Last checked at 19 Mar 2013 15:31
ECCLESIASTICAL INSURANCE OFFICE PLC
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2012
The Company has now approved its annual report and accounts for 2012.
This Annual Financial Report announcement contains the information required to comply with the Disclosure and Transparency Rules, and extracts of the Directors' Report forming part of the full financial statements.
The financial information set out below does not constitute the Company's statutory accounts for the year ended 31 December 2012. The annual report and accounts will be available from 20 March 2013 on the Company's website at www.ecclesiastical.com. Copies of the audited financial statements are also available from the registered office at Beaufort House, Brunswick Road, Gloucester GL1 1JZ.
A copy of the Company's statutory accounts for the year ended 31 December 2012 has been submitted to the National Storage Mechanism and will shortly be available for inspection at www.hemscott.com/nsm.do.
Results
Our result for the year was a profit before tax of £38m (2011 restated: -£11m). Profitability was driven by a strong investment performance, with an investment result of £57m (2011: £8m). Our investment team continued their track record of outperforming benchmarks in most asset classes and also received external recognition, winning many awards during the year. Our broker business SEIB has also continued to perform well with profit increasing by 14% to £3m, providing a diversified and less volatile source of income.
This was, however, offset by a general insurance underwriting loss of £25m. Our UK property portfolio continued to perform strongly, delivering an 85.7% Combined Operating Ratio (COR), however this was more than offset by increasing and unacceptable losses of £28m from liability business in the UK and Ireland and an underwriting loss of £5m from Ansvar Australia. As a result, our Group COR was 108.5% (2011 restated: 106.4%).
Action has been taken to address liability performance in the UK and Ireland. A number of large unprofitable risks have been removed from the account where we could not achieve the premiums required and we continue to apply significant rate increases. Action has also been taken to reduce our exposure to catastrophe risk in Australia, which has reduced reinsurance costs for 2013. We expect these actions, combined with continued strong performance from our UK property account, to result in an improved underwriting result in 2013.
Board and Management changes
On 24 January 2013, Michael Tripp announced his intention to retire from his position as Group Chief Executive in the course of 2013, once a successor has been found.
Michael took up his current position six years ago and during this time has significantly reshaped the Group. This has included exiting from our London Market and the majority of our Life business, while entering new niche markets including those relating to Heritage and Property Investors. He has also provided a steady hand during a period of unprecedented economic difficulty and exceptional natural events.
Group Chief Executive's Review
Introduction
In our 125th year, we have celebrated what is good about Ecclesiastical, how our values and expertise have enabled us to provide something different to our customers and business partners. It has also been a challenging year where we have shown great resilience in the face of a continuing turbulent financial environment and a highly competitive insurance market.
In these circumstances, a profit of £38m (2011 restated: -£11m) is a good result with key decisions and actions being taken to put us in a stronger position for the future.
Organisational and operating structures
In January, we launched an enhanced insurance solution for the UK Charity and Community market. This is an important step in maintaining a strong presence in the Charity sector, where Ecclesiastical can leverage its skills as a specialist insurer. We also extended our Property Investors proposition to regional brokers outside of London and reinforced our position as a credible provider in this sector.
In February, we launched a national campaign to reduce the amount of metal theft from Anglican churches. As part of the campaign, Ecclesiastical invested £0.5m to pay for wireless alarms to be installed at some of the most at-risk Anglican churches across the UK. Hundreds of such alarms are now in place and have already helped prevent a number of metal thefts. Whilst we can't say precisely what impact this campaign has had, in 2012 we saw a 63% reduction in the number of church metal theft claims. Although it is too early to predict whether this is a long-term change in behaviour, this is a welcome trend. The imminent amendments to the 1964 Scrap Metal Dealers' Act in 2013 should also support these efforts.
In April, we announced a new structure to our UK general insurance operations which aligns our business more closely with our business channels. This will further enhance our ability to put our relationships with customers and business partners at the heart of what we do. We also appointed a dedicated Customer Service Director to concentrate on delivering consistently excellent service and strong underwriting standards across all our niches, and challenging ourselves to raise the quality of that service delivery.
Prior to the half-year, we completed the managed withdrawal from the New Zealand market. The run-off operation, ACS (NZ) Limited, was disposed of to the Canterbury Earthquake Church and Heritage Trust, an independent trust with similar objectives to those of our ultimate parent. This action will ensure that customers' claims will continue to be dealt with in a fair and equitable manner.
In November, we announced our plans to withdraw from the motor market in the UK from 2013. It has been a challenge for insurers across the industry to make a profit in the motor insurance sector and there is no sign that this trend will change in the near future. This decision allows us to focus on sectors where we can deliver competitive advantage to enable sustainable returns.
Financial performance
Improved investor confidence in global markets helped us to deliver strong investment returns in 2012, with an investment result of £57m (2011: £8m). Our investment performance exceeded the composite benchmark we use to measure performance for our asset class mix. Our performance has also exceeded that of the composite benchmark over 15 years, which we use as a measure of long-term performance. Corporate bonds and equities helped drive the strong returns in 2012, with a positive contribution from our Asian equity exposure.
Our Group COR was 108.5% (2011 restated: 106.4%). The COR is higher than our long-term target due to a combination of higher reinsurance costs in 2012, following catastrophe events in previous years, and increased liability claims in the UK and Ireland. Our result has also been affected by another year of widespread flooding in the UK with gross incurred claims being significantly higher than the average seen over the previous five years, which includes the exceptional floods of 2007.
Reinsurance costs will be considerably lower in 2013 due to actions taken to reduce the concentration of our exposure to future catastrophe events in Australasia. Liability claims, in the UK and Ireland, have been a particular issue in the Care sector, with claims costs increasing significantly during the year. The increase in liability claims has been exacerbated by the growing compensation culture, which shows no sign of going away and lawyers being ever more aggressive in their approach. This is compounded by the poor state of the economy which always results in claims of this nature increasing. Action has been taken to strengthen rates or cease writing business where appropriate and we expect this to put the liability account on course to generating sustainable profits.
Despite the challenges mentioned above, other areas have delivered strong profits. Notably, our property account in the UK has performed well as has our Ansvar UK business division. Our owned broker, SEIB, also performed strongly, delivering higher profits in 2012.
The net loss attributable to discontinued operations was £6m (2011: -£5m). This includes the cost of disposing of ACS (NZ) Limited.
Gross Written Premium (GWP) for our general insurance businesses, excluding those in run-off, remained relatively flat for the year, up slightly to £461m (2011 restated: £457m). Growth has been particularly strong within our Education and Property Investors niches, but this has been largely offset by reduced GWP in Australia, following action taken to reduce our exposure to catastrophe events.
Ecclesiastical Investment Management has again performed strongly and we have continued to grow our funds under management which totalled £2.0bn at year end (2011: £1.8bn). This performance can be attributed to the excellent management of our award-winning funds, together with highly effective marketing campaigns.
Our people
Continuously improving the engagement and motivation of our people is critical to our success. Becoming the best place to work remains one of our core aims.
In 2012, we raised our expectations of performance, launching a new approach which makes it much clearer what 'great' performance really looks like in our business. As a specialist commercial insurer there is a constant demand for us to strengthen our expertise and capabilities. We added Customer Services to our 'Academy' approach in 2012 to complement the already well-established Claims, Survey and Underwriting academies.
Restructuring our UK operations at the beginning of the year gave us an opportunity to re-evaluate how our business should be organised and the areas we really should be focused on. This organisational change resulted in new opportunities and greater role clarity for many of our people.
In our 125th Anniversary year we did, however, also make time to celebrate our achievements. Many of our people across the Group got together for anniversary events and many more also chose to celebrate by giving back to our communities. A record number of nearly 60% of our UK employees gave their time to volunteer for charities in 2012.
Awards
2012 was another successful awards year for Ecclesiastical.
We had double success at this year's British Insurance Awards where we won the Underwriting Initiative of the Year category with the launch of our Property Investor's product and David Britton, Niche Account Manager, was crowned Young Achiever of the Year.
Our investment funds collected numerous awards throughout the year, most notably the Amity UK Fund won the flagship Best Ethical Investment Fund Award at Investment Week's Climate Change & Ethical Investment Awards, EIM was awarded the Moneyfacts Best Ethical Investment Provider Award for the fourth consecutive year, and the Higher Income Fund won the Lipper Award for Best Fund (Mixed Asset Class) over 5 and 10 years.
Our Marketing team's efforts in supporting charities were rewarded at the Financial Services Forum Awards where we won the Integrated B2B Campaign Award for our 'Changing hearts and minds' charity campaign and the judges' special award for marketing excellence.
We also received recognition for our training and development with the Birmingham Office winning the inaugural West Midlands Insurance Institute Awards for Training and Development and South Essex Insurance Brokers being shortlisted for the Training Programme of the Year award in the Insurance Times Awards.
Early in the year our Claims team was shortlisted for two Post Magazine Claims Awards in the Commercial Lines Claims Team of the Year category and Jenny Neale, Commercial Claims Team Leader, was shortlisted for the Rising Star Award.
Outlook
The Group remains cautious over the short-term outlook. The financial climate is still uncertain, particularly with the Eurozone debt crisis and potential developments in the US in relation to the 'fiscal cliff' likely to cause further volatility on global stock exchanges. The insurance markets in the UK and in our overseas territories are also likely to remain highly competitive.
However, through continuing to address the specific short-term issues of liability performance in the UK and Ireland, the reduction of reinsurance costs in Australia and growing successfully in core profitable markets, the Group remains confident about the medium to long-term outlook.
Business Review
FINANCIAL PERFORMANCE
General Insurance
2012 was a challenging year for our general insurance business. Our underwriting performance for the year was a loss of £24.6m (2011 restated:-£18.7m), resulting in a Group COR of 108.5% (2011 restated: 106.4%).
United Kingdom
Our core UK property account continued to perform well, delivering an on target underwriting profit of £14.6m. However, this was more than offset by losses from liability and motor giving an overall underwriting loss for the year of £12.3m (2011 restated: £0.7m).
An underwriting loss of £21.6m on liability reflected a number of large losses, continued increases in the frequency and cost of 'slip and trip' claims and the strengthening of reserves relating to abuse claims. Actions continued throughout 2012 to improve profitability in the poorest performing areas, notably within the Care sector, including rates being strengthened or business no longer being written. These steps should result in an improved underwriting result in 2013.
Our motor account reported a loss of £6.9m. In view of this unacceptable result and the profitability challenges which are seen across the UK motor insurance market, we made the decision in November 2012 to withdraw from this sector. This will allow us to focus on areas where we can deliver competitive advantage to enable sustainable returns.
Our UK business grew by 3% during the year, with GWP increasing to £336.6m.
Ireland
The performance of our Ireland business mirrored that of the UK, with an on target underwriting profit from the property account more than offset by losses on liability, resulting in an underwriting loss of £6.2m overall (2011 restated: break-even). We have taken similar actions to the UK business to ensure that the liability account returns to profit in the medium-term.
GWP increased by 4% in 2012 to £14.0m.
Australia
Our Australia general insurance operation reported an underwriting loss of £5.2m (2011: -£11.8m). Whilst we saw a return to profitability at the gross level in 2012, this territory has been impacted by high reinsurance costs following recent catastrophes. Action has been taken during the year to reduce our concentration exposure to catastrophe events and this has contributed to a much lower reinsurance cost for 2013.
During the year, we also refocused the business in Australia and completed the exit from personal lines and concentrated the business on its core segments.
These actions have affected GWP, which decreased in 2012 by 15% to £65.1m.
The team in Australia now has a much sharper focus on business development, underwriting for profit and excellent service delivery.
Canada
In Canada, we reported a small underwriting loss of £0.3m (2011 restated: -£0.9m). Our liability account performed strongly generating profits in line with expectations, but this was more than offset by losses on our property account caused by a catastrophe loss from floods in Montreal and increased costs following the restructuring of the Canadian Catastrophe Reinsurance program, as rates hardened following events in the Asia-Pacific region. GWP growth was strong, increasing by 8% to £37.0m, with new business being supported by excellent levels of retention.
Central operations
Our run-off operations continued to progress satisfactorily due to positive movements on claims experience for our London Market business. After inclusion of central underwriting expenses and profit from internal reinsurance arrangements, this segment recorded a loss of £0.6m (2011 restated: -£6.7m).
Investments
Global markets weathered significant challenges in 2012.
Concerns over structural issues in Europe, uncertainty surrounding the future path of the Chinese economy and the looming US fiscal cliff weighed on investor sentiment. Concerted action and the near-universal adoption of economic policies designed to stave off another global recession helped buoy financial markets to deliver solid returns to investors.
Economic activity in the UK economy remained at subdued levels as both the Consumer and Corporate sectors remained short of confidence in light of continued government austerity measures and uncertainty both at home and abroad. Over the year derivative contracts were in place as part of a defensive strategy to limit potential downside losses in equity markets.
Over the course of 2012 the FTSE All Share Index rose by 8.2%, with a 5.8% gain in the FTSE 100 Index. Our UK equity portfolio increased by 16.2%, outperforming both indexes, reflecting its higher weighting to medium-sized companies.
Our overseas equity portfolio recorded strong gains with significant positive contributions from overweight positions in Asia, particularly Singapore and Thailand.
The FTSE Government All Stocks Index fell 0.9% over the course of 2012 in part, at least, reflecting the high valuation of Gilts at the beginning of the year. Our preference for Corporate Bonds over Gilts was reflected in the returns from our Bond portfolios. Corporate Bonds performed strongly, benefitting from superior yields and tightening credit spreads as investors continued to seek alternative sources of income in a low interest rate environment. Returns from Corporate Bonds were also aided by the further rehabilitation of financial issuers, an important constituent of the sector.
Investment management
Ecclesiastical Investment Management (EIM) continued to benefit from effective marketing campaigns, consolidating our presence on fund platforms, and we continued to grow our funds under management, despite challenging market conditions.
2012 proved to be another difficult year for asset managers. EIM achieved good relative sales performance, which saw us climb the rankings of top-selling asset managers on the platforms, with £47m net new funds added to the Ecclesiastical Investment Funds (EIF) and an additional £4m invested in our special charity investment vehicle. EIM's fee and commission income grew by 10% to £10.6m, including £8.4m in respect of managing external fund mandates and the EIF, and profit was in line with prior year at £1.2m.
EIM and its funds continued to win awards, with the company winning the Moneyfacts Best Ethical Investment Provider for the fourth consecutive year. The Amity UK Fund won Best Ethical Fund at the Climate Change & Ethical Investment Awards, and the Higher Income Fund was named Best Fund (Mixed Asset Class) over 5 and 10 years by Lipper. Our Fund Managers continue to be highly rated with Sue Round, Robin Hepworth and Andrew Jackson rated by Trustnet as Alpha Trustnet Managers placing them in the top 10% of all Fund Managers.
Long-term insurance
Our life insurance business recorded a profit of £5.9m (2011: £0.7m). This was significantly higher than expected due to a number of one-off technical adjustments, including the effect of a change in the future tax basis (£3.0m), changes in reserving assumptions for future unit renewal costs (£1.3m) and allowance for spread risk in corporate bond yields (£0.8m). These adjustments, together with other minor adjustments and favourable investment returns on free assets, offset the adverse effects of new business strain driven by historically low gilt yields on the index-linked bonds we are required to invest in.
Our life insurance business continued to focus on providing whole-of-life policies to support the funeral planning products made available by our main business partner, the National Association of Funeral Directors. Business growth was contained in 2012 whilst we implemented pricing action to address the continuation of historically low gilt yields. We continue to consider options to address performance in the current economic environment.
Broking and Advisory
South Essex Insurance Brokers (SEIB) continued to provide a steady income to the Group as well as providing diversification of earnings. Despite challenging markets, SEIB performed ahead of budget in both revenue and profit, with growth in general business commission and fees to £7.2m and a 14% increase in operating profit to £2.5m. SEIB's specialist areas of funeral directors, rural taxis and wedding hire insurance generated significant growth in commission income, whilst controlling and maintaining overheads contributed to the improvement in profits.
Our immediate parent, Ecclesiastical Insurance Group, once again increased its stake in Lycetts during the year and now holds a 72.6% stake (2011: 56.2%). It is envisaged that this stake will increase further over the coming years. Lycetts performed strongly with revenue up 4% and with costs being tightly controlled saw operating profit growth of 10%.
A great deal of work was undertaken to ensure our advisory business Ecclesiastical Financial Advisory Service (EFAS) was ready for, and compliant with, the implementation of the Retail Distribution Review on 31 December 2012. A review of EFAS has taken place and going forward this will be a much smaller operation, focussed on providing financial advice for our core Church of England client base. Despite the changes taking place in 2012, and the uncertain economic climate, the total fee and commission income increased by 17%.
Governance
The Board of Directors are committed to applying the highest standards of corporate governance and believe that the affairs of the Company should be conducted in accordance with best business practice. Accordingly, the Company has chosen to voluntarily comply with the Financial Reporting Council's UK Corporate Governance Code (the 'Code'), including both the Main Principles and Code Provisions, where relevant to the Company. The Company does not have any shares with a Premium Listing on the London Stock Exchange and is therefore not legally required to comply with the Code. The corporate governance disclosures set out in the full financial statements include the Board Governance section, Group Nominations Committee Report, Group Risk Committee Report, Group Audit Committee Report and Group Remuneration Report.
Directors' Report
Principal Activities
The Group operates principally as a provider of general insurance in addition to offering a range of financial services, with offices in the UK, Ireland, Canada and Australia.
Ownership
At the date of this report the entire issued Ordinary share capital of the Company and 2.6% of the issued 8.625% Non-cumulative Irredeemable Preference Shares of £1 each ('Preference Shares') were owned by Ecclesiastical Insurance Group plc. In turn, the entire issued Ordinary share capital of Ecclesiastical Insurance Group plc was owned by Allchurches Trust Limited.
Dividends
Dividends paid on the Preference Shares were £9,181,000 (2011: £9,181,000).
The Directors do not recommend a final dividend on the Ordinary shares (2011: £nil), and no interim dividends were paid in respect of either the current or prior year.
Charitable and political donations
Charitable donations paid, and provided for, by the Group in the year amounted to £5.7 million (2011: £11.7 million).
During the last ten years, a total of £94.3 million (2011: £92.9 million) has been provided by Group companies for church and charitable purposes.
It is the Group's policy not to make political donations.
Principal risks and uncertainties
The principal risks and uncertainties, together with the financial risk management objectives and policies of the Group and Company, are included in the Risk Management section.
Going concern
The Group has considerable financial resources: financial investments of £922.1m, 96% of which are liquid (2011: financial investments of £829.9m, 96% liquid); cash and cash equivalents of £112.6m and no borrowings (2011: cash and cash equivalents of £155.0m and no borrowings); and a regulatory enhanced capital cover of 2.7 (2011: 3.1). As a consequence, the Directors have a reasonable expectation that the Group is well-placed to manage its business risks successfully and continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.
Risk Management
Introduction
The core business of the Ecclesiastical group is general insurance. Thus, risk selection, pricing, reinsurance strategy and portfolio management lie at the heart of the business model and are the biggest contributors to overall results.
Ecclesiastical has established an Enterprise Risk Management framework to ensure that risks are managed well on a consistent basis. This is overseen by the Group Risk Committee.
Enterprise Risk Management
Enterprise Risk Management is a proactive company-wide strategic process designed to identify and manage all the individual and aggregated risks that could have a significant impact on the organisation's ability to deliver its objectives.
Ecclesiastical uses a Three Line of Defence operating model:
§ 1st Line (Business Management) is responsible for strategy, performance and managing risks arising.
§ 2nd Line (Reporting, Oversight and Guidance) is responsible for establishing minimum standards, appropriate reporting, oversight and challenge of the risk profile & risk management activities. It includes executive risk management committees and is subject to oversight and challenge by the Group Risk Committee.
§ 3rd Line (Assurance) provides independent and objective assurance of the effectiveness of Ecclesiastical's systems of internal control. This activity principally comprises the Internal Audit function subject to oversight and challenge by the Group Audit Committee.
Ecclesiastical has a continuous and evolving approach to Enterprise Risk Management using emerging experience to refine its approach. Refinements during 2012 included the introduction of a formal six-monthly Business Performance Review process for each line of business and changes to the Executive Risk Committee structure.
Key Enterprise Risk Management Initiatives undertaken during 2012 included projects to implement the requirements of the forthcoming Solvency II regulatory regime, improve underwriting standards and risk pricing capabilities, finalise management of risks arising from the New Zealand earthquakes of 2010 and 2011, revisions to reinsurance risk appetite and the adoption of a smaller reinsurance purchase programme for 2013.
The Ecclesiastical Enterprise Risk Management framework is integrated into the culture of Ecclesiastical led by the Group Executive Team. It assigns responsibility throughout the organisation with each manager and employee responsible for the management of risk as part of their job description. It supports accountability, performance measurement and reward, thus promoting operational efficiency at all levels.
On an annual basis the Group Executive Team identifies key strategic risks and allocates responsibility for each. Progress on arising risk management actions is then regularly monitored.
The Group Risk Committee provides overall oversight of the Ecclesiastical Enterprise Risk Management framework, whilst the Group Audit Committee provides independent assurance on the strength and effectiveness of Ecclesiastical's internal systems of control through the activities of the Internal Audit and Compliance functions as well as the external auditors.
Risk appetite
On at least an annual basis, the Board establishes a formal appetite for risk. This sets out the principles, guidance, limits and tolerances within which the Board authorises the Group Executive Team to carry out the business plan. Compliance with risk appetite is reported to the Group Risk Committee at each meeting.
The Risk Appetite primarily sets limits on the type, nature, size and concentration of insurance risks that may be accepted together with the Board's requirements for a group wide reinsurance strategy. We purchase reinsurance cover to protect against property catastrophe events that are predicted to occur every 250 to 500 years, depending on the territory.
A key objective of the Risk Appetite is to ensure that Ecclesiastical has sufficient capital to meet its liabilities in extreme adverse scenarios. The Risk Appetite aims to achieve and support a credit rating of at least single A from Standard & Poor's and A.M. Best.
Quantitative risk measures and stress testing framework
The primary tool used to measure aggregate risk is an Internal Model calibrated to estimate the resources required to meet UK risk-based capital requirements.
Over the last two years, Ecclesiastical has invested significantly to enhance the Internal Model in preparation for the proposed Solvency II regulatory regime.
Ecclesiastical continues to refine a comprehensive scenario and stress testing framework to complement quantitative risk measures and meet regulatory requirements.
Major risks
The major risks facing Ecclesiastical are designated as being of principal or secondary importance. Principal risks are those thought to have the most potential to damage Ecclesiastical in the short term. Secondary risks are those of lesser importance either in terms of loss potential or timescale.
Principal Risks |
Risk type and description | Why we have it | How we mitigate it |
Business Mix, Underwriting & Pricing risk The risk of failing to price adequately for claims costs, expenses, cost of capital and profit requirements; failure to manage portfolio risk and failure to manage the underwriting cycle; diversification and concentration; failure to establish appropriate underwriting disciplines.
|
General insurance is a highly competitive business. The premium required for an insurance policy needs to reflect the cover provided and the risk factors present. Achieving a target price isn't always possible at all points of the insurance pricing cycle. |
Disciplined underwriting and pricing is central to the business and key to the success of Ecclesiastical. Since 2010, we have established sales, claims and underwriting academies to support these activities and to ensure the correct skill set is maintained and developed. Benchmarking of actuarial pricing techniques together with a high level of underwriting expertise and market knowledge are underpinned by technical audits and a self-assessment process. Ecclesiastical has a specialist focus and a strategy of diversification within the type of business underwritten and between territories, which helps to manage the underwriting cycle and reduce the variability of the expected outcome. Concentration risk is a key consideration and limits are established within the Risk Appetite. The size of this risk is largely unchanged over the year. |
Reinsurance risk The risk of failing to access and manage reinsurance capacity at a reasonable price.
|
Reinsurance is a central component of the Ecclesiastical business model, enabling Ecclesiastical to insure a portfolio of large risks in relation to its capital base. The Board has long accepted a high risk appetite for a strategic exposure to the reinsurance market. |
The risk is mitigated by taking a long-term relationship view towards reinsurance purchase to deliver sustainable capacity rather than opportunistic results. The size of this risk is largely unchanged over the year. |
Claims reserving risk The risk of actual claims and benefit payments exceeding the carrying amount of the insurance liabilities.
|
Claims reserving risk is a natural consequence of incurring insurance claims. Throughout the lifecycle of a claim the estimated ultimate cost will vary as additional information becomes available.
|
Ecclesiastical's careful selection of risks starts with the strategy to primarily underwrite property business, with longer tail liability business written only as part of an overall insurance package. Claims development and reserving levels are closely monitored. For statutory and financial reporting purposes margins are added to the most likely outcome to allow for uncertainties. This approach generally results in a favourable release of previous year's provisions in the current financial year. Claims reserves are reviewed and signed off by an Executive Reserve Sign-Off Management Committee and the Board acting on the advice and recommendations of the Chief Actuary. The property component of this risk reduced during 2012, following the disposal of our former New Zealand business prior to the half-year. The liability component of reserving risk has risen this year; partly due to growth in premiums in recent years and partly due to the late development of claims. |
Competition & Distribution risk The risk of failing to recognise and address changes in a competitive market, particularly competitor actions, distribution channels, an imbalance of bargaining power with distributors, business concentration and resource issues. |
General insurance is a competitive business. Distribution channel strategy and investment is a critical component of a firm's ability to put its products in front of customers. |
The Group Executive Team monitors key competitors on a regular basis managing their impact on our markets. Ecclesiastical has a strategy to deliver excellent customer service through multiple distribution channels. Having a number of distribution channels helps diversify distribution risk as does transacting business with well diversified broker panels. The size of this risk is largely unchanged over the year. |
Market risk The risk of adverse movements in asset values arising from a change in interest rates, equity prices and foreign exchange rates.
|
Market risk principally arises from investment of reserves (held to pay future claims) and shareholders' funds. Our investment strategy is fixed income focused and as a result has exposure to interest rate risk. Market risk also arises as we have a significant equity portfolio. Some investments are made in currencies other than GBP, partly to mitigate foreign currency risk on relevant reserves and partly in pursuit of better and/or more diversified investment returns. |
A robust management framework is in place to mitigate the impact of changes in financial markets. Ecclesiastical Investment Management manages shareholders' funds in accordance with the investment strategy and guidelines agreed by the Finance & Investment Committee of the Board. Ecclesiastical holds a relatively significant equity portfolio to deliver a real long-term investment return on capital and the Board has long accepted a high appetite for variable investment returns. When appropriate, as was the case in 2012, Ecclesiastical may use derivatives to reduce equity exposure considerably. Currency risk is appropriately monitored and controlled with oversight by the Finance function. Interest rate risk is partly managed through selecting appropriate portfolios to back pools of longer-term liabilities and partly through holding a portfolio which has a relatively short average period to maturity. The size of this risk is largely unchanged over the year. |
Credit risk The risk of non-payment of their obligations by counterparties and financial markets borrowers. |
Our principal exposure to credit risk arises from reinsurance, which is central to Ecclesiastical's business model. Additional credit risk arises from our investment in debt securities, cash deposits and amounts owed to us by intermediaries and policyholders. |
Investment credit risk is controlled through the investment strategy and guidelines agreed by the Finance & Investment Committee of the Board. Reinsurer credit risk is controlled by the Reinsurance Security Committee, principally through careful selection and monitoring of reinsurance partners. All reinsurers on the 2012 reinsurance program had a minimum rating of 'A-' from Standard & Poor's or an equivalent agency at the time of purchase. Counterparty risk reduced during 2012, following the disposal of our former New Zealand business prior to the half-year. |
Secondary Risks |
Risk type and description | Why we have it | How we mitigate it |
Business intelligence risk The risk of shortfalls in the quality or availability of management information for decision making. |
Accessing claims data in relation to the risk offered is a key tool in enabling sufficient and competitive pricing. Other management information can enable a quick response to claims or other market developments. |
Over the last three years an extensive programme has focused on accuracy, completeness and appropriateness of data and on the development of a strategic data warehouse. The size of this risk has reduced slightly this year due to initial deliverables from internal projects. |
Regulatory and legal risk Regulatory and legal risk is the risk of non-adherence to applicable law and regulation, unenforceable contractual rights and any dispute resolution or other proceedings arising in relation to legal rights. |
Regulatory and legal risk arises in each territory in which Ecclesiastical writes business and can result in significant cost and reputational implications if it is not managed appropriately. |
Legal and regulatory developments are monitored throughout the Group and working parties are established to consider significant developments which impact on the business. Each business area is responsible for its own legal and regulatory risks and is provided with access to internal and external legal resources. The size of this risk is largely unchanged over the year. |
Operational Risk The risk of unexpected loss or cost arising from the operation of the business or due to external impacts not covered above. |
Ecclesiastical is a relatively complex business operating in a number of markets and territories. Whilst considerable attention to detail is paid, errors and non-controllable external events do occur. |
Operational risks are reviewed bi-annually in each business area and actions are undertaken to ensure the risks are managed to the level consistent with the risk appetite set by the Board. Scenario testing is undertaken and the results are taken into capital requirement considerations. Each area of the Group has a Business Continuity Plan that is regularly tested and updated. Ecclesiastical aims to learn from all such experiences, improving internal process, controls and risk management techniques as appropriate. The size of this risk is largely unchanged over the year. |
Life insurance risks Risks arising from a difference between actual and forecast mortality and asset/liability mismatches arising there from. |
Ecclesiastical writes whole of life policies backing funeral planning products and whilst assets are closely matched to liabilities where possible, we are exposed to longevity risk. |
Life insurance risks are managed in line with regulatory requirements and the Enterprise Risk Management framework and are overseen by the Ecclesiastical Life Limited Board. The size of this risk has increased in line with growth in the life business, however, the overall level of risk is low in relation to general insurance risk. |
Expense risk Expense risk arises when expenses are too high to deliver a profitable result within chosen markets. |
Expenses primarily arise from the personnel costs required to operate the business. |
Expenses are reviewed annually as part of the business planning process and through detailed cost analysis exercises carried out on an ad-hoc basis. The size of this risk is largely unchanged over the year. |
Reputational risk The risk of a reduction in trust by customers, brokers, reinsurer and other stakeholders as a result of an event or series of events. |
Whilst Ecclesiastical always aims to be fair to stakeholders, disagreements inevitably occur and litigation can give rise to negative commentary in many forms of media.
|
Reputational risk is primarily managed through our approach to treating stakeholders fairly, combined with the other actions taken to manage risks to the company's financial position. Reputational risk is overseen by the Group Executive Team together with the Group Risk Committee. Ecclesiastical will not accept risks that will materially damage its reputation. Ecclesiastical works closely with external stakeholders, gathering feedback and encouraging dialogue through a variety of communication channels, to proactively monitor and build Ecclesiastical's reputation. The size of this risk is largely unchanged over the year. |
Directors' Responsibility Statement
The following statement is extracted from page 55 of the 2012 annual report and accounts, and is repeated here for the purposes of the Disclosure and Transparency Rules. The statement relates solely to the Company's 2012 annual report and accounts and is not connected to the extracted information set out in this announcement. The names and functions of the Directors making the responsibility statement are set out on pages 34 and 35 of the full annual report and accounts.
The Directors confirm to the best of their knowledge:
|
|
|
|
|
|
|
|
|
|
|
|
|
- | the financial statements, prepared in accordance with International Financial Reporting Standards (IFRS), give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
- | the Financial Performance and Risk Management sections within the 2012 Annual Report and Accounts' Business Review, which are incorporated into the Directors' Report, include a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. |
| ||||||||||
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2012
Restated * | |||||||||
2012 | 2011 | ||||||||
£000 | £000 | ||||||||
Revenue | |||||||||
Gross written premiums | 481,334 | 476,294 | |||||||
Outward reinsurance premiums | (157,843) | (165,727) | |||||||
Net change in provision for unearned premiums | (12,846) | 2,541 | |||||||
Net earned premiums | 310,645 | 313,108 | |||||||
Fee and commission income | 53,657 | 56,124 | |||||||
Net investment return | 64,991 | 21,266 | |||||||
Total revenue | 429,293 | 390,498 | |||||||
Expenses | |||||||||
Claims and change in insurance liabilities | (256,057) | (316,729) | |||||||
Reinsurance recoveries | 41,447 | 91,695 | |||||||
Fees, commissions and other acquisition costs | (97,454) | (109,539) | |||||||
Other operating and administrative expenses | (79,311) | (66,268) | |||||||
Total operating expenses | (391,375) | (400,841) | |||||||
Operating profit/(loss) | 37,918 | (10,343) | |||||||
Finance costs | (115) | (198) | |||||||
Profit/(loss) before tax | 37,803 | (10,541) | |||||||
Tax (expense)/credit | (4,448) | 6,686 | |||||||
Profit/(loss) for the year from continuing operations | 33,355 | (3,855) | |||||||
Net loss attributable to discontinued operations | (5,737) | (4,829) | |||||||
Profit/(loss) for the year (attributable to equity holders of the parent) | 27,618 | (8,684) | |||||||
* On 15 May 2012, the Group disposed of its wholly owned subsidiary, ACS (NZ) Limited, as disclosed in the interim financial statements. The comparative financial statements have been restated to present the results of the disposed business within discontinued operations, and for the retrospective application of changes in accounting policies, detailed in the notes to this announcement. | |||||||||
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2012
Restated | |||||||
2012 | 2011 | ||||||
£000 | £000 | ||||||
Fair value (losses)/gains on property | (313) | 40 | |||||
Attributable tax | 94 | 7 | |||||
Losses on currency translation differences | (3,784) | (425) | |||||
Actuarial (losses)/gains on retirement benefit schemes | (1,331) | 7,477 | |||||
Attributable tax | 417 | (1,908) | |||||
Net (expense)/income recognised directly in equity | (4,917) | 5,191 | |||||
Profit/(loss) for the year | 27,618 | (8,684) | |||||
Total comprehensive income attributable to equity holders of the parent | 22,701 | (3,493) | |||||
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2012
Share | Share | Equalisation | Revaluation | Translation | Retained | |||||
capital | premium | reserve | reserve | reserve | earnings | Total | ||||
£000 | £000 | £000 | £000 | £000 | £000 | £000 | ||||
At 1 January 2012 | 120,477 | 4,632 | 22,719 | 971 | 28,195 | 268,267 | 445,261 | |||
Profit for the year | - | - | - | - | - | 27,618 | 27,618 | |||
Other net expense | - | - | - | (219) | (3,784) | (914) | (4,917) | |||
Total comprehensive income | - | - | - | (219) | (3,784) | 26,704 | 22,701 | |||
Dividends | - | - | - | - | - | (9,181) | (9,181) | |||
Net charitable grant to ultimate parent | - | - | - | - | - | (3,020) | (3,020) | |||
Group tax relief in excess of standard rate | - | - | - | - | - | (104) | (104) | |||
Reserve transfers | - | - | 2,871 | - | - | (2,871) | - | |||
At 31 December 2012 | 120,477 | 4,632 | 25,590 | 752 | 24,411 | 279,795 | 455,657 | |||
At 1 January 2011 | 120,477 | 4,632 | 18,679 | 924 | 28,620 | 283,575 | 456,907 | |||
Changes in accounting policies | - | - | - | - | - | 9,064 | 9,064 | |||
As restated | 120,477 | 4,632 | 18,679 | 924 | 28,620 | 292,639 | 465,971 | |||
Loss for the year | - | - | - | - | - | (8,684) | (8,684) | |||
Other net income/(expense) | - | - | - | 47 | (425) | 5,569 | 5,191 | |||
Total comprehensive income | - | - | - | 47 | (425) | (3,115) | (3,493) | |||
Dividends | - | - | - | - | - | (9,181) | (9,181) | |||
Net charitable grant to ultimate parent | - | - | - | - | - | (7,534) | (7,534) | |||
Group tax relief in excess of standard rate | - | - | - | - | - | (502) | (502) | |||
Reserve transfers | - | - | 4,040 | - | - | (4,040) | - | |||
At 31 December 2011 (restated) | 120,477 | 4,632 | 22,719 | 971 | 28,195 | 268,267 | 445,261 | |||
The equalisation reserve is not distributable and must be kept in compliance with the insurance companies' reserves regulations. The revaluation reserve represents cumulative net fair value gains on owner-occupied property. The translation reserve arises on consolidation of the Group's foreign operations. | ||||||||||
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
For the year ended 31 December 2012
Restated | Restated | ||||||
2012 | 31 December 2011 | 1 January 2011 | |||||
£000 | £000 | £000 | |||||
Assets | |||||||
Goodwill and other intangible assets | 24,349 | 25,335 | 25,923 | ||||
Deferred acquisition costs | 34,626 | 35,788 | 41,482 | ||||
Deferred tax assets | 3,202 | 5,240 | 4,114 | ||||
Pension assets | 36,521 | 35,227 | 23,700 | ||||
Property, plant and equipment | 8,414 | 9,033 | 9,417 | ||||
Investment property | 27,315 | 27,473 | 24,641 | ||||
Financial investments | 922,109 | 829,921 | 834,163 | ||||
Reinsurers' share of contract liabilities | 141,011 | 540,773 | 285,665 | ||||
Current tax recoverable | 316 | 1,090 | 110 | ||||
Other assets | 145,714 | 147,030 | 136,661 | ||||
Cash and cash equivalents | 112,584 | 155,024 | 164,805 | ||||
Total assets | 1,456,161 | 1,811,934 | 1,550,681 | ||||
Equity | |||||||
Share capital | 120,477 | 120,477 | 120,477 | ||||
Share premium account | 4,632 | 4,632 | 4,632 | ||||
Retained earnings and other reserves | 330,548 | 320,152 | 340,862 | ||||
Total shareholders' equity | 455,657 | 445,261 | 465,971 | ||||
Liabilities | |||||||
Insurance contract liabilities | 878,691 | 1,238,054 | 945,265 | ||||
Finance lease obligations | 1,812 | 1,886 | 1,898 | ||||
Provisions for other liabilities | 7,273 | 8,717 | 11,227 | ||||
Retirement benefit obligations | 14,810 | 12,760 | 8,652 | ||||
Deferred tax liabilities | 38,653 | 36,502 | 40,792 | ||||
Current tax liabilities | 290 | 1,396 | 7,789 | ||||
Deferred income | 14,782 | 17,557 | 20,562 | ||||
Other liabilities | 44,193 | 49,801 | 48,525 | ||||
Total liabilities | 1,000,504 | 1,366,673 | 1,084,710 | ||||
Total shareholders' equity and liabilities | 1,456,161 | 1,811,934 | 1,550,681 | ||||
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 31 December 2012
Restated | |||||||
2012 | 2011 | ||||||
£000 | £000 | ||||||
Profit/(loss) before tax | 37,803 | (10,541) | |||||
Adjustments for: | |||||||
Loss before tax on discontinued operations | (834) | (4,829) | |||||
Depreciation of property, plant and equipment | 2,132 | 2,302 | |||||
Loss on disposal of property, plant and equipment | 79 | 85 | |||||
Amortisation and impairment of intangible assets | 2,125 | 2,101 | |||||
Loss on disposal of intangible assets | 83 | - | |||||
Net fair value (gains)/losses on financial instruments and investment property | (23,498) | 18,496 | |||||
Dividend and interest income | (38,867) | (37,948) | |||||
Finance costs | 115 | 198 | |||||
Changes in operating assets and liabilities: | |||||||
Net (decrease)/increase in insurance contract liabilities | (23,201) | 289,560 | |||||
Net decrease/(increase) in reinsurers' share of contract liabilities | 71,872 | (251,618) | |||||
Net decrease in deferred acquisition costs | 1,037 | 5,555 | |||||
Net decrease/(increase) in other assets | 1,404 | (13,974) | |||||
Net decrease in operating liabilities | (8,971) | (3,149) | |||||
Net (decrease)/increase in other liabilities | (877) | 1,595 | |||||
Cash generated/(used) by operations | 20,402 | (2,167) | |||||
Dividends received | 9,358 | 8,327 | |||||
Interest received | 28,967 | 28,715 | |||||
Interest paid | (115) | (198) | |||||
Tax recovered/(paid) | 303 | (4,724) | |||||
Net cash from operating activities | 58,915 | 29,953 | |||||
Cash flows from investing activities | |||||||
Purchases of property, plant and equipment | (1,633) | (1,458) | |||||
Proceeds from the sale of property, plant and equipment | 51 | 8 | |||||
Purchases of intangible assets | (1,237) | (1,518) | |||||
Disposal of businesses, net of cash transferred | (12,734) | - | |||||
Purchases of financial instruments and investment property | (256,467) | (365,815) | |||||
Sale of financial instruments and investment property | 180,742 | 349,223 | |||||
Net cash used by investing activities | (91,278) | (19,560) | |||||
Cash flows from financing activities | |||||||
Payment of finance lease liabilities | (527) | (519) | |||||
Payment of group tax relief in excess of standard rate | (463) | (909) | |||||
Dividends paid to company's shareholders | (9,181) | (9,181) | |||||
Donations paid to ultimate parent undertaking | - | (10,250) | |||||
Net cash used by financing activities | (10,171) | (20,859) | |||||
Net decrease in cash and cash equivalents | (42,534) | (10,466) | |||||
Cash and cash equivalents at beginning of year | 155,024 | 164,805 | |||||
Exchange gains on cash and cash equivalents | 94 | 685 | |||||
Cash and cash equivalents at end of year | 112,584 | 155,024 | |||||
NOTES TO THIS ANNUAL FINANCIAL REPORT ANNOUNCEMENT OF RESULTS
for the year ended 31 December 2012
1 Accounting policies
The Company has prepared this announcement of its consolidated results using the same accounting policies and methods of computation as the full financial statements for the year ended 31 December 2012 as prepared under International Financial Reporting Standards (IFRS) as adopted for use in the EU.
In the current year the Group has adopted IAS 19 (Revised), Employee Benefits,which required changes to the Group's policy for recognition of actuarial gains and losses arising from its defined benefit pension plans and post-employment medical benefits, with the movements now recognised as they occur, through other comprehensive income. This eliminates the 'corridor approach' permitted under the previous version of IAS 19 (and applied by the Group prior to 2012), accelerates the recognition of past service costs and results in the full value of the scheme deficit or surplus being reflected on the statement of financial position. Furthermore, the interest cost and expected return on scheme assets used in the previous version of IAS 19 are replaced with a 'net interest' expense or income under IAS 19 (Revised), which is calculated by applying a discount rate to the net defined benefit liability or asset, and disclosures relating to the schemes are more extensive, as presented in note 20 to the full financial statements. The actuarial gains and losses of the post-employment medical benefit scheme are required to be treated in the same manner, so where previously these were recognised immediately in the income statement they will now also be recognised immediately in other comprehensive income.
The Group has voluntarily applied changes to its accounting policy for general insurance claims reserves, remeasuring designated long-tail liabilities.
The effects of these changes are disclosed in the prior year restatement note to this announcement.
2 General Information
Whilst the financial information included in this announcement has been prepared in accordance with the recognition and measurement criteria of IFRS, this announcement does not itself contain sufficient information to comply with IFRS. Full financial statements that comply with IFRS were approved by the Board of Directors on 19 March 2013.
The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2012 or 2011, but is derived from those accounts. Statutory accounts for 2011 have been delivered to the Registrar of Companies and those for 2012 will be delivered following the Company's annual general meeting. The auditors have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under sections 498(2) and 498(3) of the Companies Act 2006.
This announcement was approved at a meeting of the Board of Directors held on 19 March 2013.
Ecclesiastical Insurance Office plc is a subsidiary of Ecclesiastical Insurance Group plc which is an investment holding company whose ordinary shares are not listed.
The ordinary shares of Ecclesiastical Insurance Office plc are not listed.
Copies of the audited financial statements are available from the registered office at Beaufort House, Brunswick Road, Gloucester GL1 1JZ.
The following information is included in this announcement in compliance with the Disclosure and Transparency Rules and has been extracted from the full financial statements for 2012.
Insurance Risk
Through its general and life insurance operations, the Group is exposed to a number of risks, as summarised in the Risk Management section. The risk under any one insurance contract is the possibility that the insured event occurs and the uncertainty of the amount and timing of the resulting claim. Factors such as the business and product mix, the external environment including market competition and reinsurance capacity all may vary from year to year, along with the actual frequency, severity and ultimate cost of claims and benefits. This subjects the Group to Underwriting and Pricing risk (risk selection and required premium); Claims Reserving Risk (the risk that the cost to settle claims exceeds the carrying amount of the related insurance liabilities) and Reinsurance Risk (the risk of failing to access and manage reinsurance capacity at a reasonable price).
(a) Risk mitigation
Experience shows that the larger and more diversified the portfolio of insurance contracts, the smaller the relative variability about the expected outcome will be. The Group's underwriting strategy is designed to ensure that the underwritten risks are well diversified in terms of type and amount of risk and geographical spread. In all operations pricing controls are in place, underpinned by sound statistical analysis, market expertise and appropriate external consultant advice. Gross underwriting exposure is protected through the use of a comprehensive programme of reinsurance and proactive claims handling. Net retention limits are in place and the Group arranges catastrophe reinsurance cover to protect against aggregations of losses.
(b) Concentrations of risk | ||||||||||
The core business of the Group is general insurance, with the principal classes of business written being property and liability. The Group also underwrites a smaller portfolio of motor policies, and has taken the decision during the year to withdraw from this market over 2013 to focus on the principal classes. The accident class of business covers injury, death or incapacity as a result of an unforeseen event. The Group's whole-of-life insurance policies support funeral planning products. | ||||||||||
With reference to written premiums, the concentration of insurance risk for the financial year before and after reinsurance by territory in relation to the type of risk accepted is summarised below:
| ||||||||||
Continuing and discontinued operations | ||||||||||
2012 | General insurance | Life insurance | ||||||||
Property | Liability | Motor | Accident | Funeral plans | Total | |||||
£000 | £000 | £000 | £000 | £000 | £000 | |||||
Territory | ||||||||||
United Kingdom | Gross | 210,913 | 72,705 | 40,937 | 20,404 | 20,208 | 365,167 | |||
Net | 111,748 | 68,629 | 38,261 | 19,308 | 20,208 | 258,154 | ||||
Australia | Gross | 41,483 | 19,585 | 2,658 | 1,400 | - | 65,126 | |||
Net | 11,495 | 13,915 | 710 | 1,319 | - | 27,439 | ||||
Canada | Gross | 27,122 | 9,873 | - | - | - | 36,995 | |||
Net | 18,748 | 8,921 | - | - | - | 27,669 | ||||
Ireland | Gross | 8,032 | 5,762 | 7 | 245 | - | 14,046 | |||
Net | 4,704 | 5,296 | 7 | 222 | - | 10,229 | ||||
Total | Gross | 287,550 | 107,925 | 43,602 | 22,049 | 20,208 | 481,334 | |||
Net | 146,695 | 96,761 | 38,978 | 20,849 | 20,208 | 323,491 | ||||
| ||||||||||
Continuing and discontinued operations | ||||||||||
2011 | General insurance | Life insurance | ||||||||
Property | Liability | Motor | Accident | Funeral plans | Total | |||||
£000 | £000 | £000 | £000 | £000 | £000 | |||||
Territory | ||||||||||
United Kingdom | Gross | 207,179 | 73,747 | 37,290 | 14,372 | 19,122 | 351,710 | |||
Net | 105,887 | 66,770 | 35,625 | 13,500 | 19,122 | 240,904 | ||||
Australia and New Zealand | Gross | 54,573 | 22,861 | 6,251 | 1,126 | - | 84,811 | |||
Net | 8,433 | 17,693 | 5,986 | 975 | - | 33,087 | ||||
Canada | Gross | 25,251 | 8,968 | - | - | - | 34,219 | |||
Net | 19,297 | 8,140 | - | - | - | 27,437 | ||||
Ireland | Gross | 7,652 | 5,626 | 6 | 181 | - | 13,465 | |||
Net | 4,795 | 5,131 | 5 | 168 | - | 10,099 | ||||
Total | Gross | 294,655 | 111,202 | 43,547 | 15,679 | 19,122 | 484,205 | |||
Net | 138,412 | 97,734 | 41,616 | 14,643 | 19,122 | 311,527 | ||||
(c) General insurance risks
Property classes
Property cover mainly compensates the policyholder for damage suffered to their properties or for the value of property lost. Property insurance may also include cover for pecuniary loss through the inability to use damaged insured commercial properties.
For property insurance contracts, including the property element of motor contracts, there can be variability in the nature, number and size of claims made in each period.
The nature of claims may include fire, business interruption, weather damage, subsidence, accidental damage to insured vehicles and theft. Subsidence claims are difficult to predict because the damage is often not apparent for some time. Changes in soil moisture conditions can give rise to changes in claim volumes over time. The ultimate settlements can be small or large with a greater risk of a settled claim being re-opened at a later date.
The number of claims made can be affected by weather events, changes in climate and crime rates. Climate change may give rise to more frequent and severe extreme weather events, such as river flooding, hurricanes and drought, and their consequences, for example, subsidence claims. If a weather event happens near the end of the financial year, then the uncertainty about ultimate claims cost in the financial statements is much higher because there is insufficient time for adequate data to be received to assess the final cost of claims.
Individual claims can vary in amount since the risks insured are diverse in both size and nature. The cost of repairing property varies according to the extent of damage, cost of materials and labour charges.
The maximum claim payable is limited to the sum insured. These contracts are underwritten on a reinstatement basis or repair and renovation basis as appropriate. Costs of rebuilding properties, of replacement or indemnity for contents and time taken to restart operations for business interruption are the key factors that influence the level of claims. Individual large claims are more likely to arise from fire, storm or flood damage. The greatest likelihood of an aggregation of claims arises from weather or recession-related events.
Claims payment, on average, occurs within a year of the event that gives rise to the claim. However, there is variability around this average with larger claims typically taking longer to settle.
Liability classes
Liability insurance contracts protect policyholders from the liability to compensate injured employees (employers' liability) and third parties (public liability) and motor injuries.
Claims that may arise from the liability portfolios include damage to property, physical injury, disease and psychological trauma. The Group has a different exposure profile to most other commercial lines insurance companies as it has lower exposure to industrial risks, where uncertainty is higher. Therefore, claims for industrial diseases are less common for the Group than injury claims such as slips, trips and back injuries.
The frequency and severity of claims arising on liability insurance contracts, including the liability element of motor contracts can be affected by several factors. Most significant are the increasing level of awards for damages suffered, the courts' move to periodic payments awards and the increase in the number of cases that have been latent for a long period of time.
The severity of bodily injury claims is highly influenced by the value of loss of earnings and the future cost of care. The settlement value of claims arising under public and employers' liability and the liability element of motor contracts is particularly difficult to predict. There is uncertainty as to whether any payments will be made and, if they are, the amount and timing of the payments. Key factors driving the high levels of uncertainty include the late notification of possible claim events and the legal process.
Late notification of possible claims necessitates the holding of provisions for incurred claims that may only emerge some years into the future. In particular the effect of inflation over such a long period can be considerable and is uncertain. A lack of comparable past experience makes it difficult to quantify the number of claims and, for certain types of claims, the amounts for which they will ultimately settle. The legal and legislative framework continues to develop which has a consequent impact on the uncertainty as to the length of the claims settlement process and the ultimate settlement amounts.
Claims payment, on average, occurs about three years after the event that gives rise to the claim. However, there is significant variability around this average.
Provisions for latent claims
The public and employers' liability classes can give rise to very late reported claims, which are often referred to as latent claims. These can vary in nature and are difficult to predict. They typically emerge slowly over many years. The Group has reflected this uncertainty and believes that it holds adequate reserves for latent claims that may result from exposure periods up to the reporting date.
Note 28 to the full financial statements presents the development of the estimate of ultimate claim cost for public and employers' liability claims occurring in a given year. This gives an indication of the accuracy of the estimation technique for incurred claims.
(d) Life insurance risks
The Group provides whole-of-life insurance policies to support funeral planning products, for most of which the future benefits are linked to inflation and backed by index-linked assets. The risk that actual claims payments exceed the carrying amount of the insurance liabilities may occur if the timing of claims is different from assumed.
Uncertainty in the estimation of the timing of future claims arises from the unpredictability of long-term changes in overall levels of mortality. The Group bases these estimates on standard industry and national mortality tables. The most significant factors that could alter the expected mortality rates profile are epidemics, widespread changes in lifestyle and continued improvement in medical science and social conditions. The primary risk on these contracts is the level of future investment returns on the assets backing the liabilities over the life of the policyholders. The investment risk within this has been largely mitigated by holding fixed interest assets of a similar term to the expected liabilities profile. The mortality risk is retained by the Group and directly impacts shareholders' equity.
Finance risk and capital management
The Group is exposed to financial risk through its financial assets, financial liabilities, reinsurance assets and insurance liabilities. In particular the key financial risk is that the proceeds from its financial assets are not sufficient to fund the obligations arising from its insurance contracts. The most important components of financial risk are interest rate risk, credit risk, currency risk and equity price risk. | |||||||||||||||||||||||||
There has been no change from the prior period in the nature of financial risks that the Group is exposed to. The disposal during the current year of the Group's New Zealand run-off business has reduced exposure to credit risk in respect of reinsurance assets, and currency risk. A new policy to remeasure designated insurance liabilities at a market rate of interest has reduced exposure of profit or loss to interest rate risk due to the matching effect of fixed income assets. The Group's management and measurement of financial risks is informed by either stochastic modelling or stress testing techniques. | |||||||||||||||||||||||||
(a) Categories of financial instruments | |||||||||||||||||||||||||
Financial assets | Financial liabilities | ||||||||||||||||||||||||
Group | Designated at fair value | Held for trading | Loans and receivables* | Held for trading | At amortised cost | Other assets and liabilities | Total | ||||||||||||||||||
£000 | £000 | £000 | £000 | £000 | £000 | £000 | |||||||||||||||||||
At 31 December 2012 | |||||||||||||||||||||||||
Financial investments | 910,785 | 1,846 | 9,478 | - | - | - | 922,109 | ||||||||||||||||||
Other assets | - | - | 142,667 | - | - | 3,047 | 145,714 | ||||||||||||||||||
Cash and cash equivalents | - | - | 112,584 | - | - | - | 112,584 | ||||||||||||||||||
Other liabilities | - | - | - | - | (37,796) | (6,397) | (44,193) | ||||||||||||||||||
Net other | - | - | - | - | - | (680,557) | (680,557) | ||||||||||||||||||
Total | 910,785 | 1,846 | 264,729 | - | (37,796) | (683,907) | 455,657 | ||||||||||||||||||
At 31 December 2011 (restated) | |||||||||||||||||||||||||
Financial investments | 816,506 | 2,298 | 11,117 | - | - | - | 829,921 | ||||||||||||||||||
Other assets | - | - | 144,150 | - | - | 2,880 | 147,030 | ||||||||||||||||||
Cash and cash equivalents | - | - | 155,024 | - | - | - | 155,024 | ||||||||||||||||||
Other liabilities | - | - | - | (1,432) | (41,315) | (7,054) | (49,801) | ||||||||||||||||||
Net other | - | - | - | - | - | (636,913) | (636,913) | ||||||||||||||||||
Total | 816,506 | 2,298 | 310,291 | (1,432) | (41,315) | (641,087) | 445,261 | ||||||||||||||||||
* Cash and cash equivalents have been presented with loans and receivables. | |||||||||||||||||||||||||
(b) Fair value hierarchy |
| ||||||||||||||||||||||||
The fair value measurement basis used to value those financial assets and financial liabilities held at fair value is categorised into a fair value hierarchy as follows: |
| ||||||||||||||||||||||||
| |||||||||||||||||||||||||
Level 1: fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities. This category includes listed equities in active markets, listed debt securities in active markets and exchange-traded derivatives. |
| ||||||||||||||||||||||||
| |||||||||||||||||||||||||
Level 2: fair values measured using inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes listed debt or equity securities in a market that is not active and derivatives that are not exchange-traded. |
| ||||||||||||||||||||||||
| |||||||||||||||||||||||||
Level 3: fair values measured using inputs for the asset or liability that are not based on observable market data (unobservable inputs). This category includes unlisted debt and equities, including investments in venture capital, and suspended securities. Where a look-through valuation approach is applied, underlying net asset values are sourced from the investee and adjusted to reflect illiquidity where appropriate, with the fair values disclosed being directly sensitive to this input. |
| ||||||||||||||||||||||||
| |||||||||||||||||||||||||
There have been no transfers between investment categories in the current year. |
| ||||||||||||||||||||||||
| |||||||||||||||||||||||||
|
| ||||||||||||||||||||||||
| |||||||||||||||||||||||||
| |||||||||||||||||||||||||
| |||||||||||||||||||||||||
Analysis of fair value measurement bases | Fair value measurement at the |
| |||||||||||||||||||||||
end of the reporting period based on |
| ||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total |
| |||||||||||||||||||||
£000 | £000 | £000 | £000 |
| |||||||||||||||||||||
At 31 December 2012 |
| ||||||||||||||||||||||||
Financial assets at fair value through profit or loss |
| ||||||||||||||||||||||||
Financial investments |
| ||||||||||||||||||||||||
Equity securities | 263,968 | 50 | 18,558 | 282,576 |
| ||||||||||||||||||||
Debt securities | 619,557 | 2,476 | 6,176 | 628,209 |
| ||||||||||||||||||||
Derivatives | - | 1,846 | - | 1,846 |
| ||||||||||||||||||||
Total financial assets at fair value through profit or loss | 883,525 | 4,372 | 24,734 | 912,631 |
| ||||||||||||||||||||
| |||||||||||||||||||||||||
| |||||||||||||||||||||||||
At 31 December 2011 |
| ||||||||||||||||||||||||
Financial assets at fair value through profit or loss |
| ||||||||||||||||||||||||
Financial investments |
| ||||||||||||||||||||||||
Equity securities | 233,885 | 992 | 17,215 | 252,092 |
| ||||||||||||||||||||
Debt securities | 562,093 | 2,095 | 226 | 564,414 |
| ||||||||||||||||||||
Derivatives | - | 2,298 | - | 2,298 |
| ||||||||||||||||||||
Total financial assets at fair value through profit or loss | 795,978 | 5,385 | 17,441 | 818,804 |
| ||||||||||||||||||||
| |||||||||||||||||||||||||
| |||||||||||||||||||||||||
| |||||||||||||||||||||||||
Fair value measurements based on level 3 |
| ||||||||||||||||||||||||
Fair value measurements in level 3 for the Group consist of financial assets, analysed as follows. |
| ||||||||||||||||||||||||
| |||||||||||||||||||||||||
| |||||||||||||||||||||||||
Financial assets at fair value |
| ||||||||||||||||||||||||
through profit and loss |
| ||||||||||||||||||||||||
Equity | Debt | Total |
| ||||||||||||||||||||||
securities | securities |
| |||||||||||||||||||||||
£000 | £000 | £000 |
| ||||||||||||||||||||||
At 31 December 2012 |
| ||||||||||||||||||||||||
Opening balance | 17,215 | 226 | 17,441 |
| |||||||||||||||||||||
Total gains/(losses) recognised in profit or loss | 1,343 | (5,179) | (3,836) |
| |||||||||||||||||||||
Purchases | - | 11,130 | 11,130 |
| |||||||||||||||||||||
Disposal proceeds | - | (1) | (1) |
| |||||||||||||||||||||
Closing balance | 18,558 | 6,176 | 24,734 |
| |||||||||||||||||||||
Total gains/(losses) for the period included in profit or loss for assets |
| ||||||||||||||||||||||||
held at the end of the reporting period | 1,343 | (5,179) | (3,836) |
| |||||||||||||||||||||
| |||||||||||||||||||||||||
At 31 December 2011 |
| ||||||||||||||||||||||||
Opening balance | 19,143 | 285 | 19,428 |
| |||||||||||||||||||||
Total losses recognised in profit or loss | (1,928) | (53) | (1,981) |
| |||||||||||||||||||||
Purchases | - | 25 | 25 |
| |||||||||||||||||||||
Disposal proceeds | - | (31) | (31) |
| |||||||||||||||||||||
Closing balance | 17,215 | 226 | 17,441 |
| |||||||||||||||||||||
Total losses for the period included in profit or loss for assets |
| ||||||||||||||||||||||||
held at the end of the reporting period | (1,928) | (53) | (1,981) |
| |||||||||||||||||||||
| |||||||||||||||||||||||||
| |||||||||||||||||||||||||
All the above gains or losses included in profit or loss for the period are presented in net investment return within the income statement. |
| ||||||||||||||||||||||||
| |||||||||||||||||||||||||
| |||||||||||||||||||||||||
(c) Interest rate risk
The Group's exposure to interest rate risk arises primarily from movements on financial investments that are measured at fair value and have fixed interest rates, which represent a significant proportion of the Group's assets, and from those designated insurance liabilities for which discounting is applied at a market interest rate. Investment strategy is set in order to control the impact of interest rate risk on anticipated Group cash flows and asset and liability values. The fair value of the Group's investment portfolio of fixed income securities reduces as market interest rates rise as does the present value of discounted insurance liabilities, and vice versa.
Interest rate risk concentration is reduced by adopting asset-liability duration matching principles where appropriate. Excluding assets held to back the long-term business, the average duration of the Group's fixed income portfolio is 3 years (2011: 3 years), reflecting the relatively short-term average duration of its general insurance liabilities. The mean-term of discounted general insurance liabilities is separately disclosed in note 28 (a) part (iv) to the full financial statements.
For the Group's long-term insurance funeral plan business, benefits payable to policyholders are independent of the returns generated by interest bearing assets. Therefore the interest rate risk on the invested assets supporting these liabilities is borne by the Group. This risk can be mitigated by purchasing fixed interest investments with durations that precisely match the profile of the liabilities. For funeral plan policies, benefits are linked to the Retail Prices Index (RPI). Assets backing these liabilities are also linked to RPI, and include index-linked gilts and corporate bonds. For practical purposes it is not possible to exactly match the durations due to the uncertain profile of liabilities (e.g. mortality risk) and the availability of suitable assets, therefore some interest rate risk will persist. The Group monitors its exposure by comparing projected cash flows for these assets and liabilities and making appropriate adjustments to its investment portfolio.
The table below summarises the maturities of long-term business assets and liabilities that are exposed to interest rate risk. | |||||||||
Maturity | |||||||||
Between | |||||||||
Within 1 year | 1 & 5 years | After 5 years | Total | ||||||
Group long-term business | £000 | £000 | £000 | £000 | |||||
At 31 December 2012 | |||||||||
Assets | |||||||||
Debt securities | 8,498 | 19,218 | 74,584 | 102,300 | |||||
Cash and cash equivalents | 441 | - | - | 441 | |||||
8,939 | 19,218 | 74,584 | 102,741 | ||||||
Liabilities | |||||||||
Long-term business provision | 5,951 | 21,985 | 65,020 | 92,956 | |||||
5,951 | 21,985 | 65,020 | 92,956 | ||||||
At 31 December 2011 | |||||||||
Assets | |||||||||
Debt securities | - | 14,477 | 72,365 | 86,842 | |||||
Cash and cash equivalents | 1,116 | - | - | 1,116 | |||||
1,116 | - | 72,365 | 87,958 | ||||||
Liabilities | |||||||||
Long-term business provision | 4,874 | 18,451 | 58,389 | 81,714 | |||||
4,874 | 18,451 | 58,389 | 81,714 | ||||||
Group financial investments with variable interest rates, including cash and cash equivalents, insurance instalment receivables and mortgage loans are subject to cash flow interest rate risk. This risk is not significant to the Group.
(d) Credit risk
The Group has exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. Areas where the Group is exposed to credit risk are:
- reinsurers' share of insurance liabilities (excluding provision for unearned premiums) and amounts due from reinsurers in respect of claims already paid;
- deposits held with banks;
- amounts due from insurance intermediaries and policyholders; and
- counterparty default on government and corporate debt securities.
The carrying amount of financial and reinsurance assets represents the Group's maximum exposure to credit risk. The Group structures the levels of credit risk it accepts by placing limits on its exposure to a single counterparty. Limits on the level of credit risk are regularly reviewed.
Reinsurance is used to manage insurance risk. This does not, however, discharge the Group's liability as primary insurer. If a reinsurer fails to pay a claim for any reason, the Group remains liable for the payment to the policyholder. The creditworthiness of reinsurers is considered on a regular basis through the year by reviewing their financial strength. The Group Reinsurance Security Committee assesses, monitors and approves the creditworthiness of all reinsurers reviewing relevant credit ratings provided by the recognised credit rating agencies, as well as other publicly available data and market information. The committee also monitors the balances outstanding from reinsurers and maintains an approved list of reinsurers.
The Group's exposure to reinsurance balances increased during the prior year following catastrophe events in Australia and New Zealand. The reinsurance programme responded well to contain net costs and the exposure reduced during the current year as claims were settled and recoveries made, followed by the disposal of the New Zealand business. There has been no significant change in the recoverability of the Group's reinsurance balances during the year with all reinsurers on the 2012 reinsurance program having a minimum rating of "A-" from Standard & Poor's or an equivalent agency at the time of purchase.
Group cash balances are regularly reviewed to identify the quality of the counterparty bank and to monitor and limit concentrations of risk.
The Group's credit risk policy details prescriptive methods for the collection of premiums and control of intermediary and policyholder debtor balances. The level and age of debtor balances are regularly assessed via monthly credit management reports. These reports are scrutinised to assess exposure in more than one region in respect of aged or outstanding balances. Any such balances are likely to be major international brokers who are in turn monitored via credit reference agencies and considered to pose minimal risk of default. The Group has no material concentration of credit risk in respect of amounts due from insurance intermediaries and policyholders due to the well-diversified spread of such debtors.
Collateral is held over loans secured by mortgages. The debt securities portfolio consists of a range of mainly fixed interest instruments including government securities, local authority issues, corporate loans and bonds, overseas bonds, preference shares and other interest bearing securities. Limits are imposed on the credit ratings of the corporate bond portfolio and exposures regularly monitored. Group investments in unlisted securities represent less than 1% of this category in the current and prior year. The Group's exposure to counterparty default on debt securities is spread across a variety of geographical and economic territories, as follows:
2012 | 2011 |
| ||||
£000 | £000 | |||||
UK | 428,760 | 386,429 | ||||
Australia | 108,761 | 94,729 | ||||
Canada | 61,113 | 61,068 | ||||
Europe | 23,773 | 21,911 | ||||
Other | 5,802 | 277 | ||||
Total | 628,209 | 564,414 | ||||
(e) Liquidity risk
Liquidity risk is the risk that funds may not be available to pay obligations when due. The Group is exposed to daily calls on its available cash resources mainly from claims arising from insurance contracts. An estimate of the timing of the net cash outflows resulting from insurance contracts is provided in note 28 to the full financial statements. The Group has robust processes in place to manage liquidity risk and has available cash balances, other readily marketable assets and access to funding in case of exceptional need. This is not considered to be a significant risk to the Group.
Non-derivative financial liabilities consist of finance leases, which are not material to the Group, and other liabilities for which a maturity analysis is included in note 31 to the full financial statements. Derivative financial liabilities of the Group all mature within one year.
(f) Currency risk
The Group operates internationally and its main exposures to foreign exchange risk are noted below. The Group's foreign operations generally invest in assets and purchase reinsurance denominated in the same currencies as their insurance liabilities, which mitigates the foreign currency exchange rate risk for these operations. As a result, foreign exchange risk arises from recognised assets and liabilities denominated in other currencies and net investments in foreign operations. The Group mitigates this risk through the use of currency options from time to time.
The Group exposure to foreign currency risk within the investment portfolios arises from purchased investments that are denominated in currencies other than sterling.
The Group foreign operations create two sources of foreign currency risk:
- the operating results of the Group foreign branches and subsidiaries in the Group financial statements are translated at the average exchange rates prevailing during the period; and
- the equity investment in foreign branches and subsidiaries is translated into sterling using the exchange rate at the financial statement year end date.
The largest currency exposures with reference to net assets/(liabilities) are shown below, before the mitigating effect of derivatives, representing effective diversification of resources.
| ||||||||||||||||||||||||
| ||||||||||||||||||||||||
2012 | 2011 |
| ||||||||||||||||||||||
£000 | £000 |
| ||||||||||||||||||||||
| ||||||||||||||||||||||||
Aus $ | 54,459 | Aus $ | 54,492 |
| ||||||||||||||||||||
Can $ | 36,651 | NZ $ | (44,330) |
| ||||||||||||||||||||
Euro | 28,093 | Can $ | 36,753 |
| ||||||||||||||||||||
Hong Kong $ | 8,180 | Euro | 19,933 |
| ||||||||||||||||||||
Singapore $ | 7,207 | US $ | (10,530) |
| ||||||||||||||||||||
| ||||||||||||||||||||||||
| ||||||||||||||||||||||||
(g) Equity price risk
The Group is exposed to equity price risk because of financial investments held by the Group and stated at fair value through profit or loss. The Group mitigates this risk by holding a diversified portfolio across geographical regions and market sectors, and through the use of derivative contracts from time to time which would limit losses in the event of a fall in equity markets.
The concentration of equity price risk by geographical listing, before the mitigating effect of derivatives, to which the Group is exposed is as follows.
|
| |||||||||||||||||||||||
| ||||||||||||||||||||||||
2012 | 2011 |
| ||||||||||||||||||||||
£000 | £000 |
| ||||||||||||||||||||||
| ||||||||||||||||||||||||
UK | 236,972 | 207,418 |
| |||||||||||||||||||||
Europe | 20,775 | 19,256 |
| |||||||||||||||||||||
Hong Kong | 8,032 | 7,259 |
| |||||||||||||||||||||
Singapore | 6,128 | 5,027 |
| |||||||||||||||||||||
Other | 10,669 | 13,132 |
| |||||||||||||||||||||
Total | 282,576 | 252,092 |
| |||||||||||||||||||||
| ||||||||||||||||||||||||
| ||||||||||||||||||||||||
| ||||||||||||||||||||||||
(h) Market risk sensitivity analysis | ||||||||||||||||||||||||
The sensitivity of profit and other equity reserves to movements on market risk variables (comprising interest rate, currency and equity price risk), each considered in isolation, is shown in the following table. | ||||||||||||||||||||||||
Potential increase/ | Potential increase/ | |||||||||||||||||||||||
Group | (decrease) in profit | (decrease) in | ||||||||||||||||||||||
other equity reserves | ||||||||||||||||||||||||
Variable | Change in | 2012 | 2011 | 2012 | 2011 | |||||||||||||||||||
variable | £000 | £000 | £000 | £000 | ||||||||||||||||||||
Interest rate risk* | -100 basis points | 1,725 | 1,408 | (24) | 27 | |||||||||||||||||||
+100 basis points | (4,212) | (3,034) | 17 | (24) | ||||||||||||||||||||
Currency risk | -5% | 2,042 | (762) | 4,419 | 4,545 | |||||||||||||||||||
+5% | (1,940) | 724 | (4,198) | (4,318) | ||||||||||||||||||||
Equity price risk | +/-5% | 10,667 | 9,264 | - | - | |||||||||||||||||||
* Interest rate risk sensitivities for the prior year have been restated to include the effect on general insurance claims reserves of specified changes to the market rate of interest. | ||||||||||||||||||||||||
The following assumptions have been made in preparing the above sensitivity analysis: | ||||||||||||||||||||||||
- | the value of fixed income investments will vary inversely with changes in interest rates, and all territories experience the same interest rate movement; | |||||||||||||||||||||||
- | currency gains and losses will arise from a change in the value of sterling against all other currencies moving in parallel; | |||||||||||||||||||||||
- | equity prices will move by the same percentage across all territories; and | |||||||||||||||||||||||
- | change in profit is stated net of tax at the standard rate applicable in each of the Group's territories. | |||||||||||||||||||||||
(i) Capital management
The Group's primary objectives when managing capital include:
- to comply with the regulators' capital requirements of the markets in which the Group operates; and
- to safeguard the Group's ability to continue to meet stakeholders' expectations, in accordance with its corporate mission, vision and values.
The Group is subject to insurance solvency regulations in all the territories in which it issues insurance and investment contracts, and capital is managed and evaluated on the basis of regulatory capital.
In the UK, the Group and its UK regulated entities are required to comply with rules issued by the Financial Services Authority (FSA), and submit FSA returns detailing levels of regulatory capital held. Regulatory capital should be in excess of the higher of two amounts. The first is an amount which is calculated by applying fixed percentages to premiums and claims (general insurance business) or by applying fixed percentages to insurance liabilities and applying stress testing (long-term business). The second is an economic capital assessment by the regulated entity, which the FSA reviews and may amend by issuing Individual Capital Guidance (ICG). The Group sets internal capital standards above the FSA's minimum requirement. For overseas business the relevant capital requirement is the minimum requirement under the local regulatory regime. Both the Group and the regulated entities within it have complied with all externally imposed capital requirements throughout the current and prior year.
Regulated subsidiaries are restricted in the amount of cash dividends they transfer to the parent entity, in order for them to meet their individual minimum capital requirements. The Group's total available capital resources are disclosed in note 28 (b) to the full financial statements.
Segmental information
| |||||||||||||||||||||||||||||||||
(a) Operating segments | |||||||||||||||||||||||||||||||||
The Group segments its business activities on the basis of differences in the products and services offered and, for general insurance, the underwriting territory. This reflects the management and internal Group reporting structure. Group activities that are not reportable operating segments on the basis of size are included within an 'Other activities' category. Changes have been made to segments during 2012 as follows: | |||||||||||||||||||||||||||||||||
- | The Ireland general insurance branch has been moved from 'United Kingdom and Ireland' (subsequently renamed 'United Kingdom') to become a discrete segment. | ||||||||||||||||||||||||||||||||
- | The New Zealand general insurance run-off operation, which was disposed of in the period, has been removed from 'Australia and New Zealand' (subsequently renamed 'Australia'). Discontinued operations are disclosed separately in note 15 to the full financial statements and excluded from the segmental analysis. | ||||||||||||||||||||||||||||||||
- | 'Other general insurance' has been renamed 'Central operations'. | ||||||||||||||||||||||||||||||||
- | 'Investment management' has been introduced as a discrete segment from 'Other activities'. | ||||||||||||||||||||||||||||||||
The prior period has been restated to the revised basis, and for the changes in accounting policy described in this announcement. | |||||||||||||||||||||||||||||||||
The activities of each operating segment are described below. | |||||||||||||||||||||||||||||||||
- General business | |||||||||||||||||||||||||||||||||
United Kingdom | |||||||||||||||||||||||||||||||||
The Group's principal general insurance business operation is in the UK, where it operates under the Ecclesiastical and Ansvar brands. | |||||||||||||||||||||||||||||||||
Ireland | |||||||||||||||||||||||||||||||||
The Group operates an Ecclesiastical branch in the Republic of Ireland underwriting general business across the whole of Ireland. | |||||||||||||||||||||||||||||||||
Australia | |||||||||||||||||||||||||||||||||
The Group has a wholly owned subsidiary in Australia underwriting general insurance business under the Ansvar brand. | |||||||||||||||||||||||||||||||||
Canada | |||||||||||||||||||||||||||||||||
The Group operates a general insurance Ecclesiastical branch in Canada. | |||||||||||||||||||||||||||||||||
Central operations | |||||||||||||||||||||||||||||||||
This includes the Group's internal reinsurance function, corporate underwriting costs and operations that are in run-off or not reportable due to their immateriality. | |||||||||||||||||||||||||||||||||
- Life business | |||||||||||||||||||||||||||||||||
Ecclesiastical Life Limited provides long-term insurance policies to support funeral planning products. | |||||||||||||||||||||||||||||||||
- Investment management | |||||||||||||||||||||||||||||||||
The Group provides investment management services both internally and to third parties through Ecclesiastical Investment Management Limited. | |||||||||||||||||||||||||||||||||
- Broking | |||||||||||||||||||||||||||||||||
The Group provides insurance broking services through South Essex Insurance Brokers Limited. | |||||||||||||||||||||||||||||||||
- Other activities | |||||||||||||||||||||||||||||||||
This includes the Group's financial advisory business, which is not a reportable operating segment due to immateriality, together with corporate costs relating to acquisition and disposal of businesses. | |||||||||||||||||||||||||||||||||
Inter-segment and inter-territory transfers or transactions are entered into under normal commercial terms and conditions that would also be available to unrelated third parties. | |||||||||||||||||||||||||||||||||
Segment revenue |
| ||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||
The Group uses gross written premiums as the measure for turnover of the general and life insurance business segments. Turnover of the non-insurance segments comprises fees and commissions earned in relation to services provided by the Group to third parties. Segment revenues do not include net investment return or general business fee and commission income, which are reported within revenue in the consolidated income statement. |
| ||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||
Continuing operations | Restated |
| |||||||||||||||||||||||||||||||
2012 | 2011 |
| |||||||||||||||||||||||||||||||
Gross written premiums | Non-insurance services | Total | Gross written premiums | Non-insurance services | Total |
| |||||||||||||||||||||||||||
£000 | £000 | £000 | £000 | £000 | £000 |
| |||||||||||||||||||||||||||
General business |
| ||||||||||||||||||||||||||||||||
United Kingdom | 336,579 | - | 336,579 | 326,327 | - | 326,327 |
| ||||||||||||||||||||||||||
Ireland | 14,046 | - | 14,046 | 13,465 | - | 13,465 |
| ||||||||||||||||||||||||||
Australia | 65,126 | - | 65,126 | 76,900 | - | 76,900 |
| ||||||||||||||||||||||||||
Canada | 36,995 | - | 36,995 | 34,219 | - | 34,219 |
| ||||||||||||||||||||||||||
Central operations | 8,380 | - | 8,380 | 6,261 | - | 6,261 |
| ||||||||||||||||||||||||||
461,126 | - | 461,126 | 457,172 | - | 457,172 |
| |||||||||||||||||||||||||||
Life business | 20,208 | - | 20,208 | 19,122 | - | 19,122 |
| ||||||||||||||||||||||||||
Investment management | - | 8,396 | 8,396 | - | 7,367 | 7,367 |
| ||||||||||||||||||||||||||
Broking | - | 7,235 | 7,235 | - | 6,635 | 6,635 |
| ||||||||||||||||||||||||||
Other activities | - | 744 | 744 | - | 637 | 637 |
| ||||||||||||||||||||||||||
Group revenue from continuing operations | 481,334 | 16,375 | 497,709 | 476,294 | 14,639 | 490,933 |
| ||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||
Group revenues are not materially concentrated on any single external customer. |
| ||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||
Segment result |
| ||||||||||||||||||||||||||||||||
General business segmental results comprise the insurance underwriting profit or loss, investment activities and other expenses of each underwriting territory. The Group uses the industry standard net combined operating ratio (COR) as a measure of underwriting efficiency. The COR expresses the total of net claims costs, commission and underwriting expenses as a percentage of net earned premiums. |
| ||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||
The life business segment result comprises the profit or loss on insurance contracts (including return on assets backing liabilities in the long-term fund), shareholder investment return and other expenses. |
| ||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||
All other segment results consist of the profit or loss before tax measured in accordance with IFRS. |
| ||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||
2012 | Combined |
| |||||||||||||||||||||||||||||||
Continuing operations | operating | Insurance | Investments | Other | Total |
| |||||||||||||||||||||||||||
ratio | £000 | £000 | £000 | £000 |
| ||||||||||||||||||||||||||||
General business |
| ||||||||||||||||||||||||||||||||
United Kingdom | 105.5% | (12,333) | 41,255 | (113) | 28,809 |
| |||||||||||||||||||||||||||
Ireland | 162.8% | (6,213) | 1,130 | - | (5,083) |
| |||||||||||||||||||||||||||
Australia | 122.1% | (5,194) | 8,663 | - | 3,469 |
| |||||||||||||||||||||||||||
Canada | 101.1% | (297) | 1,257 | (2) | 958 |
| |||||||||||||||||||||||||||
Central operations | (559) | 12 | - | (547) |
| ||||||||||||||||||||||||||||
108.5% | (24,596) | 52,317 | (115) | 27,606 |
| ||||||||||||||||||||||||||||
Life business | 5,947 | 3,113 | (5) | 9,055 |
| ||||||||||||||||||||||||||||
Investment management | - | 1,194 | - | 1,194 |
| ||||||||||||||||||||||||||||
Broking | - | - | 2,506 | 2,506 |
| ||||||||||||||||||||||||||||
Other activities | - | - | (2,558) | (2,558) |
| ||||||||||||||||||||||||||||
Profit before tax | (18,649) | 56,624 | (172) | 37,803 |
| ||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||
2011 (restated) | Combined |
| |||||||||||||||||||||||||||||||
Continuing operations | operating | Insurance | Investment | Other | Total |
| |||||||||||||||||||||||||||
ratio | £000 | £000 | £000 | £000 |
| ||||||||||||||||||||||||||||
General business |
| ||||||||||||||||||||||||||||||||
United Kingdom | 99.7% | 721 | (5,195) | (163) | (4,637) |
| |||||||||||||||||||||||||||
Ireland | 99.6% | 35 | 947 | - | 982 |
| |||||||||||||||||||||||||||
Australia | 129.6% | (11,803) | 9,815 | - | (1,988) |
| |||||||||||||||||||||||||||
Canada | 103.9% | (924) | 2,219 | (35) | 1,260 |
| |||||||||||||||||||||||||||
Central operations | (6,735) | 10 | - | (6,725) |
| ||||||||||||||||||||||||||||
106.4% | (18,706) | 7,796 | (198) | (11,108) |
| ||||||||||||||||||||||||||||
Life business | 721 | (787) | (12) | (78) |
| ||||||||||||||||||||||||||||
Investment management | - | 1,152 | - | 1,152 |
| ||||||||||||||||||||||||||||
Broking | - | - | 2,202 | 2,202 |
| ||||||||||||||||||||||||||||
Other activities | - | - | (2,709) | (2,709) |
| ||||||||||||||||||||||||||||
Loss before tax | (17,985) | 8,161 | (717) | (10,541) |
| ||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||
(b) Geographical information | |||||||||
Gross written premiums from external customers and non-current assets, as attributed to individual countries which the Group operates in, are as follows. | |||||||||
2012 | 2011 | ||||||||
Continuing operations | Gross written | Non-current | Gross written | Non-current | |||||
premiums | assets | premiums | assets | ||||||
£000 | £000 | £000 | £000 | ||||||
UK | 365,167 | 74,902 | 351,710 | 77,400 | |||||
Australia | 65,126 | 1,453 | 76,900 | 1,895 | |||||
Canada | 36,995 | 734 | 34,219 | 707 | |||||
Ireland | 14,046 | 241 | 13,465 | - | |||||
481,334 | 77,330 | 476,294 | 80,002 | ||||||
Gross written premiums are allocated based on the country in which the insurance contracts are issued. Non-current assets exclude rights arising under insurance contracts, deferred tax assets, pension assets and financial instruments and are allocated based on where the assets are located. | |||||||||
Discontinued operations | |||||||||
During the year, the Group disposed of its wholly owned subsidiary, ACS (NZ) Limited, transferring its holdings of ordinary shares in ACS (NZ) Limited to the Canterbury Earthquake Church and Heritage Trust, an independent trust constituted in New Zealand, with objectives similar to those of the Group. The loss on disposal includes a contribution made to the Trust of NZ$10.0m. | |||||||||
The disposal was effected in order to reduce the insurance and financial risks associated with the run-off of claims in relation to the series of earthquakes in Canterbury, New Zealand. | |||||||||
The results and cash flows of the discontinued operations, which have been included in the consolidated income statement and consolidated statement of cash flows respectively, were as follows: | |||||||||
Period to | Year ended | ||||||||
15 May | 31 December | ||||||||
2012 | 2011 | ||||||||
£000 | £000 | ||||||||
Total revenue | 246 | 6,177 | |||||||
Claims and change in insurance liabilities | (41,226) | (339,931) | |||||||
Reinsurance recoveries | 40,751 | 333,409 | |||||||
Other expenses | (605) | (4,484) | |||||||
Total expenses | (1,080) | (11,006) | |||||||
Loss before tax | (834) | (4,829) | |||||||
Loss on disposal, net of selling costs | (5,219) | - | |||||||
Attributable tax | 316 | - | |||||||
Net loss attributable to discontinued operations | (5,737) | (4,829) | |||||||
Net cash used by operating activities | (2,466) | (3,739) | |||||||
Net cash from investing activities | - | 5,786 | |||||||
Net cash from/(used by) financing activities* | 5,863 | (253) | |||||||
* Net cash from financing activities for the period to 15 May 2012 relates to loans provided by Group companies which are eliminated on consolidation. The full balance was repaid prior to the year end. | |||||||||
Disposal of business | |||||||||
As referred to above, on 15 May 2012 the Group disposed of ACS (NZ) Limited to the Canterbury Earthquake Church and Heritage Trust. | |||||||||
The net assets at the date of disposal and at 31 December 2011 were as follows: | |||||||||
15 May | 31 December | ||||||||
2012 | 2011 | ||||||||
£000 | £000 | ||||||||
Financial investments | 280 | 277 | |||||||
Reinsurers' share of contract liabilities | 333,745 | 351,534 | |||||||
Other assets | 5,290 | 8,148 | |||||||
Cash and cash equivalents | 6,405 | 3,008 | |||||||
Insurance contract liabilities | (337,489) | (356,323) | |||||||
Provisions for other liabilities | (46) | (45) | |||||||
Deferred tax liabilities | - | (44) | |||||||
Other liabilities | (1,755) | (6,057) | |||||||
Net assets | 6,430 | 498 | |||||||
Consideration and costs of sale: | |||||||||
Loan and trading balances receivable by the Group | (6,194) | ||||||||
Contribution paid to the Trust, plus selling costs | 6,329 | ||||||||
Currency translation equity reserves recycled to profit | (1,346) | ||||||||
Loss on disposal, net of selling costs | 5,219 | ||||||||
Net cash outflow arising on disposal | (12,734) | ||||||||
Prior year restatements | |||||||||
During 2012 the Group has made changes to its accounting policies, as follows: | |||||||||
1. Adoption of IAS 19 (Revised), Employee Benefits | |||||||||
The revised standard is effective for annual periods beginning on or after 1 January 2013, with earlier application permitted. The Group has opted to apply the standard early, with the result that the previous 'corridor method' applied to the Group's defined benefit pension schemes has been removed, and any actuarial gains and losses arising on the schemes are recognised in full. Other presentational changes do not affect shareholders' equity and are explained further in the notes below. | |||||||||
2. Remeasurement of designated insurance liabilities | |||||||||
During the year the Group made a voluntary amendment to its policies for general insurance claims reserving, resulting from a technical review of its methodology for latent claims modelling. A more sophisticated approach was adopted, with a re-parameterisation of all of the key assumptions. This included applying a market rate of interest to remeasure designated insurance liabilities, which represents a change in accounting policy, providing more reliable and relevant information due to the relatively long mean-term duration of these liabilities, disclosed further in note 28 (a) part (iv) to the full financial statements. | |||||||||
Under IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, where a new standard requires it or when a change in accounting policy is applied voluntarily, a retrospective restatement of the prior period results is required, including the adjustment of the prior period opening statement of financial position. The effects of the restatements are detailed in this note, and included throughout the financial statement comparatives, where appropriate.
| |||||||||
Reconciliation of the Group Statement of Comprehensive Income for the year ended 31 December 2011 | |||||||||
Accounting policy changes | |||||||||
As reported 2011 | Discontinued operations* | 1. Adoption of revised IAS 19 | 2. Remeasure designated insurance liabilities | Restated 2011 | |||||
A) Defined benefit pensions | B) Other post-employment benefits | ||||||||
£000 | £000 | £000 | £000 | £000 | £000 | ||||
Revenue | 396,675 | (6,177) | - | - | - | 390,498 | |||
Net incurred claims | (223,335) | 6,522 | - | - | (8,221) | (225,034) | |||
Other expenses | (181,011) | 4,484 | (3,258) | 3,780 | - | (176,005) | |||
Loss before tax | (7,671) | 4,829 | (3,258) | 3,780 | (8,221) | (10,541) | |||
Tax credit/(charge) | 4,443 | - | 660 | (906) | 2,489 | 6,686 | |||
Discontinued operations | - | (4,829) | - | - | - | (4,829) | |||
Other (expense)/income | (378) | - | 8,443 | (2,874) | - | 5,191 | |||
Total comprehensive income | (3,606) | - | 5,845 | - | (5,732) | (3,493) | |||
* The disposal of the Group's New Zealand insurance operation was effected on 15 May 2012, detailed above. | |||||||||
Notes: | |||||||||
1. The effect of the adoption of revised IAS19 on the Group's financial performance has been analysed above between two separate components:
| |||||||||
A) Applying the full recognition approach to the Group's defined benefit pension schemes resulted in the recognition of £5,845,000 of actuarial gains for the year to 31 December 2011 (net of deferred tax), previously unrecognised.
| |||||||||
The revised standard introduces a presentational change, with the expected return on plan assets (or 'interest income') calculated using the same rate used to discount the defined benefit obligation, rather than allowing for the return on specific assets held by the Fund.
| |||||||||
This resulted in an increased net charge to the consolidated income statement for the year, with experience adjustments and other actuarial gains and losses included in other comprehensive income.
| |||||||||
B) The recognition of net actuarial gains or losses on the Group post-employment medical benefit scheme through other comprehensive income, rather than profit or loss, reduces volatility in profit without affecting shareholders' equity.
| |||||||||
Additional disclosures are provided in note 20 to the full financial statements. | |||||||||
2. The increase in net incurred claims for the year relates to the movement on the discounting of net long-tail claims reserves, driven by a decrease in the market rate of interest. Further disclosure of assumptions used are included in note 28 to the full financial statements. | |||||||||
Reconciliation of the Group Statement of Financial Position as at 31 December 2011
| |||||||||
The retrospective restatement at 31 December 2011 was a net increase of £9,177,000 in Group shareholders' equity, shown below as applied to the statement of financial position on that date. | |||||||||
Accounting policy changes | |||||||||
As reported 31 December 2011 | 1. Adoption of Revised IAS 19 | 2. Remeasure designated insurance liabilities | Restated 31 December 2011 | ||||||
£000 | £000 | £000 | £000 | ||||||
Assets | |||||||||
Goodwill and other intangible assets | 25,335 | - | - | 25,335 | |||||
Deferred acquisition costs | 35,788 | - | - | 35,788 | |||||
Deferred tax assets | 5,454 | - | (214) | 5,240 | |||||
Pension assets | 33,713 | 1,514 | - | 35,227 | |||||
Property, plant and equipment | 9,033 | - | - | 9,033 | |||||
Investment property | 27,473 | - | - | 27,473 | |||||
Financial investments | 829,921 | - | - | 829,921 | |||||
Reinsurers' share of contract liabilities | 541,050 | - | (277) | 540,773 | |||||
Current tax recoverable | 3,882 | - | (2,792) | 1,090 | |||||
Other assets | 147,030 | - | - | 147,030 | |||||
Cash and cash equivalents | 155,024 | - | - | 155,024 | |||||
Total assets | 1,813,703 | 1,514 | (3,283) | 1,811,934 | |||||
Equity | |||||||||
Share capital | 120,477 | - | - | 120,477 | |||||
Share premium account | 4,632 | - | - | 4,632 | |||||
Retained earnings and other reserves | 310,975 | 889 | 8,288 | 320,152 | |||||
Total shareholders' equity | 436,084 | 889 | 8,288 | 445,261 | |||||
Liabilities | |||||||||
Insurance contract liabilities | 1,249,625 | - | (11,571) | 1,238,054 | |||||
Finance lease obligations | 1,886 | - | - | 1,886 | |||||
Provisions for other liabilities | 8,717 | - | - | 8,717 | |||||
Retirement benefit obligations | 12,760 | - | - | 12,760 | |||||
Deferred tax liabilities | 35,877 | 625 | - | 36,502 | |||||
Current tax liabilities | 1,396 | - | - | 1,396 | |||||
Deferred income | 17,557 | - | - | 17,557 | |||||
Other liabilities | 49,801 | - | - | 49,801 | |||||
Total liabilities | 1,377,619 | 625 | (11,571) | 1,366,673 | |||||
Total shareholders' equity and liabilities | 1,813,703 | 1,514 | (3,283) | 1,811,934 | |||||
Reconciliation of the Group Statement of Financial Position as at 1 January 2011 | |||||||||
The retrospective restatement at 1 January 2011 was a net increase of £9,064,000 in Group shareholders' equity, as shown below. | |||||||||
Group | Accounting policy changes | ||||||||
As reported 31 December 2010 | 1. Adoption of Revised IAS 19 | 2. Remeasure designated insurance liabilities | Restated 1 January 2011 | ||||||
£000 | £000 | £000 | £000 | ||||||
Assets | |||||||||
Goodwill and other intangible assets | 25,923 | - | - | 25,923 | |||||
Deferred acquisition costs | 41,482 | - | - | 41,482 | |||||
Deferred tax assets | 4,520 | - | (406) | 4,114 | |||||
Pension assets | 30,185 | (6,485) | - | 23,700 | |||||
Property, plant and equipment | 9,417 | - | - | 9,417 | |||||
Investment property | 24,641 | - | - | 24,641 | |||||
Financial investments | 834,163 | - | - | 834,163 | |||||
Reinsurers' share of contract liabilities | 286,194 | - | (529) | 285,665 | |||||
Current tax recoverable | 110 | - | - | 110 | |||||
Other assets | 136,661 | - | - | 136,661 | |||||
Cash and cash equivalents | 164,805 | - | - | 164,805 | |||||
Total assets | 1,558,101 | (6,485) | (935) | 1,550,681 | |||||
Equity | |||||||||
Share capital | 120,477 | - | - | 120,477 | |||||
Share premium account | 4,632 | - | - | 4,632 | |||||
Retained earnings and other reserves | 331,798 | (4,956) | 14,020 | 340,862 | |||||
Total shareholders' equity | 456,907 | (4,956) | 14,020 | 465,971 | |||||
Liabilities | |||||||||
Insurance contract liabilities | 965,309 | - | (20,044) | 945,265 | |||||
Finance lease obligations | 1,898 | - | - | 1,898 | |||||
Provisions for other liabilities | 11,227 | - | - | 11,227 | |||||
Retirement benefit obligations | 8,652 | - | - | 8,652 | |||||
Deferred tax liabilities | 42,321 | (1,529) | - | 40,792 | |||||
Current tax liabilities | 2,700 | - | 5,089 | 7,789 | |||||
Deferred income | 20,562 | - | - | 20,562 | |||||
Other liabilities | 48,525 | - | - | 48,525 | |||||
Total liabilities | 1,101,194 | (1,529) | (14,955) | 1,084,710 | |||||
Total shareholders' equity and liabilities | 1,558,101 | (6,485) | (935) | 1,550,681 | |||||
Related party transactions
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation. | |||||||||||||
|
|
| |||||||||||
Charitable grants to the ultimate parent company are disclosed in the consolidated statement of changes in equity. | |||||||||||||
|
|
| |||||||||||
Full disclosure of related party disclosures is included in note 34 to the full financial statements. | |||||||||||||