Half Yearly Report

4 August 2014

esure Group plc interim results for the six months ended 30 June 2014

Solid set of results reflecting a disciplined underwriting performance in difficult market conditions

Highlights

· Profit before tax up 0.4% to £57.1m (HY 2013: £56.9m)

· In-force policies up 2.1% to 1.974 million (FY 2013: 1.933 million)

· Gross written premiums down 1.9% to £260.4m (HY 2013: £265.4m)

· Combined operating ratio1 increased 1.3ppts to 90.9% (HY 2013: 89.6%) due primarily to the severe weather events in Q1

· Additional services revenues ("ASR")2 flat at £51.0m (HY 2013: £51.0m);

ASR, excluding Claims Income2, up 5.7% to £48.0m (HY 2013: £45.4m)

· Earnings per share3 up 2.7% to 10.9 pence (HY 2013: 10.6 pence)

· Interim dividend per share of 5.1p (HY 2013: 2.5p4), a payout ratio5 of 70% (HY 2013: 70%)

· Strong financial position with IGD6 coverage of 366%, after allowing for the interim dividend.

Peter Wood, Chairman of esure Group plc, commented:

"The Group's solid performance in the first half of the year is testament to the approach taken by the executive team, led by Stuart Vann, focusing on disciplined underwriting in difficult market conditions.

"I am pleased to announce the Board has declared an interim dividend of 5.1 pence per share, representing a payout ratio of 70%. The interim dividend that has been declared is inclusive of a 20% special dividend and is consistent with the Board's approach in setting the interim dividend. As in 2013, a key consideration when setting the final dividend will be the Board's view on prospective premium growth and our ongoing commitment to returning excess capital to shareholders."

Stuart Vann, Chief Executive Officer of esure Group plc, commented:

"The first half of 2014 has seen no let up in the competitive rating environment in both the motor and home markets. The Group remained disciplined in its approach to rating and volume which has contributed towards our solid performance.

"Our combined operating ratio of 90.9% is in line with guidance and has been achieved despite the severe weather events of Q1. This is the result of our approach to underwriting across both segments at this stage of the cycle. We continue to take a prudent approach to reserving and the Group's reserves remain in excess of 15% above our actuarial best estimate.

"We have continued to enhance our underwriting platform and customer experience in the first half of the year; these developments will play a key role in the delivery of our growth strategy, when market conditions permit."

For further information:

Notes

1. Combined operating ratio is calculated as the sum of the net loss ratio and net expense ratio. Net loss ratio is claims incurred, net of reinsurance as a percentage of earned premiums, net of reinsurance. Net expense ratio is net insurance expenses plus claims handling costs as a percentage of earned premiums, net of reinsurance.

2. Additional services revenues includes four main components: (i) sales of underwritten and non-underwritten additional insurance products to motor and home insurance customers; (ii) instalment interest on premium payment plans; (iii) policy administration fees; and (iv) legal panel membership fees and fees generated from the appointment of firms used during the claims process, including medical, vehicle repair and car hire suppliers ("Claims Income"). Additional services revenues is stated before the deduction of any internal costs of acquisition or administration. Non-underwritten Additional insurance products revenue represents the commission margins for the Group generated from sales of such products. Underwritten additional services revenues is stated after the deduction of claims costs. Additional services revenues is a non-IFRS measure which management uses to evaluate Group performance. It may not be comparable with similarly titled measures used by other companies.

3. Earnings per share, as disclosed in the highlights section on page 1, is calculated on a pro forma basis using the number of ordinary shares in issue as at 30 June 2014. The movement in earnings per share has been calculated using the unrounded earnings per share figures for 2014 and 2013.

4. The 2013 interim dividend pence per share was half that which would normally have been paid in the period, due to the Group listing mid way through the first half of 2013. The comparable figure would be 5.0 pence per share if the Group had been listed for the full period.

5. The payout ratio represents the proportion of earnings which is available for distribution prior to allowing for the 1/3, 2/3 split between the interim and final dividend.

6. Insurance Group Directive.

About esure

The Group is an efficient, customer focused personal lines insurer, founded in 2000 by Chairman, Peter Wood, Britain's foremost general insurance entrepreneur. The Group is one of the UK's leading providers of Motor and Home insurance products through the esure and Sheilas' Wheels brands. The Group's financial performance is underpinned by precise selection and pricing of risks through granular data analysis.

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.

Business overview

The Group has made a solid start to the year delivering policy growth in Motor and Home thanks to its nimble and focused approach to underwriting. Retention rates remain strong at around 80% and the Sheilas' Wheels portfolio continues to be a positive for the Group. The Group has broadly maintained its gross written premiums year-on-year, with its strong combined operating ratio evidence of a disciplined underwriting performance.

The severe weather events in Q1 2014 impacted the Group's claims costs by around £3m more than expected in the first half of 2014. In response to the severe weather events, the Group implemented its surge plan, deploying employees with the appropriate skills from its Claims and other functions to meet the needs of its customers during these difficult times.

The Group has enhanced its underwriting platform with the addition of new rating functionality and analysis tools. It has also launched a number of "test and learn" initiatives designed to shape its pricing propositions and quotability over the next few years.

Customers remain at the forefront of the Group's business model and further enhancements have been made to improve the customer experience in the first half of the year. During the second half of the year, the Group will launch an alternative business structure, in partnership with one of the UK's leading law firms, Irwin Mitchell, seamlessly enhancing the customer experience.

Improvements to the Group's underwriting platform and customer experience, combined with strong brands and prudent approach to reserving all mean the Group is poised for growth when market conditions permit.

Outlook

The Group expects the competitive environment in both the UK motor and home markets to continue throughout the remainder of 2014. It therefore expects gross written premiums in the second half of the year to be lower than in the equivalent period in 2013 as it will continue to focus on profit rather than volume. There has been no change to the Group's view that the UK motor market will not turn until Q1 2015 at the earliest.

The Group is on track to deliver a full year combined operating ratio, broadly similar to that achieved in the first half of 2014, assuming normal weather for the remainder of the year.

Financial highlights

Gross written premiums

Gross written premiums have reduced by 1.9% to £260.4m (HY 2013: £265.4m). The reduction in gross written premiums reflects the competitive rating environment in both the motor and home markets. The Group has continued to focus on its underwriting discipline, enabling it to grow its in-force policies where it believes it is profitable to, and broadly maintain both the Motor and Home gross written premiums year-on-year.

Trading profit

Trading profit is 6.4% lower than HY 2013 at £61.0m (HY 2013: £65.2m). This is largely driven by the severe weather events in the first quarter of 2014 which impacted the Group's claims by £3m more than expected and the reduced income from the Group's share of joint venture profits.

The Motor underwriting result of £17.1m is broadly flat compared to HY 2013 after adjusting for £1m of exceptional weather claims costs in Q1 2014. The Motor underwriting trading profit continued to benefit from strong favourable development of prior accident year reserves.

The Home underwriting result has increased 12.1% to £7.4m after adjusting for £2m of exceptional weather claims costs in Q1 2014, reflecting the Group's good risk selection. On a reported basis, Home underwriting has reduced £1.2m to £5.4m (HY 2013: £6.6m).

Non-underwritten additional services are 2.2% lower than HY 2013 at £25.5m (HY 2013: £26.1m). During Q1 2013 the Group received £3.3m from the receipt of legal panel membership fees in personal injury claims prior to the implementation of The Legal Aid, Sentencing and Punishment of Offenders Act 2012 ("LASPO") which banned such payments.

The Group derives investment returns from its investment portfolio and receives a share of profits from its 50% investment in the price comparison website, Gocompare. Investment income in the first half of 2014 was £7.6m (HY 2013: £7.5m) and represents a return for the period of 1.2%. The trading profit from the Group's 50% holding in Gocompare is lower at £5.4m (HY 2013: £6.7m). The reduction in the Group's share of profits largely reflects Gocompare's increased advertising expenditure relating to a new television campaign which was launched in the first half of 2014. The Group received an interim cash dividend from Gocompare of £6.8m (HY 2013: £2.8m).

Profit before tax

Profit before tax grew 0.4% to £57.1m (HY 2013: £56.9m). The Group incurred £2.2m of finance costs and £2.8m of non-trading costs, relating to the Group's Admission to the London Stock Exchange in the first half of 2013, which have not repeated in 2014.

Profit after tax

Profit after tax has increased 2.7% to £45.5m (HY 2013: £44.3m). The Group incurred an effective tax rate of 20.3% (HY 2013: 22.1%). The UK corporation tax rate changed from 23% to 21% with effect from 1 April 2014.

Other key performance indicators

* Movement is calculated against FY 2013

1 ASR per IFP is calculated on a rolling 12 months basis. The average number of in-force policies on a rolling 12 month basis as at 30 June 2014 was 1.924m, 1.783m as at 30 June 2013 and 1.857m as at 31 December 2013.

Combined operating ratio

The combined operating ratio of 90.9% is 1.3ppts higher than HY 2013. The severe weather events in Q1 2014 increased the combined operating ratio by 1.2ppts, with both the Motor and Home loss ratios impacted by 0.5ppts and 4.8ppts, respectively. The expense ratio is 0.6ppts higher at 24.5% largely reflecting a reduction in the average net earned premium per policy.

In-force policies

In-force policies have increased by 2.1% to 1.974m since the end of 2013. Motor has increased by 2.6% to 1.421m polices through a combination of the segment re-entry strategy and increased retention. Home has increased by 0.9% to 0.553m policies. The Group's focus remains on targeting profitable underwriting segments that are within the Group's risk appetite.

Additional services revenues

ASR is flat at £51.0m (HY 2013: £51.0m). During Q1 2013 the Group received £3.3m from the receipt of legal panel membership fees in personal injury claims prior to the implementation of The Legal Aid, Sentencing and Punishment of Offenders Act 2012 ("LASPO") which banned payment of referral fees. ASR, excluding Claims Income, increased 5.7% to £48.0m, broadly in line with policy growth since HY 2013.

ASR per IFP of £53.7 is £2.3 down on FY 2013, with the reduction since FY 2013 largely reflecting the reduction in Claims Income post LASPO and the pricing strategy on the Home additional insurance products to aid core product conversion. Motor ASR per IFP, excluding Claims Income, is down slightly compared to FY 2013, in line with the guidance provided.

Pro forma earnings per share

Pro forma earnings per share have increased 2.7% from 10.6 pence per share at HY 2013 to 10.9 pence per share at HY 2014.

Dividend per share

An interim dividend of 5.1 pence per share (HY 2013: 2.5 pence per share) has been declared and approved by the Board. The dividend comprises a 3.6 pence per share base dividend and a further special dividend of 1.5 pence per share.

The special interim dividend is consistent with the Board's approach in setting the interim dividend. When considering the final dividend, the Board will consider the Group's capital resource requirements, prospective premium growth expectations and retain a prudent margin for contingencies. The Board remains committed to returning excess capital to shareholders.

The interim dividend will be paid on 17 October 2014 to all holders of Ordinary Shares on the Register of Members at close of business on 5 September 2014.

Investments

Asset allocation

The reduction in investments of 5.0% since 31 December 2013 to £730.4m is largely driven by the Group's payment of its 2013 final dividend. The portfolio remains of short duration, approximately one year, with 84% of those assets bearing credit risk holding a credit rating of 'A' or above. The Group's current asset allocation is in line with its strategic asset allocation which has resulted in an increase in the level of equity and yield enhancing assets held. The Group continues to seek a reasonable yield, with the primary objective of capital preservation.

The portfolio performed broadly in line with expectations during the first half of 2014 and the Group continues to target an annualised investment return in the region of 2%.

Reserving

The Group continues to benefit from strong favourable development of prior accident year reserves, with total prior year releases of £46.6m in HY 2014 (HY 2013: £36.9m, FY 2013: £82.4m). The Group continues to adopt a prudent approach to reserving.

Further analysis of claims development is included within note 10.2 to the financial statements.

Principal risks and uncertainties

To the best of the directors' knowledge the principal risks and uncertainties of the Group for the remaining six months of the year are outlined in note 12 to the financial statements.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 30 June 2014

1. General information

esure Group plc is a Company incorporated in England and Wales. Its registered office is The Observatory, Reigate, Surrey RH2 0SG.

The nature of the Group's operations is the writing of general insurance for private cars and homes. The Company's principal activity is that of a holding Company.

All of the Company's subsidiaries are located in the United Kingdom, except for esure S.L.U, which is incorporated in Spain.

2. Accounting policies

Basis of preparation

These condensed consolidated interim financial statements present the Group's financial information for the six months ended 30 June 2014 and have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union (EU). They do not include all of the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements of the Group as at the year ended 31 December 2013 which are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU.

As required by the FCA's Disclosure and Transparency Rules, the condensed set of financial statements has been prepared applying the accounting policies and presentation that were applied in the preparation of the Group's published consolidated financial statements for the year ended 31 December 2013.

There have been no new standards or interpretations adopted by the Group during the period. The Group has adopted the following amendments to standards during the period, with a date of initial application of 1 January 2014:

· Amendments to IFRS 10, IFRS 12 and IAS 27 - Investment Entities. These amendments provide an exception to the consolidation requirement for entities that meet the definition of an investment entity under IFRS 10 Consolidated Financial Statements. These amendments have no impact to the Group, since none of the entities in the Group qualifies to be an investment entity under IFRS 10.

· Amendments to IAS 32 Financial Instruments: Presentation - Offsetting Financial Assets and Financial liabilities. These amendments address inconsistencies in current practice when applying the offsetting criteria in IAS 32 for financial assets and liabilities. The adoption of these amendments has had no impact on the Group's accounting policies.

· Amendments to IAS 39 - Novation of Derivatives and Continuation of Hedge Accounting. These amendments provide relief from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria. The adoption of these amendments has had no impact on the Group as the Group has not novated its derivatives during the current or prior periods.

· Amendments to IAS 36 - Recoverable Amount Disclosures for Non-Financial Assets. These amendments remove the unintended consequences of IFRS 13 Fair Value Measurement on the disclosures required under IAS 36 Impairment of Assets. In addition, these amendments require disclosure of the recoverable amounts for the assets or cash-generating units (CGUs) for which an impairment loss has been recognised or reversed during the period.The adoption of these amendments has had no impact on the disclosure provided in the condensed consolidated interim financial statements as at 30 June 2014.  

NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 30 June 2014

2. Accounting policies (continued)

These consolidated interim financial statements have been prepared on a going concern basis. The Group has a strong financial position with no debt, robust reserves, a conservative investment portfolio and capital significantly in excess of the minimum regulatory requirement. In addition, the Board has reviewed the Group's projections for the next 12 months and beyond, including cash flow forecasts and regulatory capital surpluses. The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for at least 12 months.

The financial information contained in these interim results does not constitute statutory accounts of esure Group plc within the meaning of Section 435 of the Companies Act 2006. Statutory accounts for esure Group plc for the year ended 31 December 2013 have been delivered to the Registrar of Companies. The auditors have reported on the accounts, their report was:

(i) unqualified;

(ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report; and

(iii) did not constitute a statement under Section 498 (2) or (3) of the Companies Act 2006.

3. Critical accounting judgements and estimates

The Group's 2013 Annual Report and Accounts provide details of significant judgements and estimates used in the application of the Group's accounting policies. There have been no significant changes to the judgements and estimates during the interim period.

Key source of estimation uncertainty

Insurance contract liabilities

Estimates have to be made both for the expected ultimate cost of claims reported at the reporting date and for the expected ultimate cost of claims incurred but not reported ("IBNR") at the reporting date. It can take a significant period of time before ultimate claims cost can be established with certainty and for some types of claims, IBNR claims account for the majority of the liability in the statement of financial position.

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.

NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 30 June 2014

4. Segmental information

Segmental revenues, expenses and other information

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

The Group incurred non-trading costs of £0.8m in the six months ended 30 June 2014 relating to share-based payments in respect of the long service and one-off awards disclosed in the Group's annual financial statements as at 31 December 2013.

NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 30 June 2014

4. Segmental information (continued)

The Group incurred non-trading costs of £2.2m in the six months ended 30 June 2013 relating to activities associated with the Group's Admission to the London Stock Exchange and share-based payments in respect of the long service and one-off awards disclosed in the Group's annual financial statements as at 31 December 2013.

 NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 30 June 2014

4. Segmental information (continued)

The Group incurred non-trading costs of £2.8m in the year ended 31 December 2013 relating to activities associated with the Group's Admission to the London Stock Exchange and share-based payments in respect of the long service and one-off awards disclosed in the Group's annual financial statements as at 31 December 2013.

Reconciliation of segmental information to IFRSs statement of comprehensive income

The Group's segmental information presents amortisation of acquired intangible assets separately from other operating expenses.

NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 30 June 2014

4. Segmental information (continued)

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

5. Dividends

During the six months ended 30 June 2014, a dividend per share of 13.3p (£55.4m) was declared by the Board of Directors as a final dividend for the year ended 31 December 2013. The esure Employee Benefit Trust waived their right to a dividend (£0.2m) and a dividend of £55.2m was paid by the Group. Subsequent to 30 June 2014, an interim dividend per share of 5.1p (£21.3m) has been declared by the Board of Directors.

6. Earnings per share

Basic

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

Diluted

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

The difference between the basic and diluted weighted average number of shares outstanding during the period, being 814,151 (31 December 2013: 135,848, 30 June 2013: 129,643), relates to the dilutive potential of the share-based payment arrangements.

Capital transactions during the six months ended 30 June 2013 and the year ended 31 December 2013

During the year ended 31 December 2013, esure Group plc undertook a number of capital transactions, in anticipation of Admission to trading on the London Stock Exchange.

On 21 February 2013, the share capital of esure Group plc was reduced by the cancellation of 4,000,000,000 Non-Voting Old Ordinary Shares of £0.01 each and £40 million cash was paid to Tosca Penta Investments LP out of existing financial resources.

On 25 February 2013, each A, B and C Ordinary Share was subdivided into 12 shares of the same class. Immediately prior to Admission, these 399,600,000 shares of 1/12 pence, were converted into a single class of Ordinary Share.

On Admission to the London Stock Exchange on 27 March 2013, esure Group plc repurchased from Tosca Penta Investments LP the remaining 4,485,014,000 Non-Voting Ordinary Shares of £0.01 each at par (amounting, in total, to £44.85 million) and the 1,000 Redeemable Priority Return Shares of £0.01 each.

esure Group plc issued 17,241,380 new Ordinary Shares with a nominal value of 1/12 pence each on 27 March 2013 for a total aggregate amount of £50 million.

The calculation of basic and diluted earnings per share for comparative periods has been adjusted accordingly. Where there has been no change in existing resources, the calculation has been adjusted retrospectively to reflect these changes; where there has been a change in resources, the calculation has been adjusted from the date of that change in resources.

NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 30 June 2014

6. 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 six months ended 30 June 2014. An additional pro forma earnings per share calculation has been included below to reflect the share structure of the Group on Admission to the London Stock Exchange.

Pro forma earnings per Ordinary Share

Pro forma earnings per share is calculated as profit after tax divided by the number of Ordinary Shares in issue on Admission to the London Stock Exchange. There have been no changes to the number of Ordinary Shares in issue since Admission to the London Stock Exchange.

 NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 30 June 2014

7. Intangible assets

Included in software as at 30 June 2014 is £1.3m relating to assets which are not yet available for use in the manner intended by management (31 December 2013: £nil). As a result, no depreciation has been charged on these assets during the six months ended 30 June 2014. Work on bringing these assets into a condition necessary for their intended use is expected to be completed by December 2015, after which the assets are expected to have a useful economic life of five years.

 NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 30 June 2014

8. Property, plant and equipment

Included in fixtures and fittings as at 30 June 2014 is £8.6m relating to computer hardware assets that are not yet available for use in the manner intended by management (31 December 2013: £nil). As a result, no depreciation has been charged on these assets during the six months ended 30 June 2014. Work on bringing these assets into a condition necessary for their intended use is expected to be completed by December 2015, after which the assets are expected to have a useful economic life of five years.

NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 30 June 2014

9. Financial assets and liabilities

9.1 Financial assets