Results for the year ended 31 December 2013

11 March 2014

esure Group plc preliminary results for the year ended 31 December 2013

Strong, resilient financial performance delivered in 2013 despite challenging market conditions. 

Financial highlights

· Gross written premiums up 4.0% to £535.8m (2012: £515.0m)

· In-force policies up 9.9% to 1.933 million (2012: 1.759 million)

· Profit before tax up 2.5% to £118.4m (2012:£115.5m)

· Combined operating ratio1 improved by 3.1ppts to 89.7% (2012: 92.8%)

· Additional Services Revenue ("ASR")2 broadly flat at £103.9m (2012: £104.1m)

- ASR excluding Claims Income2 up 7.9% to £95.7m (2012: £88.7m)

· Pro forma earnings per share3 up 5.8% to 22.4 pence (2012: 21.1 pence)

· Final dividend of 13.3 pence per share (FY 2012: nil). Full year dividend of 15.8 pence per share (2012: nil) represents an annualised pro forma payout ratio of 85%6

· Return on capital employed4 of 37.7% (2012: 37.0%)

· Strong financial position with IGD5 coverage of 308%, after the final dividend

Peter Wood, Chairman of esure Group plc, commented:

"Our financial performance in our first year as a listed company is a testament to the Group's resilience, adaptability and the quality of the management team. We held firm to disciplined underwriting throughout the year and capitalised on some market opportunities. I am pleased to announce the Board has proposed a final dividend of 13.3 pence per share, which together with the interim dividend of 2.5 pence per share, represents an annualised pro forma payout ratio of 85%."

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

"2013 was a year of strong, resilient financial performance within tough market conditions. The Group has delivered premiums, customer numbers and earnings per share that are all up on the prior year. This performance has been underpinned by our disciplined underwriting, reserve strength and efficient expense base.

"The Group is financially strong and continues to hold robust reserves in excess of 15% above the actuarial best estimate. We believe this prudent approach can be a significant differentiator over time given the prevailing market conditions.

"In Motor, I believe our Sheilas' Wheels brand continues to deliver unique advantages to the Group as does our decision to re-enter segments of the market that we had exited during the personal injury crisis. In Home, performance has been strong, reflecting the benefits of precise risk selection and pricing mirroring those in Motor. Operationally, we work hard to support our competitive advantages.

"By remaining nimble, focused and adaptable we will rise to meet market challenges to the benefit of customers, staff and shareholders alike." 

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 Revenue 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 Revenue 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 Revenue is stated after the deduction of claims costs. Additional Services Revenue 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. Pro forma earnings per share is calculated as profit after tax divided by the number of Ordinary Shares in issue on Admission and as at 31 December 2013. The pro forma earnings per share movement has been calculated using the unrounded pro forma earnings per share figures for 2013 and 2012. Further information on earnings per share can be found in Note 6 to the financial statements.

4. Return on capital employed is calculated as profit after tax divided by the average capital held in the Group.

5. Insurance Group Directive.

6. The annualised pro forma payout ratio has been grossed up to reflect the fact the Group has not been Listed for a full year and as such the dividend pence per share represents 5/6ths of the full year dividend that would have been paid had the Group been Listed for the full year.

About esure Group

The Group is a customer focused UK personal lines insurer founded in 2000 by Peter Wood, the foremost general insurance entrepreneur in the UK and the Group's Chairman. The Group is one of the UK's leading providers of general insurance products, applying a data-led risk focus and underwriting approach to offer Motor and Home insurance products to customers 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, esure 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

Introduction

The Group achieved strong, resilient financial results in 2013, a year marked by changes, challenges and opportunities. A number of milestones were passed; the Group listed on the London Stock Exchange and declared its first dividends for shareholders. Furthermore, I am proud that the business built by my team and I over the past 14 years has progressed from a start-up into an innovative business within the FTSE 250. Together with a strong, diverse Board and an experienced management team, I look forward to realising further the potential of the Group.

Motor market developments

Following Motor market rate reductions experienced during most of 2012, rates were relatively benign in Q4 2012 and Q1 2013 and appeared to stabilise. This gave us the confidence to deliver strong policy and premium growth. This pricing stability was, however, short lived. Starting in the latter period of Q2 2013, Motor insurance customers saw yet more significant price reductions. This was most likely caused by insurers taking pre-emptive action in anticipation of potential future indemnity benefits from the Government's civil justice reforms to tackle the UK whiplash epidemic and the Legal Aid, Sentencing and Punishment of Offenders Act 2012, which we collectively refer to as the "LASPO Reforms".

The full effects of these welcome reforms will take some time to come to fruition and, whilst early signs are promising, they are not yet clear enough or large enough to justify the significant market rating shift in 2012 and 2013. I believe, however, the esure and Sheilas' Wheels brands are both very well placed to benefit from any future improvements.

The UK Motor insurance market remains cyclical and, in my experience, history shows that what the market needs is not necessarily what guides individual insurer's decisions. As a result, clear movements in the cycle tend to come when a critical mass of companies see their combined operating ratios deteriorate and their surplus reserves run dry in the same period. I don't believe the market is quite there yet. For now, however, focusing on the Group, given our careful monitoring of risks and prudent approach to reserving, I believe we are currently well placed to capitalise when conditions change.

Home performance

Our Home book is a key factor in the diversification of our income and profit streams. We started 2013 with over half a million customers and added more during the year. Over the long term, Home insurance is typically more profitable than Motor but more vulnerable to significant, unpredictable weather events. Our low risk focus helped our Home underwriting performance to remain strong despite both the adverse weather at the tail of 2013 and the competitive pricing conditions.

The esure IPO

esure Group plc listed on the London Stock Exchange on 27 March 2013. This milestone provided the Group with a solid platform to take the Business to the next level within one of the World's most competitive general insurance markets.

At IPO, we paid back all remaining debt from our capital structure removing the associated costs of servicing this debt. Our Listing also increased the profile of the esure and Sheilas' Wheels brands and provided an opportunity to introduce share ownership and retention schemes for the majority of our staff.

Strong management team

The Group's management team - under the stewardship of CEO, Stuart Vann, and CFO, Darren Ogden - demonstrated an exemplary collaborative work ethic throughout a year of transition. I am proud of their determination to drive the business forward in what have been challenging market conditions.

Financial strength and dividend

esure Group has a strong, debt-free financial position, supported by a conservative investment portfolio and a prudent reserving policy.

The Board has proposed a final dividend of 13.3 pence per share. The full year dividend of 15.8 pence per share represents an annualised pro forma payout ratio of 85%. The full year annualised pro forma dividend comprises a base dividend of 50% and a special dividend of 35% of post tax profits. The annualised pro forma payout ratio has been grossed up to reflect the fact the Group has not been Listed for a full year and as such the dividend pence per share represents 5/6ths of the full year dividend that would have been paid had the Group been Listed for the full year. 

The full year dividend comprises a base dividend of 9.3 pence per share and a special dividend of 6.5 pence per share. The special dividend has been set with reference to the Group's capital resource requirements, prospective premium growth expectations and a prudent margin for contingencies. It is the combination of these factors that the Board has examined when setting the final dividend that we have announced today.

Summary

The Group's financial results have been delivered against a backdrop of tough market conditions and we are well-placed for the future. It would not have been possible to achieve the year's significant milestones without the hard work of the management team and all our committed staff, to whom the Board and I would like to express our thanks. Personally, I would also like to thank esure and Sheilas' Wheels customers and to confirm the Group's commitment to act with integrity and fairness at all times to safeguard the trust they place in us.

Peter Wood

Chairman

Chief Executive's review

2013 Performance overview

Last year was a landmark in esure Group's history that included a strong and resilient financial and operational performance within a competitive and changing market landscape. We delivered pro forma earnings per share of 22.4 pence, up by 5.8% on 2012. Despite significant market rating pressures, the Group's combined operating ratio improved from 92.8% in 2012 to 89.7% in 2013. Both of these metrics - and many others you will read in this document - reflect the resilience of our business model and strategy. We have adapted nimbly to changing market conditions while forging strong relationships with our customers.

esure Group's technical approach to risk selection and pricing is the bedrock of our ability to underwrite Motor and Home insurance business at the right price for our customers. We review key metrics with daily, weekly and monthly analysis to identify market developments and opportunities which we can act upon quickly.

Motor underwriting

In 2013, despite all the market challenges, the Group maintained a disciplined underwriting approach while benefiting from two specific opportunities: the first full year of gender-neutral pricing, and segment re-entry following the Group's withdrawal four years ago.

Sheilas' Wheels

Our Sheilas' Wheels brand launched in 2005 and grew rapidly to become the largest female-focused car insurance brand in the UK. This growth was predicated on two key factors - brand strength and differential pricing by gender. Historical data shows that women have less expensive claims than men on average. So while the European Court of Justice's decision to outlaw gender pricing has, in our opinion, not been fair for all women drivers in the short-term, the Group was able to implement the transition for the benefit of our Sheilas' Wheels customers, and therefore, our Business.

Equalised prices were forecast to favour men more than women across the market, however, the female dominant Sheilas' Wheels brand became more competitive for many existing customers.

Following a targeted burst of younger female driver growth prior to the gender law taking effect on 21 December 2012, we have been able to offer keen prices and retain more of our existing customers. Our very pink brand has a natural attraction within a largely commoditised market place to the advantage of our Sheilas' Wheels customers and our Business.

Segment re-entry and LASPO Reforms

To understand why esure Group's strategy in 2013 was particularly effective, it is helpful to understand the Group's recent history. In response to our early sight of disproportionately high levels of whiplash claims, we took the tough decision in 2009 to withdraw completely from some previously profitable segments. In the process, we temporarily reduced our in-force policies to protect the quality of our book.

Since 2009, the market has significantly re-rated these segments, with rates now higher than four years ago. In the interim, the Group has improved its data-led underwriting, bolstered its internal processes and introduced a new Claims System, all with the aim of optimally managing segments where personal injury frequency may be an issue. In addition, from April 2013, the first LASPO Reforms were introduced, putting greater market controls in place.

I believe these factors presented and continue to present a unique opportunity given our prior withdrawal. In advance of the LASPO Reforms and as they started to take effect, we decided to return cautiously to those segments. There have been some encouraging early signs that the re-entry segments are delivering a positive contribution, however, the LASPO Reforms will take time to have their full impact.

Home underwriting

Our Home underwriting business had a successful year and delivered an excellent underwriting result in 2013, despite a competitive rating environment and the adverse weather in Q4 2013. The adverse weather continued in the early part of Q1 2014. We have taken all steps necessary to assist customers who have been affected.

The Group's Home insurance growth has been delivered predominantly through price comparison websites which offer homeowners easy ways to compare rates across many providers. By encouraging more people to shop around in this market, where traditional and mortgage-linked providers are still major players, I believe the Group's competitive Home pricing and product quality makes us well-placed to benefit in the future.

Diversified income streams

esure Group is now a significant player in the UK Motor insurance market with room to grow, even within its core markets. As part of our diversification strategy, as well as having built a significant book of Home business, we offer a range of additional insurance products, derive income from our investment portfolio and receive a share of profits from our 50% investment in price comparison website Gocompare. Together, this gives us a diverse range of income streams.

During 2013, we also launched an enhancement to our Motor additional insurance products with a keenly priced combination of four services under the name "Just in Case". The attractive price - that includes personal accident benefit, misfuelling cover, lost key cover and car hire - enables us to reach more customers with a range of enhanced cover at a substantial discount to market prices. I am pleased with the customer response to date.

Our customers

As the CEO of one of the leading Motor and Home insurers, my focus on a quality business starts and ends with a focus on our customers. Our job is first to attract and then to work to retain customers. We do this by offering excellent products at competitive prices. Each of our staff then works to serve those customers fairly and professionally throughout their relationship with the Group.

In 2013, an increasing number of our Motor and Home customers chose to renew their policies with esure and Sheilas' Wheels, a testament to the service we provide and competitive prices we offer. High retention, in itself, helps support growth within the competitive markets in which we operate and nine out of ten customers would recommend us to a friend.

Our staff

Following the IPO, over two thirds of our employees were granted shares in esure Group plc and even more benefit from our profit share scheme. We always look for ways to ensure that the interests of staff, customers and shareholders can be further aligned in the provision of quality products, outstanding service and efficient working practices.

Summary

We have moved our business forward significantly in 2013 and delivered strong, resilient financial results through hard work and our customer-focused strategy.

I encourage all my staff to look continually for new ways to improve and adapt for the benefit of our customers, who are at the heart of everything we do. Our marketplace changes rapidly and each year brings new challenges. By remaining nimble, focused and adaptable we will continue to rise to those challenges for the benefit of all our staff, customers and shareholders alike.

2014 Weather update

Claims from the severe weather events in the first quarter of 2014 are likely to cost the Group £3million to £4million more than expected. The Group continues to manage the claims in a fast and efficient manner to meet the needs of customers during their difficult times.

Outlook

The rating environment for both the Motor and Home markets remains highly competitive. The Group expects gross written premiums in 2014 to be similar to 2013, but may choose tactically to reduce or increase premium depending on market conditions. As a result, we are targeting a combined operating ratio broadly similar to 2013, before adjusting for the impact of exceptional Q1 weather and assuming normal weather for the remainder of the year. With our nimble and adaptable approach, underpinned by our disciplined underwriting, robust reserving and strong financial position, we are well placed to manage the cycle and poised for profitable growth when market conditions permit.

Stuart Vann

Chief Executive Officer

Financial review

* The pro forma earnings per share movement has been calculated using the unrounded pro forma earnings per share figures for 2013 and 2012. Further information on earnings per share can be found in Note 6 to the financial statements.

Gross written premiums and in-force policies

Gross written premiums increased by 4.0% to £535.8m in 2013, with Motor up 4.1% and Home up 3.8%. In-force policies increased by 9.9% in 2013 to 1.933 million, with both Motor and Home up, 10.4% and 8.7% respectively.

The growth in Motor gross written premiums and in-force policies has been delivered through continued focus on the core underwriting book and two specific market opportunities. The LASPO Reforms and re-rating in the market allowed the Group to re-enter certain segments of the market that it had previously exited in 2009, in response to disproportionately high levels of whiplash claims. Also, Sheilas' Wheels benefited from increased retention due, in part, to the gender-neutral directive.

The Group has grown Home gross written premiums and in-force policies through competitive pricing and its additional insurance product pricing strategy to aid customer conversion and retention.

Trading profit

2012 normalised trading profit of £126.7m (£7.0m exceptional cost relating to above average weather - £4.0m attributed to Motor and £3.0m attributed to Home, £23.6m exceptional investment income gains, £0.9m incremental broker expenses and £4.3m loss on a claims supplier entering administration).

The Group's normalised trading profit increased by 3.1% to £130.6m (2012: £126.7m). In 2012, the Group experienced exceptional investment returns, above normal weather compared to 2013, a claims supplier entering administration and incremental broker expenses compared to 2013. The Group's reported trading profit has fallen 5.4% to £130.6m. 

A reconciliation between trading profit and profit before tax can be found on page 11.

Underwriting

The Group's underwriting trading profit increased 45.8% to £50.6m on a reported basis. Underwriting profit, adjusted for the exceptional weather events of 2012 (cost of £7.0m) and a claims supplier going into administration in 2012 (cost of £2.3m), increased by 15.0% to £50.6m.

The Motor underwriting trading profit increased 34.4% to £41.0m through focused and disciplined underwriting, continued favourable development of prior accident year reserves, the Group's new bespoke Claims System and no exceptional weather costs impacting the 2013 Motor result.

The Home underwriting trading profit increased 128.6% to £9.6m benefiting from lower claims frequency, no exceptional weather costs impacting the 2013 Home result, despite the severe weather events in the fourth quarter; and continued favourable development of prior accident year reserves.

Combined operating ratio

The Group's combined operating ratio improved by 3.1ppts to 89.7%. 

The Motor combined operating ratio improved 2.5ppts to 89.9% driven by a 2.8ppts improvement in the loss ratio to 67.2%, offset slightly by a 0.3ppts increase in the expense ratio, to 22.7%.

The Home combined operating ratio improved 6.3ppts to 88.2% underpinned by an improvement in the loss ratio of 5.2ppts to 59.3%, and an improvement in the expense ratio of 1.1ppts, to 28.9%.

Net loss ratio

(1) Adjustments made for exceptional weather events, above those expected by the Group, and a claims supplier entering administration in 2012.

(2) Adjustment for exceptional weather events, above those expected by the Group.

The Group continues to apply a prudent approach to reserving, as demonstrated by the favourable development of prior accident years. The small deterioration in the Motor current year adjusted net loss ratio largely reflects the market rating environment in 2013, which is partly offset by strategic actions of the Group. The Home current year adjusted net loss ratio has benefited from a lower claims frequency compared to 2012, despite the competitive rating environment.

Prior-year reserve releases

Prior year reserve releases increased to £82.4m in 2013 (2012: £68.9m) reflecting the continued favourable development of prior accident year reserves across both Motor and Home.

The Group has always had a prudent approach to reserving and total net reserves remain comfortably in excess of the actuarial best estimate.

Expense ratio

The Group's net expense ratio remained broadly flat in 2013 at 23.8% (2012: 23.6%), despite the impact of the rating environment on both Motor and Home earned premiums.

Additional services revenues

(1) Non-underwritten additional insurance products revenue represents the commission margins for the Group generated from sales of such products.

(2) Policy administration fees comprise income received as a result of administration charges (for example, as a result of mid-term alterations to policy details by the policyholder) and cancellation charges. Other income includes introduction fees where the Group does not have a continuing relationship with the customer.

(3) Claims income comprises income generated by the Group from legal panel membership fees and fees generated from the appointment of firms used during the claims process, including medical and car hire suppliers.

(4) Total income from the Group's non-underwritten additional services reporting segment.

(5) Underwritten additional insurance products is calculated by deducting the Group's claims costs associated with its underwritten additional insurance products from the gross written premiums relating to these products in a particular period.

(6) Pet, Pest and Travel additional insurance products have been reclassified from policy administration fees and other income to non- underwritten additional insurance products in 2013.

The Group's total income from additional services is broadly flat compared to 2012, despite the implementation of the Legal Aid, Sentencing of and Punishment of Offenders Act 2012, which affected the Group's receipt of legal panel membership fees.

Non-underwritten additional insurance products income has remained level with 2012 as a result of the tactical pricing of the Home additional insurance products to aid Home gross written premiums growth. This strategic action reduces the level of income from non-underwritten additional insurance products.

The Group has grown its additional services revenues in underwritten additional insurance products, instalment income and policy administration fees which are primarily linked to the Group's in-force policy growth.

Investments

Investment income

The investment portfolio has performed broadly in line with the Group's expectation and delivered an investment return of 2.2%. Interest and other income is broadly flat year-on-year but the exceptional fair value gains of £23.6m in 2012, as expected, have not been repeated.

The fixed income portfolio represents 79.9% of the portfolio and at year end had a yield of 1.6%.

Gocompare

The Group's share of profit from Gocompare increased 4.9% to £12.9m and the Group received £6.0m of dividends in 2013. The investment continues to provide a strong return.

Profit before tax

Profit before tax is up 2.5% to £118.4m. The Group has seen a reduction in its finance costs to £2.2m, driven by the repayment of all the Perpetual Subordinated Loan Notes in March 2013. Non-trading costs are down 46.2% to £2.8m as costs relating to Admission in 2013 were recognised directly in equity. The Group also recorded a small gain on its property revaluation in 2013. The amortisation charge on acquired intangible assets has reduced 17.3% to £4.3m.

Taxation

The Group's tax expense was £25.2m compared with £27.4m in 2012. The decrease in the Group's tax expense was largely due to a reduction in the UK corporation tax rate from 24.0% to 23.0% with effect from 1 April 2013; and a prior year tax benefit relating to the treatment of costs incurred in 2012 in respect of the Group's Admission to the London Stock Exchange.

The Group incurred an effective tax rate of 21.3% (2012: 23.7%). 

Pro forma earnings per share 

Pro forma earnings per share increased 5.8% to 22.4 pence per share. This is in line with the growth in profit after tax.

Further information on earnings per share can be found in Note 6 to the financial statements. 

Dividend per share

The Board has proposed a final dividend of 13.3 pence per share. The full year dividend of 15.8 pence per share represents an annualised pro forma payout ratio of 85%. The full year annualised pro forma dividend comprises a base dividend of 50% and a special dividend of 35% of post tax profits. The annualised pro forma payout ratio has been grossed up to reflect the fact the Group has not been Listed for a full year and as such the dividend pence per share represents 5/6ths of the full year dividend that would have been paid had the Group been Listed for the full year. 

The full year dividend comprises a base dividend of 9.3 pence per share and a special dividend of 6.5 pence per share. The special dividend has been set with reference to the Group's capital resource requirements, prospective premium growth expectations and a prudent margin for contingencies.

The ex-dividend date is 9 April 2014, the record date is 11 April 2014 and the payment date is 23 May 2014.

Return on capital employed

The Group has delivered a high return on capital employed of 37.7% (2012: 37.0%) reflecting its strong, resilient financial result and efficient capital base.

Financial position

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.

Investments and cash

The Group deploys a conservative investment strategy with the primary objective of capital preservation.

Asset allocation

The reduction in investments to £768.8m is predominantly driven by the repayment of £84.9m of capital instruments prior to and immediately on Admission. The Group continues to have no direct exposure to peripheral Eurozone countries sovereign debt. The total portfolio remains of short duration, approximately one year.

Fixed income portfolio

Consistent with the Group's conservative investment strategy, the duration of the fixed income funds remains short at approximately one year.

Fixed income credit risk quality

The Group continues to hold the majority of its assets in investment grade instruments with 82% of the fixed income portfolio having a credit rating of "A" or above.

Reserving

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

The ultimate costs and expenses of the claims for which these reserves are held are subject to a number of material uncertainties. As time passes between the reporting of a claim and the final settlement of the claim, circumstances can change that may require established reserves to be adjusted either upwards or downwards. Factors such as changes in the legal environment, results of litigation, propensity of personal injury claims, changes in medical and care costs, and costs of vehicle and home repairs can all substantially impact overall costs and expenses of claims, and cause a material divergence from the bases and assumptions on which the reserves were calculated. These factors can cause actual developments to vary materially from the projections and assumptions on which the Group's technical reserves were calculated.

Given this uncertainty, the Group looks to maintain a consistent and prudent reserving philosophy and the Group has always established its Claims Outstanding Reserves and Incurred But Not Reported ("IBNR") Reserves at a prudent level in excess of the 'best estimate' level determined through standard actuarial techniques.

The prudent approach to reserving has meant that the Group has historically experienced favourable development in its claims reserves over time as claims have ultimately settled at a lower cost than initially calculated for the purposes of its booked Claims Outstanding Reserves and IBNR Reserves. This prudent approach can be evidenced by the gross and net claims development triangles that are shown in Note 8 to the financial statements. The triangles illustrate, that for all accident years, the latest booked loss ratio is lower than the initial booked loss ratio. In 2013, the total release from prior year reserves was £82.4m (2012: £68.9m) representing 16.8% of net earned premiums (2012: 14.3%).

The amount of the Group's Claims Outstanding Reserves and IBNR Reserves, net of outward reinsurance, together with the related reserves in respect of the requirement for claims handling expenses, is comfortably in excess of the actuarial best estimate.

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. At the present time, 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 availability of reinsurance in the market.

Cash flow

The operating activities of the Group are highly cash generative. The Group has made a net reduction in its financial investments of £38.0m and raised £50.0m in proceeds from its Admission in 2013. These significant cash inflows, in addition to its operating activities, funded the £84.9m repayment of capital instruments, £50.0m repayment of Perpetual Subordinated Loan Notes and the Group's maiden interim dividend of £10.4m.

Capital management

The Group's approach to capital management is outlined in Note 10 to the financial statements.

Solvency II

Solvency II is scheduled for implementation on 1 January 2016, following the agreement on Omnibus II. However, there are remaining uncertainties around some specific details and the phasing of the implementation. The Group is focused on developing its business processes to reflect and further embed the known Solvency II requirements. These include evolution of the governance and framework for risk management and development of the internal and external reporting requirements - in particular, the FLAOR (Forward Looking Assessment of Own Risks) based on the ORSA principles (Own Risk and Solvency Assessment). The Group is also enhancing its Internal Economic Capital Model to support its business and strategic decisions, including assessment of the regulatory and business capital requirements. In addition, the Group will continue to calculate its likely capital requirements using the Solvency II standard formula approach.

Principal risks and uncertainties

To the best of the Directors' knowledge the principal risks and uncertainties of the Group are outlined in Note 12 to the financial statements.

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. 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 2013, 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 financial performance and position of the Group, its cash flows and its approach to capital management are set out in the financial review. 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 twelve months and beyond, including cash flow forecasts and regulatory capital surpluses. The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for at least 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.

Principal accounting policies

The Group's 2012 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 new standards, including consequential amendments to other standards, with a date of initial application of 1 January 2013:

• IFRS 10 Consolidated Financial Statements (2011)

• IFRS 11 Joint Arrangements

• IFRS 12 Disclosure of Interests in Other Entities

• IFRS 13 Fair Value Measurement

IFRS 10, 11 and 12 are effective under EU law from 1 January 2014, with early adoption permitted, and have been early adopted by the Group. The nature and effects of these changes have had no impact on the recognised assets, liabilities and comprehensive income of the Group.

There are a number of other new standards and amendments to standards with a date of initial application of 1 January 2013, the adoption of which has had no material effect on the Group's accounting policies.

At the date of approval of these financial statements there were no standards, amendments or interpretations in issue and endorsed by the EU which the Group had not adopted. The following amendment to an existing standard has been endorsed by the EU, but is not mandatory for the year ended 31 December 2013 and has not been early adopted by the Group:

• Effective 1 January 2014: Amendments to IAS 32 Financial Instruments: Presentation - Offsetting Financial Assets and Financial liabilities. This amendment addresses inconsistencies in current practice when applying the offsetting criteria in IAS 32 for financial assets and liabilities. The adoption of the amendment is expected to have no material effect on the Group's accounting policies.

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

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 ventures' 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.

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. For each business combination, the Group has an option to measure any non-controlling interests in the acquiree either at fair value or at the non-controlling interest's proportionate share of the acquiree's identifiable net assets.

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 and liabilities assumed. 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, with the exception of insurance contracts and operating leases, 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.

3. Critical accounting judgements and estimates

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 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.

4. Segmental information

Operating segments

The Group has four 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 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, including medical, car hire suppliers; and, prior to the implementation of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 ("LASPO"), applicable legal panel membership fees.

Investments

This segment represents income from investments (to manage liabilities under insurance contracts and generate return for shareholders) and an equity holding in a joint venture.

Segmental information (continued)

Segmental revenues, expenses and other information

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

The average number of in-force policies during the year ended 31 December 2013 was 1.86m. 

4. Segmental information (continued)

The average number of in-force policies during the year ended 31 December 2012 was 1.72m.

Segmental information (continued)

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 and non-underwritten additional services is £130.6m (2012: £138.1m).

The Group's profit after tax is £93.2m (2012: £88.1m).

The Group incurred non-trading costs of £2.8m in 2013 relating to activities associated with the listing of esure Group plc on the London Stock Exchange and share based payments in respect of the long service and one-off awards. The Group incurred non-trading costs of £5.2m in 2012, primarily relating to potential corporate transactions.

Segmental profit drivers

Motor and Home underwriting

The performance of the Motor and Home underwriting segments is measured by reference to a number of Key Performance Indicators, 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 2013, the Motor underwriting net loss ratio was 67.2% (2012: 70.0%) and the Home underwriting net loss ratio was 59.3% (2012: 64.5%). The total net loss ratio was 65.9% (2012: 69.2%).

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 2013, the net expense ratio was 23.8% (2012: 23.6%) giving a combined operating ratio of 89.7% (2012: 92.8%).

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 2013, revenue per IFP was £56.0 (2012: £60.6).

Since the implementation of the Legal Aid, Sentencing and Punishment of Offenders Act 2012, applicable legal panel membership fees are no longer received. For comparability, Motor additional services income has been measured by reference to additional services revenue, excluding claims income, per Motor IFP. At 31 December 2013, revenue per IFP under this metric was £64.3 (2012: £62.9).

Statement of financial position

The assets and liabilities of the Group are managed 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.

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. Dividends

An interim dividend of 2.5 pence per share (£10.4m) was declared by the Board of Directors on 6 August 2013. No dividends were declared in the year ended 2012 by the Group. Subsequent to the year end, a final dividend in respect of the year ended 31 December 2013 of 13.3 pence per share (£55.4m) was 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 135,848 (2012: nil), relates to the dilutive potential of the share-based payment arrangements. 

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 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.

Basic and diluted earnings per Ordinary Share

Pro forma earnings per Ordinary Share

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

7. Financial assets and liabilities

7.1 Financial assets

Financial investments are held to support the Group's insurance activities and may be required to be realised in order to meet the obligations arising out of those activities at any time. On that basis, the investments are deemed to be recoverable within 12 months.

Credit risk

Investments bearing credit risk, and cash and cash equivalents, are summarised below, together with an analysis by credit rating as at the reporting date:

Shares and other variable-yield securities and units in unit trusts do not bear credit risk. Cash and cash equivalents are "A" rated. The analysis by credit rating illustrates a slight reduction in credit quality over the period under review, with a lower proportion of assets rated "AAA" in 2013 compared to 2012. This is due to the repayment on Admission of £84.9m of capital instruments funded by a commensurate reduction in money market funds. The Group continues to hold the majority of its assets in strong investment grade instruments.

7.2 Financial liabilities

Derivative financial instruments are due within one year. All of the subordinated loan note liability at 31 December 2012 was perpetual and there was no contractual maturity date.

Perpetual Subordinated Loan Notes

On 11 February 2010, esure Finance Limited, a wholly owned subsidiary undertaking, created and issued 50,000,000 unsecured perpetual subordinated loan notes of £1 each (the "Perpetual Subordinated Loan Notes"). The interest rate was 18.9% per annum, paid annually.

The Perpetual Subordinated Loan Notes were listed on the Channel Islands' Stock Exchange.

On 28 March 2013 the Perpetual Subordinated Loan Notes were repaid by the Group following Admission.

7.3 Fair value estimation

In accordance with "IFRS 7 Fair Vale Measurement" financial instruments held at 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 that are derived from inputs other than quoted prices included in Level 1, if all significant inputs required to fair value an instrument are observable, would result in the instrument being included in Level 2. The majority of assets classified as Level 2 are over-the-counter corporate bonds, where trades are less frequent owing to the nature of the assets. Inputs used in pricing the Group's level 2 assets include:

• quoted prices for similar (i.e. not identical) assets in active markets;

• quoted prices for identical or similar assets in markets that are not active, the prices are not current, or price quotations vary among market makers, or in which little information is released publicly;

• inputs that are derived principally from, or corroborated by, observable market data by correlation; and

• for forward foreign exchange contracts, the use of observable forward exchange rates at the balance sheet date, with the resulting value discounted back to present value.

As a result of the application of IFRS 13 Fair Value Measurement, from 1 January 2013, the Group has revisited the fair value hierarchy and now classifies all corporate bonds as Level 2 assets with the exception of Government backed securities which are classified as Level 1 unless they are illiquid. As a result of the change, £14.0m has been transferred from Level 1 to Level 2 in the year. In addition, £3.0m of debt securities have been transferred from Level 1 to Level 2 in the year as a result of insufficient trade frequency for the assets to be classified as Level 1.

Inputs for the asset or liability that are not based on observable market data (unobservable inputs) - (Level 3)

Unobservable inputs have been used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset at the measurement date (or market information for the inputs to any valuation models). As such, unobservable inputs reflect assumptions about the inputs that market participants would use in pricing the asset.

If one or more of the significant inputs is not based on observable market data, the instrument is included in Level 3. The Group held Level 3 equity securities of £17.8m at 31 December 2012, representing an investment in a managed fund. Although the fair value was calculated using simple models and extrapolation techniques by reference to the observable market prices of the underlying assets, the fund was closed to new investment during 2011 and hence reclassified from level 2 to level 3 due to the illiquidity of the fund. During the year ended 31 December 2012, £4.7m was credited to the income statement in respect of Level 3 financial assets. At 31 December 2012, the majority of investments held by the fund classified at Level 3 were listed investments. Therefore, no sensitivity analysis was performed due to the nature of the investments.

Following the Group's decision to sell its holding in a managed fund, there are no Level 3 assets, other than land and buildings, as at 31 December 2013. The total sales proceeds for these financial assets was £21.7m. Cumulative unrealised losses of £3.0m were reversed on the sale of these Level 3 financial assets and realised gains of £1.0m were recorded in investment income.

Under IFRS 13, land and buildings with a carrying value of £11.6m (2012: £11.4m) are now classified as Level 3 assets. Owner-occupied properties are stated at their revalued amounts, as assessed by qualified external valuers annually, all with recent relevant experience. These values are assessed in accordance with the relevant parts of the current RICS Valuation Standards in the UK ("Red Book"). The valure's opinion of fair value was primarily derived using comparable recent market transactions on arm's length terms. More frequent revaluations are performed by management to assess that the carrying amount does not materially differ from its fair value.

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

8. Reinsurance assets and insurance contract liabilities

a. Analysis of recognised amounts

b. Claims development

(a) Insurance claims - gross ultimate claims (£m)

(b) Insurance claims - net ultimate claims (£m)

(c) Insurance claims - net loss ratio development

d. Movements in insurance liabilities and reinsurance assets

(a) Claims reported and claims handling expenses (£m)

The movements in claims reported, including claims handling expenses, both gross and net of reinsurance (RI), are shown below:

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

Following the inclusion of an allowance within total reserves for an assumed reduction of one percentage point in the Ogden discount rate from 31 December 2012, the Group increased its estimate of gross claims outstanding and claims outstanding recoverable from reinsurers. During 2013, the Group continued to experience favourable development of prior accident year reserves resulting in a reduction in both gross claims outstanding and claims outstanding recoverable from reinsurers as at 31 December 2013.

9. Share capital and other reserves