2018 Interim results and proposed acquisition

14 August 2018

esure Group plc interim results for the six months ended 30 June 2018 and proposed acquisition by a subsidiary of funds managed by Bain Capital Private Equity (Europe) LLP

Continued growth in premiums and policies in a period impacted by exceptional weather costs

Headline results

· Gross written premiums up 12.0% to £440.3m (1H 2017: £393.3m)

· In-force policies up 8.5% to 2.449 million (1H 2017: 2.258 million)

· Profit before tax of £36.1m (1H 2017: £45.1m) includes an impact of £14m from adverse weather related claims costs in the Home and Motor accounts; excluding these costs profit before tax is £50.1m (1H 2017: £45.1m)

· Solvency coverage(1) of 154% (1H 2017: 157%)

Proposed Acquisition

· The Board is pleased to have reached agreement with Blue (BC) Bidco Limited ("Bidco"), a wholly owned subsidiary of funds managed by Bain Capital Private Equity (Europe) LLP on the terms of a recommended all cash offer for the entire issued and to be issued ordinary share capital of esure Group plc ("esure") by Bidco (the "Proposed Acquisition")

· Consequently, Bidco has today announced its firm intention to make an offer for esure under Rule 2.7 of the Takeover Code. A copy of the Bidco announcement is available on the esure website at www.esuregroup.com

· Under the terms of the Proposed Acquisition, each esure shareholder will be entitled to receive 280p in cash for each esure share held, representing a premium of approximately 37 per cent. to the closing price per esure Share of 204 pence on 10 August 2018 (being the last business day prior to the possible offer announcement released by esure on 13 August 2018)

· In light of the Proposed Acquisition, the Board is not recommending the payment of an interim dividend (1H 2017: 4.1 pence per share)

Sir Peter Wood, Chairman, said: "The first half of 2018 demonstrates that esure continues to deliver profitable growth and it is pleasing to see that we have grown our market share in motor during this period.

"Alongside these results, I'm pleased to be announcing the Proposed Acquisition today, because it is a great outcome for shareholders, for the company, and for customers. Since its IPO in 2013, esure has grown to nearly 2.5 million in-force policies, delivered more than £800 million of annual gross written premiums, and returned just under £300 million to shareholders in dividends as well as the considerable value delivered to shareholders through the demerger of GoCompare."  

Darren Ogden, Interim Chief Executive Officer, said: "The first half of 2018 has seen continued growth in premiums and polices in a period impacted by exceptional weather costs.

"The Motor account grew strongly, underpinned by the Group's footprint expansion programmes which now account for over 400,000 in-force policies. In addition, the Home account returned to growth in the month of June, aided by the Group's investment in its underwriting and data capability. The Group will remain disciplined in its rating actions as it targets 3 million in-force policies by 2020.

"The UK suffered a number of adverse weather events in the first half of 2018 and these contributed to exceptional costs of £14m in the Home and Motor accounts. I would like to thank colleagues for their hard work and dedication in supporting our customers during these difficult times.

"The Group remains well placed to continue delivering profitable growth in 2018." 

For further information:

Notes

(1) The solvency coverage is estimated and unaudited

About esure Group plc

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

Cautionary statement

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

No profit forecasts or profit estimates

No statement in this announcement is intended as a profit forecast or profit estimate for any period and no statement in this announcement should be interpreted to mean that earnings or earnings per share for esure for the current or future financial years would necessarily match or exceed the historical published earnings or earnings per share for esure.

Further information

This Announcement is for information purposes only and is not intended to and does not constitute, or form part of, an offer to sell or an invitation to purchase any securities or the solicitation of an offer to buy, otherwise acquire, subscribe for, sell or otherwise dispose of any securities, pursuant to the Proposed Acquisition or otherwise, nor shall there be any purchase, sale, issuance or exchange of securities or such solicitation in any jurisdiction in which such offer, solicitation, sale, issuance or exchange would be unlawful prior to the registration or qualification under the laws of such jurisdiction.  

Important notices

Deutsche Bank AG ("Deutsche Bank") is authorised under German Banking Law (competent authority: European Central Bank) and, in the United Kingdom, by the Prudential Regulation Authority. It is subject to supervision by the European Central Bank and by BaFin, Germany's Federal Financial Supervisory Authority, and is subject to limited regulation in the United Kingdom by the Prudential Regulation Authority and Financial Conduct Authority. Neither Deutsche Bank nor any of its subsidiaries, branches or affiliates will be responsible to any person other than esure for providing any of the protections afforded to clients of Deutsche Bank nor for providing advice in relation to any matters referred to in this announcement. Neither Deutsche Bank nor any of its subsidiaries, branches or affiliates owes or accepts any duty, liability or responsibility whatsoever (whether direct or indirect, whether in contract, in tort, under statute or otherwise) to any person who is not a client of Deutsche Bank in connection with this announcement, any statement contained herein, or otherwise. Deutsche Bank, acting through its London branch, is acting as corporate broker and financial adviser to esure and no other person in connection with the contents of this announcement.

Disclosure requirements of the Takeover Code (the "Code")

Under Rule 8.3(a) of the Code, any person who is interested in 1% or more of any class of relevant securities of an offeree company or of any securities exchange offeror (being any offeror other than an offeror in respect of which it has been announced that its offer is, or is likely to be, solely in cash) must make an Opening Position Disclosure following the commencement of the offer period and, if later, following the announcement in which any securities exchange offeror is first identified. An Opening Position Disclosure must contain details of the person's interests and short positions in, and rights to subscribe for, any relevant securities of each of (i) the offeree company and (ii) any securities exchange offeror(s). An Opening Position Disclosure by a person to whom Rule 8.3(a) applies must be made by no later than 3.30 pm (London time) on the 10th business day following the commencement of the offer period and, if appropriate, by no later than 3.30 pm (London time) on the 10th business day following the announcement in which any securities exchange offeror is first identified. Relevant persons who deal in the relevant securities of the offeree company or of a securities exchange offeror prior to the deadline for making an Opening Position Disclosure must instead make a Dealing Disclosure.

Under Rule 8.3(b) of the Code, any person who is, or becomes, interested in 1% or more of any class of relevant securities of the offeree company or of any securities exchange offeror must make a Dealing Disclosure if the person deals in any relevant securities of the offeree company or of any securities exchange offeror. A Dealing Disclosure must contain details of the dealing concerned and of the person's interests and short positions in, and rights to subscribe for, any relevant securities of each of (i) the offeree company and (ii) any securities exchange offeror(s), save to the extent that these details have previously been disclosed under Rule 8. A Dealing Disclosure by a person to whom Rule 8.3(b) applies must be made by no later than 3.30 pm (London time) on the business day following the date of the relevant dealing.

If two or more persons act together pursuant to an agreement or understanding whether formal or informal, to acquire or control an interest in relevant securities of an offeree company or a securities exchange offeror, they will be deemed to be a single person for the purposes of Rule 8.3.2.

Opening Position Disclosures must also be made by the offeree company and by any offeror and Dealing Disclosures must also be made by the offeree company, by any offeror and by any persons acting in concert with any of them (see Rules 8.1, 8.2 and 8.4).

Details of the offeree and offeror companies in respect of whose relevant securities Opening Position Disclosures and Dealing Disclosures must be made can be found in the Disclosure Table on the Takeover Panel's website at www.thetakeoverpanel.org.uk, including details of the number of relevant securities in issue, when the offer period commenced and when any offeror was first identified. You should contact the Panel's Market Surveillance Unit on +44 (0)20 7638 0129 if you are in any doubt as to whether you are required to make an Opening Position Disclosure or a Dealing Disclosure.

Relevant securities in issue

In accordance with Rule 2.9 of the Code, esure confirms that, as at the date of this announcement, it has 419,092,661 ordinary shares of 1/12p each in issue and admitted to trading on the London Stock Exchange. The International Securities Identification Number (ISIN) of the shares is GB00B8KJH563.

Publication on a website

In accordance with Rule 26.1 of the Code, a copy of this announcement will be available at www.esuregroup.com.

The content of the website referred to in this announcement is not incorporated into and does not form part of this announcement.

The person responsible for arranging for the release of this announcement on behalf of esure is Darren Ogden, Interim Chief Executive Officer.

Disclaimer

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

The esure Group plc LEI number is 213800KOI3F5LM54PT80.

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

Review of 1H 2018

Group

 \* The solvency coverage at 1H 2017 and 1H 2018 are estimated and unaudited. The solvency coverage at 1H 2017 is after allowing for the interim dividend.

Premiums, policies and profit

Gross written premiums increased 12.0% to £440.3m (1H 2017: £393.3m) driven by strong growth in Motor and a stable performance in Home. In-force policies increased 8.5% to 2.449 million (1H 2017: 2.258 million) through continued growth in the Motor account. Profit before tax was lower at £36.1m (1H 2017: £45.1m) driven by exceptional weather costs, a reduction in prior year reserve releases in Motor and a lower investment return. The Group incurred exceptional weather costs of £14.0m in the first half of 2018 that impacted the Home and Motor accounts. Adjusting for these items the Group's profit before tax increased 11.1% to £50.1m (1H: £45.1m).

Motor

Gross written premiums increased 13.4% to £398.4m (1H 2017: £351.3m) as a result of the in-force policy growth.

In-force policies increased by 13.3% to 1.972 million (1H 2017: 1.740 million) with the Group's core and footprint expansion segments showing good levels of growth in the period. In addition, the Group continues to retain a significant proportion of its customers.

Trading profit is 2.9% higher at £49.5m (1H 2017: £48.1m). The reduction in underwriting profit to £8.2m (1H 2017: £12.8m) reflects an increase in the loss ratio which has been impacted by a reduction in the level of favourable development of prior accident year reserves. In addition, the adverse weather conditions seen in the first half of the year impacted the account by £7.0m (1H 2017: nil).

The combined operating ratio increased by 2.3ppts to 97.6% (1H 2017: 95.3%) driven by an increase in the loss ratio of 3.1ppts to 75.7% (1H 2017: 72.6%), partly offset by an improvement in the expense ratio of 0.8ppts to 21.9% (1H 2017: 22.7%). Favourable development of prior accident year reserves of £4.9m equated to 1.4% of net earned premiums (1H 2017: £11.0m; 4.0%).

Non-underwritten additional services increased 27.6% to £38.3m (1H 2017: £30.0m) with a strong performance delivered across all income streams.

Home

Gross written premiums were broadly stable at £41.9m (1H 2017: £42.0m) and in-force policies reduced 7.9% to 477 thousand (1H 2017: 518 thousand). The Group has invested in its underwriting capability and this resulted in the Group delivering growth in the Home account from the month of June.

Home delivered a trading loss in the period of £7.3m (1H 2017: profit of £3.4m). The Group's underwriting performance was significantly impacted by the adverse weather events in the first half of the year, notably the 'Beast from the East', alongside flash flooding in May. The adverse weather events resulted in claims costs in the Home account of £7m more than expectations in the first half of the year.

The combined operating ratio of 130.1% (1H 2017: 104.9%) is 25.2ppts higher than 1H 2017 largely driven by an increase in the loss ratio due to the adverse weather costs. The loss ratio of 87.5% (1H 2017: 61.6%) was impacted by c18ppts of exceptional weather costs in the period. The expense ratio improved by 0.7ppts to 42.6% (1H 2017: 43.3%). Favourable development of prior accident year reserves of £3.1m equated to 7.9% of net earned premiums (1H 2017: £3.7m; 9.0%).

Non-underwritten additional services were lower at £4.2m (1H 2017: £4.8m) driven by the reduction in in-force policies in the period.

Additional services revenues

Total income from additional services increased 18.2% to £69.6m (1H 2017: £58.9m) driven by a strong performance across all income lines. Non-underwritten additional services trading profit increased 22.1% to £42.5m (1H 2017: £34.8m) ahead of the Group's in-force policy and premium growth as it leveraged the efficient expense base. Instalment income, where customers choose to pay monthly, has also benefited from an increase in the proportion of customers choosing this method of payment.

Investment return

The Group achieved a gross investment return of 0.6% (1H 2017: 0.9%) and a net investment return of 0.3% (1H 2017: 0.7%).

Investment income has increased 28.1% to £8.2m (1H 2017: £6.4m) as the Group benefitted from higher yields on investments held within its Surplus portfolio. The net investment return is lower year-on-year at £3.3m (1H 2017 : £5.9m) due to steepening at the shorter end of the UK yield curve, although this is matched by the discounting credit recognised on Solvency II Technical Provisions. Additionally, the one-off gain of £2.0m in 1H 2017 did not repeated in 1H 2018.

Trading profit

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 reportable segments are Motor and Home and these delivered a trading profit of £42.2m (1H 2017: £51.5m).

Reconciliation of trading profit to profit before tax

The Group incurred £4.3m in finance costs (1H 2017: £4.3m) relating to the £125.0m of 6.75% ten year tier two Subordinated Notes issued on 19 December 2014 ("the Notes").

Profit after tax

The Group's profit after tax reduced to £30.8m (1H 2017: £36.5m) largely as a consequence of the adverse weather events in period.

Earnings per share

Earnings per share reduced to 7.4 pence (1H 2017: 8.7 pence) in line with the reduction in profit after tax.

Dividend per share

In light of the Proposed Acquisition, the Board is not recommending the payment of an interim dividend (1H 2017: 4.1 pence per share).

Cash flow

The Group's cash and cash equivalents at the end of the period are £44.2m (1H 2017: £35.4m).

Operating activities were a net inflow of £50.2m (1H 2017: net inflow of £61.3m) driven by the Group's strong growth in the first half of the year.

Investing activities were a net outflow of £9.0m (1H 2017: net outflow of £3.4m) reflecting the Group's investment in property, plant, equipment and software.

Financing activities were a net outflow of £43.6m (H1 2017: net outflow of £48.0m) of which £39.3m reflects the Group's 2017 final dividend and £4.3m relates to the interest payable on the Notes.

The Group's cash flow statement can be found on page 15.

Investments

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

Strategic investment allocations

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

At the end of 2017, the Group had committed £150m to new investments. As at 30 June, £83m of these committed funds had been drawn down. The remaining £67m are expected to be drawn down by investment managers over the next 12 months.

As at the 30 June 2018 the Group held the following investments:

The Group's total assets under management are 1.6% higher at £991.6m (2017: £975.9m).

The Cash & Liquidity portfolio continues to reflect accessible cash for operational activities and includes a buffer for adverse events. At 8%, the allocation is higher than the Group's target allocation due to the timing of certain contractual outflows payable in July 2018.

The Claims portfolio is constructed with reference to the expected future cost of the Group's technical liabilities as defined under Solvency II. The duration of the Group's assets and liabilities has remained broadly stable across the period at 3.4 years (2017: 3.7 years) and 2.5 years (2017: 2.9 years), respectively. The Group continues to designate newly acquired assets within this portfolio as available for sale ('AFS') to minimise the impact of interest rate changes on the Group's earnings. At 30 June 2018 the Group has designated £415.0m as AFS (FY 2017: £342.0m) and £127.2m as fair value through profit and loss (FY 2017: £160.3m).

The Surplus portfolio seeks to deliver returns in asset classes that are aligned with the Group's risk appetite, in particular with reference to its solvency capital requirements. In line with the Group's strategic asset allocation commitments to infrastructure equity have been fully deployed and the remaining commitments relate to investments in the direct lending asset class.

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

The Group's total investment duration is 1.8 years (FY 2017: 2.2 years).

Claims portfolio - Fixed income

Claims portfolio - Credit risk quality

The credit risk quality of the claims backed fixed income portfolio remains strong with 77% held in assets rated 'A' or above.

Reserving

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

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 reserve margin is comfortably in excess of its actuarial best estimate.

The Group benefited from favourable development of prior accident year reserves of £8.0m in 1H 2018 (1H 2017: £14.7m) and this equated to 2.1% of net earned premium (1H 2017: 4.6%). 

Reinsurance

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

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

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

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

Capital

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

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

The Group's capital position is outlined below:

\* The 1H 2018 figures quoted are estimated and unaudited. The 2017 solvency coverage is audited.

The Group's Own Funds increased 2.8% to £426.9m (FY 2017: £415.4m). The SCR increased 4.1% to £277.5m (FY 2017: £266.4m) driven by the committed investible funds at the year end being invested in the period and the Group's growth ambitions.

Own Funds comprise Tier 1 and Tier 2 qualifying capital. The Notes meet the qualifying criteria of a Tier 2 capital instrument and qualify up to a maximum of 50% of the SCR. The quality of the Group's capital remains strong with 72% in Tier 1 and 28% in Tier 2.

Solvency Capital Requirement

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

The main risk driver is underwriting, consisting of premium, reserve and catastrophe risk, reflecting the capital requirements of the core business activities for the Group. The movement between Underwriting risk and Market risk reflects the investment of committed funds within the Group's investment portfolio towards its strategic asset allocation. 

Dividend Policy

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

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

Outlook

The Group remains well placed to deliver profitable growth in 2018 and expects to deliver a combined operating ratio in the region of 98-99%, assuming normal weather for the remainder of the year. The Group will remain disciplined in its rating actions as it targets 3 million in-force policies by 2020.