence per share which represents 70% of underlying profit after tax, inclusive of 20% special dividend. The Board's current outlook for profitable growth is reflected in its decision to retain capital, in line with the dividend policy, as we look to deliver stakeholder value over the medium to long term."

Stuart Vann, Chief Executive Officer, said: "Our underlying profit before tax of £82.9 million is a good achievement in a highly competitive market. During 2015 we grew both our customer base and premiums in Motor in a controlled and measured way through the delivery of our underwriting initiatives. We saw positive movements in the motor rating environment throughout the year and are well positioned to take advantage of this.

"In Home, market conditions continue to be competitive, but we remained disciplined in our rating decisions and maintained premium and customer numbers during the year. In December, we incurred around £4m of claims costs from the exceptional weather events and while our focus was on our customers at this time, through our focused and disciplined approach to underwriting our claims costs were significantly less than our market share.

"Gocompare.com is making great progress and delivered income growth of 10% in the second half of the year driven by our new advertising campaigns featuring Gio Compario, while continuing to focus on efficiency.

"We are in a strong position to deliver on our strategic objective of growing our insurance business and to take advantage of the opportunities presented through an improving Motor market. 2016 has got off to a good start and we expect to deliver gross written premium growth of 10-15% and policy growth of 4-6%, assuming stable market conditions. The combined operating ratio in Motor and Home is expected to be in the region of 97-98%. Gocompare.com is already benefitting from our full ownership and we expect the business to achieve an increase in profitability of 20-30% in 2016."

For further information:

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 £134.0m (2014: £103.3m) is adjusted for the Group's joint venture deemed disposal gain of £63.8m (2014: £nil) and amortisation of acquired intangible assets £12.7m (2014: £3.9m).

2. The payout ratio represents the proportion of underlying earnings which is available for distribution.

3. Gocompare.com 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.com on 31 March 2015.

About esure Group plc

esure Group comprises of an efficient personal lines insurance business and a price comparison website. Founded in 2000 by Chairman, Peter Wood, Britain's foremost general insurance entrepreneur, the company is a leading provider of motor and home insurance under the esure and Sheilas' Wheels brands. Price comparison website Gocompare.com is also part of the Group.

Through a focused approach to underwriting and by offering a diverse range of products, the Group is able to attract and retain customers with its strong brands, competitive prices and excellent customer service. The Group's strategy is designed to deliver value to all stakeholders including shareholders, customers and employees with an overarching theme of makings things simple.

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.

Chairman's statement

As founder of esure Group and Chairman, I am pleased to report that the Group delivered a trading profit of £92.3 million in 2015, competing well in competitive markets.

Marketplace

2015 has been a mixed year for general insurers but one with developments which I believe will help the Group progress in future years.

In Motor, latterly in the year there have been positive signs that rates are improving, following a challenging claims environment. The Government announcement that it will end the right to cash compensation for minor whiplash injuries and raise the upper limit for the small claims court is positive and we will be working with the Government to ensure this is implemented effectively.

In Home, pressure remains on pricing as competitors look to enter the market or maintain their market share and profitability has been affected across the industry by the severe weather events seen late in the year.

Our performance

Turning to our results in more detail, despite these challenging market conditions we have delivered a trading profit of £92.3 million. Gross written premiums increased to £550.3 million as a result of the growth of in-force policies to two million and an increase in rates. The Group is focused on its underwriting performance and continues to expand its footprints in Motor and Home to offer more customers our excellent products and services.

We were delighted to complete the acquisition of Gocompare.com in March and I am pleased with progress so far. The relaunch of Gio Compario has already reinvigorated the brand and our attention now turns to delivering growth across all product lines in the future.

Our goal is, as ever, to provide a good level of return for shareholders and I am pleased to confirm the Board has recommended a final dividend of 7.3 pence per share. This together with the interim dividend of 4.2 pence takes the full year to 11.5 pence per share representing a payout ratio of 70% of underlying profit after tax. The payout reflects our strategy of retaining capital when we see good growth opportunities. Through retaining profit the Group remains well capitalised and is well positioned for this growth.

Our Board

As Chairman of the Board I am committed to ensuring the highest levels of governance and expertise. Our Board continues to do an excellent job of providing leadership and overseeing the direction of the business and I would like to take this opportunity to thank them all for their input.

During the year we have seen a number of changes including the departures of Dame Helen Alexander and Anthony Hobson, both of whom stepped down at our AGM, and Mike Evans who left in August and Anne Richards who stood down in February 2016 following her appointment as CEO of M&G investments. I would like to thank them for their support over the years; they have been invaluable in offering guidance and challenge. As a result of Dame Helen Alexander stepping down, Shirley Garrood, a member of the Board since 2013, was appointed as the Senior Independent Director in May and Deputy Chairman in June.

We have welcomed two new Non-Executive Directors, Martin Pike and Angela Seymour-Jackson, in August and October respectively. Martin and Angela both bring further expertise to our Board and I look forward to working with them over the coming years.

Our people

In 2015, we further strengthened the operational management team during the year with a number of senior hires who will work with Stuart and his executive team to drive the business forward over the coming years. I welcome them and our other new recruits and would like to say thank you for the hard work of all our colleagues across the Group, who I know are dedicated to our customers and making our business a success.

Peter Wood

Chairman

Chief Executive Officer's review

Introduction

2015 has been a year of steady progression on our strategic plans against a backdrop of challenging yet improving market conditions. With our focus on building esure Group for the future and we have delivered a trading profit of £92.3 million.

We have seen growth in both our total customer base and premium income, and have taken a controlled approach to customer expansion. Rates are now moving up and we are well placed to benefit from better market conditions in the future.

Our combined operating ratio of 97.8% is higher than 2014, with an improvement in the current year loss ratio, more than offset by the reduction in favourable development of prior accident year reserves from the exceptional levels seen in 2014. Without the weather events seen in December last year that cost the Group £4m, the combined operating ratio would have been in the range of 96-97% as outlined in the 2015 third quarter Interim Management Statement. We fully support the review of personal injury costs announced in the Chancellor's Autumn statement, and will work with the Government and industry bodies to ensure the review is successful and implemented in the most effective way for customers.

Gocompare.com

In March, we acquired Gocompare.com. The business is an online destination of choice for consumers looking to shop around for good value and suitable products across financial services, telecoms, energy and much more and contributed £20.2 million to our trading profit over the course of the year. The business offers comparison services on over 40 products, and with brand recognition at an extremely high 93%, we are well placed for further growth. Since April when we took full control we have brought back the established Gio Compario advertising and improved efficiency in the business.

Our commitment to innovation is demonstrated in the launch of the midata initiative, which enables consumers to be able to make meaningful comparisons on current accounts based on their own experience. This is an industry first which no other comparison site offers.

Gocompare.com's comparison services are run on an independent basis ensuring that it continues to be a highly regarded partner for the insurance industry, along with its other business partners.

Motor

In Motor, we have seen growth in written premiums and customer numbers. Competition has remained high but we have been able to implement rate increases, which we expect to continue to do in 2016. Latterly in the year, we launched further growth initiatives which will see us quoting for a more diverse selection of risks, meaning we will be able to provide cover for more motorists.

Home

Our Home customer base and premium income has remained steady year-on-year as we have chosen not to grow this line of business whilst pressure on rates continues. We insure over 500,000 homes across the UK and similarly to Motor, we are in the early days of expanding our footprint and in future will be offering competitive prices for more households.

We had a small number of customers affected by the storms at the end of the year and I am pleased to say exposure was relatively limited for us. We have focused on ensuring our customers claims are dealt with quickly and with an excellent level of care.

Customer

Customer service remains high on the agenda and as we evolve we look for ways to constantly improve our customer experience. Our retention rate of 80% shows a high level of satisfaction amongst our customers as they choose to stay with the Group year-on-year and continue to benefit from our good value, high quality products. This year, we have introduced a new Net Promoter ScoreTM, which measures customer satisfaction, and provides insightful information on which to build our proposition in 2016 and beyond.

People

Investment in our people is fundamental to our success and we aim to make esure Group a great place to work for all of our colleagues. Our people strategy is built upon a competitive reward and benefits package, a high level of colleague engagement, and career progression.

Everyone from our front-line staff to colleagues in support and specialist areas is important in ensuring we meet customers' needs and during 2015 we partnered with Towers Watson to survey every member of staff to find out their views on working at the Group which has given us an excellent level of insight. Going forward this will be undertaken on a yearly basis.

Outlook

We are in a strong position to deliver on our strategic objective of growing our insurance business and to take advantage of the opportunities presented through an improving Motor market. 2016 has got off to a good start and we expect to deliver gross written premium growth of 10-15% and policy growth of 4-6%. The combined operating ratio in Motor and Home is expected to be in the region of 97-98%. Gocompare.com is already benefitting from our full ownership and we expect the business to achieve an increase in profitability of 20-30% in 2016.

Summary

Looking back over 2015, we have progressed well against our strategic priorities. Looking ahead, we are now in a strong position for this year and thereafter. I would like to thank our customers, shareholders and colleagues for their continued support.

Stuart Vann

Chief Executive Officer

Operating and financial review

Group

Motor

esure Group provides Motor insurance products and services to its customers through its two key brands, esure and Sheilas' Wheels, with all its underwritten products rated 5 Star by independent research and software company, Defaqto.

Developments

The Group continued to widen its underwriting footprint to provide more customers with competitive quotes as it looks to deliver controlled and measured growth. In addition, improvements have been made to processes and customer interaction all with the aim of making customers' lives simple.

Market

The rating environment in the UK motor market improved in 2015 with rate increases noted across the market indices. The Association of British Insurers ("ABI") indicated that average written premiums increased by 8% in 2015 compared to 2014, with the confused.com and Towers Watson rating index suggesting quoted premiums rose 13%. These increases are reflective of rising claims costs and an increase in insurance premium tax from 6% to 9.5% on 1 November 2015. The Government announced in November 2015, as part of its Autumn Statement, a consultation on proposed measures to end the right to cash compensation for minor whiplash injuries and removing legal costs by transferring personal injury claims of up to £5,000 to the small claims court.

Performance

Gross written premiums increased 7.4% to £461.0m (2014: £429.3m) through growth in in-force policies and positive rate increases across the portfolio. In-force policies increased by 4.1% to 1.435 million (2014: 1.378 million) as the Group increased its retention rate and continued to widen its underwriting footprint, while remaining disciplined in its core markets.

Trading profit of £6.7m (2014: £31.1m) has been impacted by the higher combined operating ratio of 98.4% (2014: 92.4%) as the improvement in the current accident year loss ratio is less than the reduction in favourable development of prior accident year reserves, albeit these remained strong at £46.4m (2014: £79.6m) and equated to 11.2% of net earned premiums (2014: 19.5%).

The Group continued to take a disciplined approach to cost management and delivered an expense ratio of 22.1% (2014: 22.5%) demonstrating the Group's efficient operations.

Home

The Group provides Home insurance products and services to its customers through its two key brands, esure and Sheilas' Wheels with all its underwritten products rated 5 Star by independent research and software company, Defaqto.

Developments

As with Motor, the Group widened its underwriting footprint to provide more customers with competitive quotes as it looks to deliver controlled and measured growth. In addition, improvements have been made to processes and customer interaction all with the aim of making customers' lives simple.

In response to the exceptional weather events of December 2015, the Group proactively called all flood customers in affected areas to assist them in their time of need. In recognition of these difficult times the Group also provided customers with emergency payments and goodwill gestures to help them over the Christmas period, while deploying innovative techniques to return them to their homes faster than previously possible.

Market

The UK home insurance market remained competitive in 2015, with premium reductions seen across the market, despite the increase in insurance premium tax. In Q4, three significant storm and flood events occurred across the UK with an estimated total insurance claims cost for domestic property and commercial of £1.3 billion (source: ABI).

Performance 

Gross written premiums and in-force policies remained broadly flat at £89.3m (2014: £88.5m) and 0.566 million (2014: 0.568 million), respectively. In competitive market conditions, the Group remained disciplined in its rating actions while exploring opportunities to widen its quote footprint.

Trading profit of £4.2m (2014: £8.4m) has been impacted by the higher combined operating ratio of 94.9% (2014: 89.9%) as the continued competitive rating environment earns through. The Group also incurred an increase in reinsurance costs following the purchase of additional cover as part of its capital management programme.

The weather in the UK was benign for the first 11 months and benefitted the Home performance; however, in December 2015 the Group incurred £4m of weather event related claims costs. The total claims costs from the December weather events was significantly lower than the Group's implied market share of claims costs. Weather event costs in total for 2015 were broadly in line with the Group's annual expectation. In addition, the expense ratio increased marginally as a consequence of the lower average earned premiums in 2015 compared to 2014.

The current year loss ratio increased as outlined above and the Group continued to benefit from strong favourable development of prior accident year reserves of £10.3m (2014: £10.4m) which equated to 12.5% of net earned premiums (2014: 12.5%)

Additional services revenues

Total income from additional services of £102.9m is broadly similar to that achieved in 2014. The Group's non-underwritten additional services trading profit increased 8.0% to £55.1m (2014: £51.0m) and continued to deliver a strong performance.

Price comparison

income and expenses on a standalone 100% ownership basis

Note: Gocompare.com's £20.2m contribution to the Group's trading profit for the year ended 31 December 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.com under full ownership) and £16.7m for the nine month period subsequent to the acquisition of the outstanding 50% of the ordinary shares of Gocompare.com on 31 March 2015.

Gocompare.com's income increased 5.0% to £119.0m (2014: £113.3m) largely as a result of increased brand awareness following the re-launch of the Gio Compario advertising campaign in late July which has led to an increase in sales in the second half of the year. In addition, Gocompare.com continued its strategic objective to diversify its income streams through investing in its product offering and this is expected to deliver income growth in 2016.

Expenses increased 9.4% to £95.7m (2014: £87.5m) as a consequence of higher spend in the second half of the year from creative and production spend relating to the re-launch of the Gio Compario advertising campaign and investment in developing Gocompare.com's product offering.

Investment returns

The Group achieved an investment return of £6.1m in 2015 in weak investment markets. Investment income of £14.1m was lower than 2014 as a result of the on-going low interest rate environment. In addition, the Group's fixed income portfolio was impacted by a widening of credit spreads in the second half of 2015 along with a deterioration in the equity markets which has resulted in a net loss of £7.7m (2014: gain of £1.0m), of which, £5.5m is unrealised.

The Group achieved a gross investment return of 0.8% (2014: 2.0%) and a net investment return of 0.5% (2014: 1.7%).

Other income improved to £3.0m (2014: £0.1m) as a result of income from the Group's investment in IMe Law Limited, operated by the Group's partner, Irwin Mitchell.

Reconciliation of trading profit to profit before tax

Reconciliation of profit before tax to underlying profit before tax

Non-trading costs of £0.2m are £5.1m lower than 2014 primarily as a consequence of the costs associated with the Group's acquisition of the remaining 50% of Gocompare.com in 2014 not repeating in 2015.

The Group incurred £8.7m in finance costs in 2015 relating to the £125.0m of 6.75% ten year tier two Subordinated Notes issued on 19 December 2014 ("the Notes") primarily to fund the acquisition of Gocompare.com.

Upon completion of the acquisition of Gocompare.com on 31 March 2015 and in line with the requirements of IFRS 3, the Group's existing 50% interest in Gocompare.com was remeasured to fair value at the acquisition date, with the resulting gain of £63.8m recognised as the Group's joint venture deemed disposal gain.

In addition, the Group recognised intangible assets for the brand and customer relationships associated with the acquisition of Gocompare.com which resulted in an increased amortisation charge. Further information can be found in note 10 to the financial statements on page 28.

In order to better reflect the Group's performance for the period and its dividend paying capacity the Group has disclosed its underlying profit before tax of £82.9m (2014: £107.2m). The reported profit before tax for each period is adjusted for the Group's joint venture deemed disposal gain (31 December 2015: £63.8m; 31 December 2014: £nil) and amortisation of acquired intangible assets (31 December 2015: £12.7m; 31 December 2014: £3.9m).

Profit after tax

Profit after tax increased to £121.9m (2014: £82.4m), despite a reduction in the Group's underwriting and investment performance, largely as a result of the £63.8m joint venture deemed disposal gain. The Group incurred an effective tax rate (inclusive of deferred tax) of 9.0% (2014: 20.2%) primarily as a result of the tax treatment on the joint venture deemed disposal gain. The UK corporation tax rate changed from 21% to 20% with effect from 1 April 2015.

Underlying profit after tax of £68.2m (2014: £85.6m) reflects the Group's net of tax position after adjusting for the Group's joint venture deemed disposal gain and amortisation of acquired intangible assets. The Group incurred an effective tax rate on an underlying basis of 17.7% (2014: 20.2%).

Earnings per share

Earnings per share increased by 48.0% to 29.3 pence (2014: 19.8 pence) despite a reduction in the Group's underwriting and investment performance which were more than offset by the £63.8m joint venture deemed disposal gain.

Underlying earnings per share decreased by 20.0% to 16.4 pence (2014: 20.5 pence) after adjusting for the Group's joint venture deemed disposal gain and amortisation of acquired intangibles.

Dividend per share

The Board has proposed a final dividend of7.3 pence per share, which together with the interim dividend of 4.2 pence per share, takes the full year dividend to 11.5 pence per share. The full year dividend of 11.5 pence per share represents an annualised payout ratio of 70% of the Group's underlying profit after tax. The payout ratio comprises a base dividend of 50% and a special dividend of 20%.

When setting the special dividend, the Board considers the Group's capital 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 profitable growth.

The ex-dividend date is 7 April 2016, the record date is 8 April 2016 and the payment date is 20 May 2016. These dates are in respect to both the base and special dividend.

Investments and cash

The Group deploys a conservative investment strategy with the primary objectives of capital preservation and maintaining liquidity.

Investments

*includes the derivative financial liabilities.

Total investments are £78.1m lower than 2014 as the Group used the majority of the net proceeds from the Notes to fund the acquisition of Gocompare.com in March 2015. Adjusting for the £122.1m net proceeds from the Notes, the Group's investments are 6.2% higher at £757.0m (2014: £713.0m).

The Group's strategic asset allocation is unchanged as follows:

- Fixed income: 80%

- Cash and liquidity funds: 15%

- Equities: 5%

As at 31 December 2015, the asset allocation was weighted towards cash and liquidity funds in light of market volatility and cash held from the sale of a fixed income fund in the fourth quarter awaiting reinvestment. The Group expects its asset allocation to trend towards its strategic asset allocation in 2016.

The Group looks to manage its portfolio with the objective of aligning the duration of its assets and liabilities. The duration of the portfolio is short at under one year largely driven by its fixed income portfolio.

Fixed income

Fixed income credit risk quality

The Group's fixed income portfolio of £494.7m is lower than 2015 as the Group disposed of a fixed income fund that was subsequently held in cash as at 31 December 2015. It is expected that this will be reinvested in 2016.

The Group continues to minimise its interest rate risk and the increase in floating rate notes reflects the continued uncertainty following the decision from the U.S. to increase its base rate in December 2015. Corporate bond exposure has been reduced in light of volatility within global financial markets with increased exposure to government bonds. In addition, the Group took actions in 2015 to position its asset portfolio ahead of the implementation of Solvency II, in particular reducing its exposure to the penal capital charges of certain residential mortgage back securities.

There has been no significant change in the credit risk quality of the fixed income portfolio with 79% held in assets rated 'A' or above.

Cash flow

The Group's cash and cash equivalents at the end of the period are £31.9m (2014: £25.1m).

Operating activities generated £154.8m (2014: net outflow of £41.0m) as a consequence of the net cash inflows from the Group's investment portfolio to fund the acquisition of Gocompare.com in March 2015.

Investing activities generated a net outflow of £73.5m (2014: £7.2m) reflecting the net cash impact of the acquisition of Gocompare.com in March 2015 and the cash dividends received from Gocompare.com prior to completion when held as a joint venture.

Financing activities includes the Group's dividend payments in 2015 of £66.1m (2014: £76.4m) and the finance costs associated with the Notes of £8.4m (2014: £0.3m).

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

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 cash flow projections were undertaken on a discounted basis. The total net claims provision recognised for PPOs and potential PPOs in the consolidated statement of financial position represents less than 5% of net claims outstanding at 31 December 2015.

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.

The Group benefited from strong favourable development of prior accident year reserves, with total prior year releases of £56.7m in 2015 (2014: £90.0m). The favourable development represents 11.4% of net earned premium (2014: 18.3%).

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 protects its capital and the underwriting result of both Motor and Home.

Currently, the Group has in place non-proportional 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 reinsurance treaties are in place covering all years in which the Group has underwritten Motor policies.

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

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.

Capital

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

The Group's objectives in managing capital are:

• To match the profile of its assets and liabilities, taking account of the risks inherent in the Business;

• To maintain financial and capital strength to support growth;

• To satisfy the requirements of its policyholders and regulators; and

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

The Group manages, as capital, all items that are eligible to be treated as capital for regulatory purposes.

Solvency II

From 1 January 2016, 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 and Solo entity will adopt the standard formula to calculate their respective capital requirements under Solvency II. The Group is well capitalised under Solvency II and as at 31 December 2015 the Group's coverage ratio was 123% (137% prior to the Group's final dividend) and the Solo coverage ratio was 138%.

The Group's Own Funds comprise Tier 1 and Tier 2 qualifying capital at 59% and 41% respectively. The Group's Notes meet the qualifying criteria of a Tier 2 capital instrument and qualify up to a maximum of 50% of the SCR.

Insurance Groups Directive

The Group has a strong capital position and has an IGD coverage ratio of 390% after allowing for the final dividend (2014: 377%).

The Notes meet the criteria of a lower tier two capital instrument. £21.4m of the Notes qualifies as capital under the IGD as the amount of qualifying lower tier two debt is restricted to a maximum of 25% of the lesser of either the Group's available solvency margin or required solvency margin.

Dividend policy

The Group's dividend policy is to target a base dividend of 50% of underlying 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 buffer and future growth.

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 of the aggregate "base" and "special" dividends for the relevant year.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

CONSOLIDATED STATEMENT OF CASH FLOWS

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 and, following the acquisition of the outstanding 50% of the ordinary shares of Gocompare.com Holdings Limited ("Gocompare"), 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 financial statements present the esure Group plc group financial statements for the year ended 31 December 2015, 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.

These consolidated financial statements have been prepared on a going concern basis. The Directors' have assessed the Group's prospects and viability for the three year period to 31 December 2018.

Based on this robust assessment, the Directors confirm that they have a reasonable expectation that the Group has adequate resources to continue in operational existence for at least the next 12 months.

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

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

Principal accounting policies

The Group's 2014 financial statements provide details of the Group's principal accounting policies. There have been no significant changes to these policies and they have been applied consistently throughout the periods presented in the preliminary results.

Changes to accounting policies

The Group has adopted the following interpretation during the period, with a date of initial application of 1 January 2015:

· IFRIC Interpretation 21 - Levies (issued on 20 May 2013): IFRIC Interpretation 21 Levies became effective under EU law for accounting periods beginning on or after 17 June 2014 and has been adopted by the Group from 1 January 2015. The interpretation clarifies that a government (or governmental agency) levy is not recognised until the obligating event specified in legislation/regulation occurs, even if there is no realistic opportunity to avoid the obligation. The Group has aligned the timing of its recognition of provisions for levies to that required by the IFRIC interpretation. Whilst this is considered to be a change in accounting policy in line with IAS 8, no restatement of comparative information has been performed on materiality grounds.

There are a number of other amendments to standards with a date of initial application of 1 January 2015, the adoption of which has had no material effect on the Group's accounting policies.

2. Accounting policies (continued)

There are a number of standards, amendments and interpretations which have been issued by the IASB but which have not yet been endorsed by the EU thus the date and impact of applying these is uncertain.

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.

Joint ventures 

Prior to the acquisition of the outstanding 50% of the ordinary shares of Gocompare on 31 March 2015, the Group's interest in Gocompare was classified under IFRS 11 - Joint Arrangements as a joint venture.

A joint venture is an arrangement in which the Group has joint control, whereby the Group has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities. The Group's interests in jointly controlled entities are accounted for using the equity method of accounting. The Group recognises the cost of the investments which, together with the Group's share of the joint venture's post-acquisition changes to shareholders' funds, is included in the consolidated statement of financial position. The Group's share of post-acquisition profit or loss and other comprehensive income is stated after appropriate adjustments to align the accounting policies of the joint venture with those of the Group. In addition, adjustments are made for the amortisation of separately identifiable intangible assets recognised on acquisition and to eliminate unrealised profits relating to commission charged to esure Group plc by the joint venture. Carrying values are reviewed at each reporting date to determine whether there are any indications of impairment. If any such indications exist, the asset's recoverable amount is estimated and compared to the carrying value. Impairment losses are recognised through the income statement. Impairment may be reversed if conditions subsequently improve and credited through the income statement.

2. Accounting policies (continued)

Business combinations

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of non-controlling interest in the acquiree, plus if the business combination is achieved in stages, the fair value of the pre-existing equity interest in the acquiree. Any gain arising from the difference between the fair value of the Group's pre-existing equity interest and its carrying value is recorded as a deemed disposal gain in the consolidated statement of comprehensive income.

Goodwill is recognised at the date of acquisition as the excess of the cost of the acquisition over the fair value of the identifiable assets acquired, liabilities assumed and any deferred tax asset or liability recognised as part of the business combination according to the requirements of IAS 12 - Income Taxes. Where the excess is negative a gain is recognised in the income statement at the date of acquisition.

When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions at the acquisition date. All acquisition-related costs are expensed in the income statement when incurred.

Other income

Other income comprises fees for additional services and, following the acquisition of the outstanding 50% of the ordinary shares Gocompare on 31 March 2015, revenue relating to price comparison services.

2. Accounting policies (continued)

Revenue relating to price comparison services received from third party partners is credited to the profit and loss account when the relevant policy or product is sold and the amount of revenue can be measured reliably, with a probable flow of economic benefits associated with the transaction to the Group.

Expenses incurred in relation to other income (including, from 31 March 2015, price comparison income) are reported within other operating expenses.

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 and reinsurance assets 

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.

Intangible assets recognised on acquisition of the outstanding 50% of Gocompare

On acquiring the outstanding 50% of Gocompare, the Group recognised intangible assets separately from goodwill as required by IFRS 3 - Business Combinations ("IFRS 3"). The valuations were performed using fair value as the standard of value, being the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction. As detailed in note 10.

The valuation techniques applied to the identified intangible assets were selected based on the nature of the asset and experience of management, being the relief-from-royalty method for the brand and the multi-period excess earnings approach for customer relationships.

Cash flow projections underlying the valuations were based on Board approved forecasts at the date of acquisition. Management judgement was applied in calibrating key inputs to the valuation models including; profit margins, growth rates, persistency, royalty rates, contributory charges and the discount rate.

4. Segmental information

Operating segments

The Group has five 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 underwriting

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.

Home underwriting 

This segment incorporates the revenues and expenses directly attributable to the Group's Home insurance underwriting activities.

Non-underwritten additional services

This segment represents the revenue and expenses relating to sales of third party additional insurance products to Motor and Home insurance customers; policy administration fees; instalment interest income; fees generated from the appointment of firms used during the claims process and car hire suppliers. 

Price comparison services

Following the acquisition of the outstanding 50% of the ordinary shares of Gocompare on 31 March 2015, this segment represents the contribution of Gocompare to the Group's consolidated income and expenses, other than the amortisation of the Gocompare brand and customer relationships and the joint venture deemed disposal gain which are reported as non-trading items.

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. 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 reported in 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 2014.

Investments

This segment represents income from investments (to manage liabilities under insurance contracts and generate return for shareholders) and the Group's interest in Gocompare prior to the 31 March 2015 acquisition.

Segmental revenues, expenses and other information

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

(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 £3.5m 50% share of Gocompare's profit up until the date of acquisition is reported as share of joint venture profit.  

The average number of in-force policies during the year ended 31 December 2015 was 1.99m.

4. Segmental information (continued)

The average number of in-force policies during the year ended 31 December 2014 was 1.96m. 

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

Trading profit, 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, comprised of Motor underwriting, Home underwriting, Investments, Non-underwritten additional services and Price comparison services is £92.3m (2014: £115.4m).

The Group's profit after tax is £121.9m (2014: £82.4m).

The Group incurred non-trading costs of £0.2m in 2015 relating to activities associated with the acquisition of Gocompare (see note 10) and share-based payments in respect of the long service and one-off awards, offset by a £1.3m upwards revaluation of the Group's land and buildings. The Group incurred non-trading costs of £5.3m in 2014 relating to activities associated with the acquisition of Gocompare and share-based payments in respect of the long service and one-off awards.

4. Segmental information (continued)

Segmental profit drivers

Motor and Home underwriting

The performance of the Motor and Home underwriting segments is measured by reference to a number of performance metrics, including in-force policies and the combined operating ratio.

Profitability of segmental underwriting activities is measured by reference to the net loss ratio, being net incurred claims as a percentage of earned premiums, net of reinsurance. For the year ended 31 December 2015, the Motor underwriting net loss ratio was 76.3% (2014: 69.9%) and the Home underwriting net loss ratio was 62.2% (2014: 59.1%). The total net loss ratio was 74.0% (2014: 68.0%).

The overall profitability of the Group's underwriting activities is measured by reference to the combined operating ratio, being the net expense ratio (net insurance expenses plus claims handling costs as a percentage of earned premiums, net of reinsurance) plus the net loss ratio. For the year ended 31 December 2015, the net expense ratio was 23.8% (2014: 23.9%) giving a combined operating ratio of 97.8% (2014: 91.9%).

All Motor and Home underwriting income is generated in the UK.

Additional services

The performance of additional services (inclusive of underwritten additional insurance products that are reported within the Motor underwriting segment), is measured by reference to revenue per in-force policy ("IFP") on a rolling 12 month basis. At 31 December 2015, revenue per IFP was £51.7 (2014: £52.5).

Price comparison services 

Following the acquisition of Gocompare, the performance of price comparison services is measured by reference to Gocompare's contribution to the Group's trading profit.

Investment income

The performance of investment income is measured by reference to gross investment return on invested assets (see page x of the Operating and financial review for a definition of this metric). For the year ended 31 December 2015, this was 0.8% (2014: 2.0%). In addition, the Group received income from its investment in IMe Law Limited, operated by the Group's partner, Irwin Mitchell.

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 5.

Reconciliation of segmental reporting to the consolidated statement of comprehensive income

The Group's segmental reporting presents amortisation of acquired intangible assets separately from other operating expenses. The Group's share of joint venture profit is presented before tax and amortisation.

5. Other income

Following the acquisition of the outstanding 50% of the ordinary shares of Gocompare on 31 March 2015, other operating expenses include expenses incurred in relation to price comparison services. For the year ended 31 December 2015 these were £67.4m (see note 4). 

During the year ended 31 December 2015, a credit of £1.3m is included within other operating expenses in relation to a revaluation of the Group's land and buildings (2014: £0.1m). In addition, £0.2m of other operating expenses were incurred in relation to activities associated with the acquisition of Gocompare (2014: £3.8m).

7. Dividends

An interim dividend of 4.2 pence per share (£17.5m) was declared by the Board of Directors in August 2015 (2014: interim dividend 5.1 pence per share, £21.3m). Subsequent to the year end, a 2015 final dividend per share of 7.3 pence (£30.3m) was declared by the board of directors (2014: final dividend per share of 11.7 pence, £48.8m).

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.

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.

The difference between the basic and diluted weighted average number of shares outstanding during the year, being 1,202,953 (2014: 607,206), relates to the dilutive potential of the share-based payment arrangements.

8. Earnings per share (continued)

Basic and diluted earnings per Ordinary Share

The IAS 33 earnings per share calculation is disclosed above and is based on a weighted average number of shares in issue for the year ended 31 December 2015.

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 better reflect the Group's performance for the year and its dividend paying capacity, an additional underlying earnings per share calculation is presented below. The reported profit after tax for each year is adjusted for the Group's joint venture deemed disposal gain (2014: £nil) and amortisation of acquired intangibles, as disclosed in the segmental information in note 4, net of the deferred tax credit associated with the amortisation (2014: £3.2m). The number of ordinary shares is set at the number of Ordinary Shares in issue at the reporting date.

9. Taxation

The Group incurred an effective tax rate (inclusive of deferred tax) of 9.0% (2014: 20.2%) primarily as a result of the tax treatment on the joint venture deemed disposal gain. The UK corporation tax rate changed from 21% to 20% with effect from 1 April 2015. The Group incurred an effective tax rate on an underlying basis of 17.7% (2014: 20.2%).

10. Acquisition of Gocompare Holdings.com Limited

On 31 March 2015, the Group acquired the outstanding 50% of the ordinary shares of Gocompare. Following the acquisition, the Group owns 100% of the ordinary share capital of Gocompare and controls 100% of the voting rights.

Gocompare is an internet based price comparison website for financial and non-financial products.

The acquisition has been made to further the Group's strategy of diversifying its income streams with significant opportunities to grow Gocompare's revenues and profitability over the medium to long term.

Consideration transferred

The Group paid £96.2m in cash for the outstanding 50% of the ordinary share capital of Gocompare, being the £95.0m committed to as at 31 December 2014 and £1.2m arising as a result of the adjustment mechanism described in the Group's 2014 annual report and accounts.

In line with the requirements of IFRS 3, the Group's existing 50% interest in Gocompare was remeasured to fair value at the acquisition date, with the resulting gain of £63.8m recognised in the statement of comprehensive income as a joint venture deemed disposal gain. This treatment effectively considers that the Group's existing interest is sold immediately prior to the acquisition at its fair value, and subsequently repurchased at the same value at the acquisition date. The fair value of the Group's existing interest immediately prior to the acquisition has been estimated to be equal to the fair value of consideration offered by the Group for the other 50% of Gocompare.

The table below summarises the provisional acquisition date fair values of each major class of consideration transferred:

Acquisition-related costs

The Group incurred total acquisition related costs of £4.0m, of which £0.2m are included within other operating expenses for the year ended 31 December 2015 (2014: £3.8m). These expenses are reported as non trading costs in the Group's segmental reporting (note 4).

Identifiable assets acquired and liabilities assumed

The following table summarises the book values of the identifiable assets and liabilities acquired and their fair values at the date of acquisition:

10. Acquisition of Gocompare Holdings.com Limited (continued)

Measurement of fair values

Identifiable intangible assets at the acquisition date include fair values of £40.9m for the Gocompare brand and £10.2m for Gocompare customer relationships. The brand and customer relationships were valued according to the relief-from-royalty method and the multi-period excess earnings method respectively.

The relief-from-royalty method considers the notional present value of estimated royalty payments that would be payable were the Gocompare brand to be licensed from a third party owner. A royalty rate of 10% of revenue was used for the Gocompare brand based on comparable royalty rates in the market place, applied to the brand's estimated useful economic life of five years.

The multi-period excess earnings method considers the present value of net cash flows expected to be generated by the Gocompare customer relationships over their estimated useful economic life of two years, by excluding from total cash flows any estimating cash flows relating to other contributory assets.

For all other assets the IFRS book values were considered to approximate fair value.

Goodwill

Goodwill arising on acquisition of £127.7m relates to future value derived from the Group having gained control of Gocompare, planned strategic developments and other intangible assets that do not qualify for separate recognition under IFRS 3. No goodwill is expected to be deductible for tax purposes.

10. Acquisition of Gocompare Holdings.com Limited (continued)

Impact on reported revenue and profit after tax

Had the acquisition occurred on 1 January 2015, assuming that the same joint venture deemed disposal gain and fair value adjustments that arose at the date of acquisition had occurred on 1 January 2015, the adjustments to the Group's income, profit after tax and trading profit for the year ended 31 December 2015 would have been as follows:

· Increase in other income of £29.0m to £151.2m for the year ended 31 December 2015 following inclusion of revenue relating to Gocompare;

· Increase in profit after tax of £0.5m to £122.4m for the year ended 31 December 2015, including £3.3m of additional other operating expenses relating to amortisation of acquired intangibles; and

· Increase in consolidated trading profit of £3.4m to £95.7m for the year ended 31 December 2015.

11. Goodwill and intangible assets

11. Goodwill and intangible assets (continued)

Goodwill of £127.7m as at 31 December 2015 relates to goodwill arising on the acquisition of Gocompare by the Group (see note 10).

Included in acquired brands and customer relationships are the Gocompare brand and the Gocompare customer relationships recognised on application of IFRS 3 to the 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 31 December 2015 is £2.8m relating to assets which are not yet available for use in the manner intended by management (2014: £2.9m). As a result, no depreciation has been charged on these assets during the year ended 31 December 2015. Work on bringing these assets into a condition necessary for their intended use is expected to be completed in the six months ending 30 June 2016, after which the assets are expected to have a useful economic life of five years.

12. Property, plant and equipment

Included in fixtures and fittings as at 31 December 2015 is £18.8m relating to computer hardware assets that are not yet available for use in the manner intended by management (2014: £12.5m). As a result, no depreciation has been charged on these assets during the year ended 31 December 2015. Work on bringing these assets into a condition necessary for their intended use is expected to be completed in the six months ending 30 June 2016, after which the assets are expected to have a useful economic life of five years.

13. Financial assets and liabilities

13.1 Financial assets

Of the financial investments and cash above, £297.0m have a credit rating of AAA as at 31 December 2015 (2014: £350.1m), £132.1m have a credit rating of AA (2014: £143.7m), £173.8m have a credit rating of A (2014: £186.7m) and £115.7m have a credit rating of BBB or below, or are not rated (2014: £113.8m). The shares and other variable yield securities, units in unit trusts and derivative financial instruments as shown above are not subject to credit rating.

13.2 Financial liabilities

The £125m 10 year Subordinated Notes were issued by esure Group plc on 19 December 2014 at the rate of 6.75% per annum, with payments made biannually. Directly attributable fees were £2.9m. A payment of £8.4m was made in the year ended 31 December 2015.

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

13.3 Capital management

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

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

· to satisfy the requirements of its policyholders and regulators;

· to maintain financial strength to support business growth; and

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

The Group manages as capital all items that are eligible to be treated as capital for regulatory purposes.

From 1 January 2016, 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 and Solo entity will adopt the standard formula to calculate their respective capital requirements under Solvency II. See Operating and financial overview for more detail.

13.4 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 2014.

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;