Ecclesiastl.8fe Regulatory News (ELLA)

Ecclesiastical Insurance Office plc announces results for the year ended 31 December 2020

Ecclesiastical Insurance Office plc ("Ecclesiastical"), the specialist financial services group, today announces its full year 2020 results. A copy of the results will be available on the Company's website at www.ecclesiastical.com

Group overview

· During an unprecedented year, the Group remained committed to its purpose of contributing to the greater good. In addition to over £23m of funds awarded through our parent Allchurches Trust, the Group gave over £2.7m to support charities and communities during this difficult time. This included £1m through our annual corporate giving programme Movement for Good, and over £200,000 to a combination of the industry's Covid‑19 Support Fund, The National Emergency Trust and the Disaster Emergency Committee's Coronavirus Crisis Appeal.

· The Group has now given over £99m to charity, and we are about to meet the £100m target we set ourselves back in 2016. This means that over the last five years our rolling average donations have exceeded £20m per annum.

· Following a strong financial performance in 2019, we reported a loss before tax of £15.7m (2019: profit before tax £73.3m) principally due to Covid-19's impact on financial markets.

· Gross Written Premiums (GWP) grew 11% to £437m (2019: £394m), supported by strong retention and rate increases as well as new business wins.

· Underwriting profit of £12.1m (2019: £20.0m) after £18.7m for Covid-19 related claims where there is confirmed cover, demonstrating continued progress in our underlying performance.

· We have prioritised the health and wellbeing of our people, successfully adapting to new ways of working and providing a seamless service to our customers.

· Continued external recognition of the Group as a trusted and specialist financial services organisation. This included being named as the UK's most trusted home insurer for the 12th time by independent ratings agency Fairer Finance, and our Canadian team was once again awarded Top Employer for Young People.

· With a new brand, new offices and new systems, and a hardening market, we are well placed to grow in all our specialisms, particularly heritage, charity, education, real estate and private clients. At a time when others are pulling back, Ecclesiastical is very much open for business.

Mark Hews, Group Chief Executive Officer of Ecclesiastical, said:

"2020 was a uniquely challenging year for all of us. While we entered the year in a position of strength, the Covid-19 pandemic had a significant impact on the global economy and our financial performance suffered like many businesses. Despite this, we remained true to our purpose of contributing to the greater good and have continued to give to church, charities and communities most in need.

"We remain financially resilient despite the headline loss before tax of £15.7m (2019: profit before tax £73.3m), which was principally due to investment losses experienced in the first half of 2020. Given our financial strength, we hold a sizeable equity portfolio and accept that this can lead to short-term volatility in our reported results. We have since seen steady gains and we continue to take a long-term view with our investment strategy.

"Despite the challenging environment, our underlying performance continued to be robust. Gross Written Premiums (GWP) grew 11% to £437m (2019: £394m), supported by strong retention as well as new business wins, and we reported a solid underwriting profit of £12.1m (2019: £20.0m) after £18.7m for Covid-19 related claims where there is confirmed cover.

"The real measure of our performance in 2020, however, has been how we responded to support our customers, brokers, people and communities. I am immensely proud of the way our colleagues showed great courage and resilience to continue to deliver for our customers. All our colleagues quickly and successfully moved to remote working and we adapted our plans to enable our response to the pandemic, showing flexibility and agility across our businesses. Throughout the pandemic, we have made the health, safety and wellbeing of our employees a key priority.

"I also recognise that this has been a challenging time for many of our customers. Many businesses, charities, schools, nurseries and churches have suffered financially due to the impact of successive lockdowns. We introduced a series of measures to support our customers and partners during this difficult period. These included paying claims quickly where cover was in place, offering enhanced cover, free of charge, to many of our customers, and providing credit support to customers in financial difficulty. We also introduced online information hubs, as well as pandemic-related risk management advice.

"Some customers have been disappointed that their policy has not provided business interruption (BI) cover during the pandemic. We were always clear that our BI policies were never intended to cover pandemics and we welcomed the certainty and clarity provided by the outcome of the Financial Conduct Authority test case in our favour.

"Recognising the impact Covid-19 has had on communities, we continued our programme of giving during this difficult time. This includes £1m through our annual corporate giving programme Movement for Good awards and a further £120,000 through our 12 days of giving campaign. We also gave over £200,000 to a combination of the industry's Covid-19 Support Fund, The National Emergency Trust and the Disaster Emergency Committee's Coronavirus Crisis Appeal. The Group has now given over £99m to charity, and we are about to meet the £100m target we set ourselves back in 2016. This means that over the last five years our rolling average donations have exceeded £20m per annum.

"As we move into 2021, we are entering an exciting phase in our history. While many businesses retreat in the face of the coronavirus pandemic, we see the opportunity to refocus and re-energise our business based on our core strengths - our charitable purpose, our outstanding people and our passion to do the right thing. We recently unveiled a new visual identity for the Ecclesiastical Insurance brand. It represents everything that our audiences know and love about our organisation - our expertise, our ethics, and our unique purpose - but articulated with greater energy than before. It reflects an Ecclesiastical that not only does good, but is unified, dynamic and innovative. Alongside the investment in our new visual identity, I'm delighted that our new head office in Gloucestershire is now fully operational and ready to welcome employees with new flexible ways of working once lockdown restrictions are lifted. We are also continuing to invest in new systems to improve our efficiency and improve the customer experience.

"Despite the challenging environment, we remain in a strong capital position with S&P and AM Best reaffirming our strong credit ratings. As we head into 2021 we recognise the challenges in the economic environment but are energised by the clarity of our charitable purpose and are optimistic about the opportunities ahead.

"On behalf of all our charitable beneficiaries, I would like to thank all those who continue to support the Group's work, enabling it to give to so many worthy causes at a time when the need has never been greater. Together, we are supporting charities, communities and improving lives."

ECCLESIASTICAL INSURANCE OFFICE PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2020

The Company has now approved its annual report and accounts for 2020.

This Annual Financial Report announcement contains the information required to comply with the Disclosure and Transparency Rules, and extracts of the Strategic Report and 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 2020. The annual report and accounts will be available on or before 1 April 2021 on the Company's website at www.ecclesiastical.com. Copies of the audited financial statements are also available from the registered office at Benefact House, 2000 Pioneer Avenue, Gloucester Business Park, Brockworth, Gloucester GL3 4AW.

A copy of the Company's statutory accounts for the year ended 31 December 2020 will be submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk

Chairman's Statement

Throughout this period, I've been overwhelmed by the efforts of all our colleagues at Ecclesiastical to continue to deliver what matters most to our customers. I have heard inspiring stories from around the Group of how colleagues have overcome their own personal challenges to support our customers and help those in society who need it most. True character emerges in adversity and our teams pulled together during this difficult time to keep us on course and stay true to our vision and purpose.

Achievements

The year had many highlights, but I am especially proud that we kept our impressive customer satisfaction rankings, continued to win independent awards and maintained our strong credit ratings in the most trying of circumstances. A heart-felt thanks to all.

While I recognise it was a difficult and uncertain period for our customers, I welcome the clarity and certainty brought by the courts' rulings in the FCA High Court Case. I know that we also remain determined to do the right thing by handling claims with empathy and sensitivity following the publication of the IICSA report into the Anglican Church.

A resilient set of results

Despite the difficulties of the Covid-19 pandemic and the Group reporting a loss of £15.7m (2019: profit before tax £73.3m), our businesses generally performed well and we remain financially strong. Our underwriting performance was resilient and gross written premiums grew, thanks to a number of new business wins. What makes Ecclesiastical unique in the financial services world is our charitable ownership. It's a business model suited to our times and means we're not driven by the short-term pursuit of profit. Instead, we take a long-term view, focused on sustainable growth, enabling us to weather the difficult times. I'm delighted that, despite the challenges of the past 12 months, we've been able to donate over £2.7m to good causes through our own direct giving such as the Movement for Good awards. This is in addition to over £23m of funds awarded though our parent Allchurches Trust.

Looking ahead

This is an exciting year for Ecclesiastical. We enter a new chapter in our strategy with a new visual identity. Representing a modern and confident Ecclesiastical, the new brand focuses on our core strengths of being trusted, specialist and committed to customer service.

The benefits of our long-term investment programme continue to be realised. Our new purpose-built office in Gloucestershire opened its doors in February, providing a modern and inspiring environment for our colleagues. It's a great achievement, particularly considering the challenges of the past 12 months, and I'm looking forward to visiting when restrictions are eased.

This year will also see the start of the rollout of our new strategic General Insurance (GI) system for the UK and Ireland, which will provide customers and brokers with a better, faster experience. At a time when our competitors are battening down the hatches, we are well-placed to thrive and achieve our purpose of contributing to the greater good of society.

Board activity

On a personal level, my second year leading the Group as Chairman could not have been more different to my first. While I was fortunate enough at the start of the year to spend time with colleagues developing the new GI operating system, many of my plans to engage with the business were curtailed due to the pandemic and I have missed the personal engagement of being with colleagues. As a Board, we had to adapt to new ways of working and since March last year, we have been meeting virtually in our role of reviewing and overseeing the Group's activities.

I was pleased to welcome two new Board members in 2020. Neil Maidment joined in January, bringing a wealth of industry experience, and Sir Stephen Lamport followed him in March, bringing vast experience from his time in Westminster and serving in the Royal Household. Their diversity of skills and experience strengthen our Board considerably. We were sad to bid farewell to Dean Christine Wilson, who served the Board admirably for 11 years.

The future

At a time when the reputation of the insurance industry is under scrutiny, it's more important than ever that Ecclesiastical is and is seen to be doing the right things for its various stakeholders. I believe that, provided we continue to fulfil our purpose and live our values, we are well-placed to stand out amongst our competitors and enhance our already considerable achievements.

Chief Executive's Report

We are driven by the pursuit of excellence, which we achieve through our unrivalled knowledge of our specialist markets and a commitment to customer service.

Throughout our long history, we have been unwavering in our focus and determination to serve our customers and support those in society who need us most. This time last year, as I wrote the Chief Executive's report for the 2019 annual report, the impact of Covid-19 was just beginning to be felt across the globe. None of us could have predicted just how much of an impact it would have on our lives. Businesses closed, financial markets collapsed and at times that most basic of human needs, social contact, all but ceased. The global Covid-19 pandemic has affected every aspect of our lives - economically, politically and socially- and has changed the way we live and work forever.

Extraordinary times require an extraordinary response and our businesses responded to this most unprecedented challenge in the best way possible. Together, we rose above the challenges to dream even bigger, and perform even better. Through it all, we never lost sight of our purpose, our strategy and our ambition to drive and grow our business in order to make an even bigger contribution to the greater good of the communities in which we live and work.

Continuing to build a Movement for Good

Thanks to the incredible support of our customers, brokers, business partners, employees and all our supporters, we have now given over £99m to charity, and are about to meet the £100m target we set ourselves back in 2017. This means that over the last five years our rolling average donations have exceeded £20m per annum something of which all our supporters can be proud.

Indeed in 2020, in addition to over £23m of funds awarded through our parent Allchurches Trust, the Group gave over £2.7m to support charities and communities during this difficult time, including:

· £1m through our annual corporate giving programme Movement for Good awards which saw 500 charities receive £1,000 grants and 10 charities receive longer- term funding of £50,000 - and a further £120,000 through our 12 days of giving campaign

· Over £200,000 to a combination of the industry's Covid-19 Support Fund, The National Emergency Trust and the Disaster Emergency Committee's Coronavirus Crisis Appeal

· Over £250,000 via local charitable programmes such as our "Community Impact Grants" in Canada and our "Community Education Programme" in Australia

We launched Fundraising Hubs to support Church and Charities raise much needed financial support, and undertook a programme to encourage "Acts of Kindness" across the group for those in need. These acts, mostly unsung, range from providing meals to the homeless or those in isolation, through to the establishment of a Hygiene Bank by our Ansvar office in Eastbourne, and for which Ansvar have been recognised as "Pro-Bono Company of the Year".

It's very humbling to think we've been able to support so many good causes during such a challenging period. For many frontline charities, their work has never been more vital, and they are often helping the most vulnerable members of society. I'm proud that we've been able to make a difference to so many lives.

Our charitable purpose drives us to help those most in need and we have now increased our aspirations and are focused to exceed our original £100m charitable giving target by September 2021. We invite others to join us in this goal. By working together, and with these charities, we can help to build a movement for good.

Delivering for our customers

I am immensely proud of the way our colleagues showed great courage and resilience to continue to deliver for our customers. All our colleagues quickly and successfully moved to remote working and we adapted our plans to enable our response to the pandemic, showing flexibility and agility across our businesses. This was all achieved while colleagues faced many personal challenges of their own. The Board and I are immensely grateful for the hard work and sacrifice of our colleagues who went above and beyond to ensure customer service was enhanced, and our charitable purpose maintained. Throughout the pandemic, we have made the health, safety and wellbeing of our employees a key priority. We invested in new systems to enable different ways of working, and provided home working and mental health and wellbeing support. We decided not to take financial benefit from the Government's furlough scheme.

I also recognise that this has been a challenging time for many of our customers. Many businesses, charities, schools, nurseries and churches have suffered financially due to the impact of successive lockdowns. We introduced a series of measures to support our customers and partners during this difficult period. These included paying claims quickly where cover was in place, offering enhanced cover, free of charge, to many of our customers, and providing credit support to customers in financial difficulty. We also introduced online information hubs, as well as pandemic-related risk management advice.

The insurance industry came under intense scrutiny as a result of the test case on Business Interruption (BI) insurance brought by the Financial Conduct Authority. We were always clear that our BI policies were never intended to cover pandemics and we welcomed the certainty and clarity provided by the High Court's judgment in our favour. Nevertheless, the case has damaged trust in the insurance industry and I believe we now need to work together to restore trust in insurance.

Despite all the challenges of the pandemic, I am pleased to report that 98% of surveyed customers were satisfied with how we handled their claim last year, with 92% being very and extremely satisfied, which is consistent with previous years.

In last year's report, I talked about the importance of managing claims for physical and sexual abuse and we remain committed to improving the claims experience in these sensitive cases. To this end, we welcomed the publication of the Independent Inquiry into Child Sexual Abuse (IICSA) report on the Anglican Church investigation and the insights it gives into the best possible ways to better safeguard children and how to improve the treatment of victims and survivors when disclosing abuse.

The experience of bringing an insurance claim can be traumatic for victims and survivors within the adversarial civil justice system in which we operate. We always aim to handle claims with empathy and sensitivity, as embodied in our Guiding Principles. We thank the Inquiry for its work, and we will continue to review our processes as part of our commitment to continual improvement.

Financial performance

2020 was a challenging year for all businesses due to the significant impact of Covid-19 and our results were affected by the falls in investment markets. While this affected our reported overall financial performance, resulting in a loss of £15.7m (2019: profit before tax £73.3m), our underlying businesses performed well and we remain financially resilient as we move into 2021.

Underwriting results have been resilient at £12.1m (2019: £20.0m) after £18.7m for Covid-19 related claims where cover is confirmed. We delivered Gross Written Premium (GWP) growth of 11% to £437m (2019: £394m) supported by strong retention and new business. Despite the challenges faced by all businesses in 2020, our commitment to long term profitable growth has endured and our diverse portfolio of companies has continued to support this. Our long-term view of risk means we have a strong capital position that can withstand short-term volatility and I'm delighted that our excellent A and A- credit ratings by AM Best and S&P were both maintained throughout 2020.

Our strategy for the future

As we move into 2021, we are entering an exciting phase in our history. After making significant progress in recent years to become the most trusted and ethical specialist financial services group, we are now investing in the next stage of our journey. While many businesses retreat in the face of the coronavirus pandemic, we see the opportunity to refocus and re- energise our business based on our core strengths - our charitable purpose, our outstanding people and our passion to do the right thing.

I'm excited to be able to showcase the new Ecclesiastical Insurance brand in this year's Annual Report & Accounts. The new visual identity represents the organisation that we are today shaped by tradition, while looking to the future. The star carries many meanings but for me it represents our pursuit of excellence, the ethics and standards that we strive for and the guiding light we aspire to be.

Through the launch of our new visual identity, we will be reinforcing everything that our audiences know and love about our organisation - our expertise, our ethics, and our unique purpose - but articulated with greater energy than before. It reflects an Ecclesiastical that not only does good, but is unified, dynamic and innovative. It's a new era for our business and, to support us, we adapted the strategy in 2020 that will take us through this challenging period and enable us to take advantage of the hardening market conditions.

Alongside the investment in our new visual identity, I'm delighted that our new head office in Gloucestershire is now fully operational and ready to welcome employees with new flexible ways of working once lockdown restrictions are lifted. The premises are truly impressive and provide a modern and spacious working environment for our employees.

In addition to investing in our people and brand, we have also continued to invest in new systems and technology, helping our businesses to innovate with purpose and increase our agility and efficiency. We have recently implemented new systems for our broking, investment management and overseas insurance businesses. This year, we'll start to deliver a new strategic General Insurance system for the UK and Ireland which, once live, will help us to provide our customers and brokers with an enhanced experience and more efficient processes and capacity.

This investment in our business, together with our great people and financial strength, provides us with the foundation for a bright future.

Working together for the greater good

With our £100m charitable target within our near term grasp, our adapted strategy, new brand, new systems, new head office and the new ways of working developed this year, we enter 2021 energised and inspired to work together for our customers and society.

The challenges we have overcome, the progress made and speed with which we have done it would not be possible were it not for the dedication of our specialist teams worldwide. As such the Board and I say "Thank you" to our exceptional colleagues who, no matter where they might be, or whatever their circumstances, will always put doing what is right for our customers and our charitable purpose at the centre of everything they do.

To those who are reading about Ecclesiastical for the first time, I invite you to join us, whether as a colleague, customer or business partner, and experience for yourself how it is possible to do business differently. There is no doubt that, together, we are creating something very special a movement for good that touches and transforms lives in our homes, in our communities, in this country and abroad.

Together, by understanding what matters, we are better able to help our customers. Together, we are better able to increase giving to our beneficiaries. And together, in the words of Captain Sir Tom Moore, we will ensure that for more people "Tomorrow will be a good day".

Financial Performance Report

We entered 2020 from a position of strength, but as the global economy slowed from the impacts of the pandemic, our financial performance suffered in line with the rest of the economy. The real measure of our performance in 2020 however has been how we responded to support our customers, brokers, people and communities.

Following a strong financial performance in 2019, reported loss before tax of £15.7m (2019: profit before tax £73.3m) was principally due to investment losses experienced in the first half of the year, offset by steady gains later in the year. The Group's underwriting businesses reported profit of £12.1m (2019: £20.0m) after £18.7m for Covid-19 related claims where there is confirmed cover, demonstrating continued progress in our underlying performance. To ensure the Group delivers sustainable profitable growth, we have continued to make strategic investments in technology, property and our people and this is reflected both in our capital expenditure and other costs.

We continue to be a trusted partner to our customers and brokers, and this is reflected in our strong retention and satisfaction levels, which have supported our growth in gross written premiums (GWP) of more than 10%. Despite the unprecedented challenges of 2020, we have continued to invest in the future of our business, including development of our new insurance underwriting platform and our new head office.

Our business is managed with a long-term view of risk and as a result, we have a strong capital position that can withstand short-term volatility and our strong credit ratings with S&P and AM Best were both reaffirmed during the second quarter of 2020. Our Solvency II regulatory capital position remains above regulatory requirements and risk appetite and was further supported with the issuance of €30m subordinated debt in February 2021, as the Group seeks to take advantage of profitable growth opportunities.

General insurance

The Group's underwriting businesses have proven resilient in 2020, reporting a Combined Operating Ratio (COR) of 95.1% (2019: 91.1%). Underlying underwriting performance has been resilient, despite the impact of adverse weather events in Australia and Canada and the impacts of anticipated lower prior year releases and reserves strengthening. Our strategy has continued to deliver moderate GWP growth by maintaining our strong underwriting discipline and focussing on profit over growth. GWP grew 11% to £437m (2019: £394m), supported by retention and rate increases as well as new business towards the later part of the year.

United Kingdom and Ireland

In the UK and Ireland, financial year underwriting profits decreased to £12.3m (2019: £20.4m) giving a COR of 92.5% (2019: 86.8%) and GWP grew by 7.6% to £276.6m (2019: £257.1m). This represents another strong performance with positive results on both the property and liability accounts. As expected, the level of prior year releases during 2020 was significantly lower than in 2019. The run-off of unprofitable business exited in 2012 and 2013, combined with our prudent approach to reserving have positively impacted the overall result over the last four years. We would expect to continue to see a modest level of prior year releases, but with a greater contribution coming from our current year underwriting performance.

Both property and casualty accounts generated net underwriting profits on a current year basis, despite the impacts of Covid-19 and a significant church fire. Current year loss ratios are in line with expectations, reflecting favourable underlying claims performance and fewer weather events. We have also seen the benefit of rate increases in a number of portfolios.

Trading conditions remained competitive and we expect this to continue in a number of areas. The education sector was particularly competitive, although we observed some market hardening in property, specifically for larger property exposures. We have continued to achieve high levels of retention and carried positive rate change where needed, whilst continuing to have very strong customer satisfaction and Net Promotor Scores across the UK and Ireland. Market hardening in some property lines and a strong operational response to keep trading through Covid-19 has also enabled us to bring on good levels of new business at the required rate, and our Real Estate, Heritage and Art & Private Client business delivered particularly strong growth during 2020. GWP in respect of our Faith business remained in line with prior year reflecting a good result in challenging market conditions.

We expect the market to continue to harden in some parts of the property portfolio as competitors correct portfolios, and also in some parts of the casualty sector. Education is likely to remain a key competitive area as the UK Government's risk protection arrangement (RPA) attracts local authority maintained schools in addition to academies. This has left the independent schools sector at increased competition from all education insurers.

Our strategy over the medium term is to deliver moderate GWP growth, while maintaining our strong underwriting discipline, as our philosophy is to seek only profitable growth. We will continue to deepen our specialist capabilities through investment in technology and innovation together with the propositions and excellent service that our customers value.

Ansvar Australia

Our Australian business reported an underwriting loss of AUD$1.2m resulting in a COR of 102.2% (2019: AUD$6.0m loss, COR of 114.1%). GWP grew by 18.5% in local currency to AUD$149.9m (2019: AUD$126.5m) with strong new business growth, retention and rate increases. Action has been taken to exit from unprofitable business and the current year performance of the ongoing business has shown improvement over 2019. The property account was adversely impacted by early 2020 weather events and Covid-19 related claims and the liability account was strengthened for physical and sexual abuse (PSA) reserves to reflect higher claims reported in 2020.

Canada

Our Canadian business continued its track record of delivering premium growth, reporting a 20.2% increase at CAD$131.5m (2019: CAD$109.5m) supported by strong retention, growth in new business and rate increases.

Canada reported an underwriting profit of CAD$7.4m resulting in a COR of 91.2% (2019: CAD$3.4m profit, COR of 95.1%). Despite the impact from Covid-19 and two weather events, the property book performed well, driven by fewer large losses and a favourable development on prior year claims. The liability account also performed well delivering an underwriting profit despite some adverse development on prior year claims.

Investments

With the conclusion of a Brexit deal and the US election, the year ended with far less uncertainty and volatility compared to that experienced from March 2020 as markets reacted to the measures taken by Governments to tackle Covid-19. The Group's net investment loss of £4.2m as compared to the 2019 net investment profit of £74.4m can be largely attributed to performance of UK equities. The Group's fund nevertheless produced a total return ahead of its asset benchmark over the year.

The lower than expected return on investments of £20.9m reflects market conditions and reactions to the pandemic during 2020 (2019: £26.2m). The impact from Covid-19 was also reflected in fair value losses on financial instruments of £13.6m which contrasted with gains of £56.0m in 2019. Whilst 2020 ended with less uncertainty, as for all businesses, there remains economic uncertainty which could impact the performance of our investments. However we remain confident in our long-term value investment philosophy, and are relatively defensively positioned.

Within our UK equity portfolio, small and mid-cap bias proved beneficial as the FTSE Small-Cap and FTSE 250 indices outperformed the FTSE All-Share.

Our directly-held sterling bond portfolio underperformed the FTSE Gilts benchmark by 5.4%, as the longer dated index outperformed on falling yields and our portfolio has a higher proportion of short dated bonds.

The downward movement in bond yields led to a decrease in the discount rate applied to long-tail general insurance liabilities. The change in discount rate on those liabilities resulted in a £10.9m loss recognised within net investment return (2019: £9.9m loss).

Investment Management

The Group's investment management business, EdenTree, incurred a loss before tax for the year of £1.0m (2019: loss before tax £0.3m) as it continued to invest in infrastructure. The Covid-19 pandemic resulted in a challenging year, limiting the assets clients had available to invest, in particular charities. Against this backdrop, EdenTree were pleased to report £58m of net new money for the year having reached a historic high of £204m in 2019.

Global equity markets dipped significantly in March and April due to the pandemic, the recovery accelerating towards the back end of the year with some markets approaching opening levels. Assets under management were £3.1bn (2019: £3.1bn) and £2.3bn (2019: £2.3bn) excluding assets managed for the Group.

Net income at £12.4m was slightly down (2019: £12.6m). This is due to the combination of lower fees earned on assets, a trend which has been seen across the industry in recent years, and market turbulence over the course of the year

Long-term insurance

Our life insurance business, which is currently closed to new business, reported a profit before tax of £0.5m for the year (2019: £0.3m). Assets and liabilities are well matched, and the small profit is in line with our expectations for this business.

Broking and advisory

Overall, broking and advisory had modest growth in income and profit, reporting a profit before tax of £2.4m (2019: £2.1m). This area of our business includes our insurance broker, South Essex Insurance Brokers (SEIB) and our financial advisory business, Ecclesiastical Financial Advisory Services (EFAS). SEIB reported an increase in profit before tax to £2.8m (2019: £2.6m) and during the year, extended its own range of specialisms with the acquisition of WRS Insurance Brokers, recognised as specialists in charity, church and care and community groups. EFAS reported a loss of £0.3m in the year (2019: £0.4m loss).

In addition to these broking and advisory businesses our immediate parent company, Ecclesiastical Insurance Group holds interests in the specialist broker groups Lycetts and Lloyd & Whyte and a prepaid funeral plan business, Ecclesiastical Planning Services. Whilst the results of these are not included within the Ecclesiastical Insurance Office plc Group, they are managed together as part of Ecclesiastical's wider broking and advisory group of businesses. The broker businesses were profitable in 2020 but the prepaid funeral plan business was loss making as a result of the adverse impacts caused by lockdown measures in the UK.

Outlook

Whilst the conclusion of Brexit and the US election towards the end of 2020 provided some market stability, we are still living with Covid-19 and the economic consequences are expected to continue. However, the Group's long-term view to managing and investing in the business has underpinned its financial resilience and strong capital position and we are well positioned for the future.

We remain focussed on our vision to be the most trusted and ethical financial services group, and whilst we can look forward with more hope, we will do so whilst continuing to exercise caution where we operate around uncertainty and market disruption. We will continue to focus on delivering sustainable profit growth and evolve our business for the greater good of society and to make a positive impact on people's lives.

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 3.16% 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, the ultimate parent of the Group.

Dividends

Dividends paid on the Preference shares were £9,181,000 (2019: £9,181,000).

The directors do not recommend a final dividend on the Ordinary shares (2019: £nil), and no interim dividends were paid in respect of either the current or prior year.

Charitable and political donations

Charitable donations made in the year amounted to £2.7 million (2019: £32.5million).

It is the Company's policy not to make political donations. No political donations were made in the year (2019: £nil).

Principal risks and uncertainties

The directors have carried out a robust assessment of the principal risks facing the Group including those that threaten its business model, future performance, solvency and liquidity. The principal risks and uncertainties, together with the financial risk management objectives and policies of the Group are included in the Risk Management section of this announcement.

Going concern

The Group has considerable financial resources: financial investments of £820.8m, 92% of which are liquid (2019: financial investments of £857.9m, 91% liquid) and cash and cash equivalents of £104.4m (2019:£74.8m). Liquid financial investments consist of listed equities and open-ended investment companies, government bonds and listed debt. In February 2021, the Company raised Euro 30 million of Tier 2 capital with the issue of 20-year subordinated bonds, callable after year 10. The Group also has a strong risk management framework and solvency position, is well placed to withstand significant market disruption and has proved resilient to stress testing. Due to the level of uncertainty created by the global Covid-19 pandemic, the Group has considered its capital position, liquidity and the impact on performance. The Group and its businesses have strong levels of cash and other liquid resources and has no concerns over the ability to meet its cash commitments over the three year planning horizon. The Group and its businesses expect to continue to meet regulatory requirements.

Covid-19 has impacted how the businesses operate, with a significant proportion of employees working effectively in a remote environment. They have continued to support our customers, work with our key suppliers and perform other functions of the Group. Whilst making some of these changes to the way the Group and its businesses operate caused some level of disruption, the businesses is equipped to deliver services in this way and can continue to do so over a prolonged period. Given the Group's operations, robust capital strength, liquidity and in conjunction with forecast projections and stress testing, the Directors have a reasonable expectation that the Group has adequate resources and is well placed to manage its risks successfully and continue in operational existence for at least 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts.

Risk Management

Strong governance is fundamental to what we do and drives the ongoing embedding of our enterprise-wide risk management framework. This provides the tools, guidance, policies, standards and defined responsibilities to enable us to achieve our strategy and objectives and ensure that individual and aggregated risks to our objectives are identified and managed on a consistent basis.

The risk management framework is integrated into the culture of the Group and is owned by the Board. Responsibility for facilitation of the implementation and oversight is delegated via the Group Chief Executive to the Group Risk Function, led by the Group Chief Risk and Compliance Officer.

The risk management process demands accountability and is embedded in performance measurement and reward, thus promoting clear ownership for risk and operational efficiency at all levels. On an annual basis, the Group Risk Committee (GRC), on behalf of the Board, carries out a formal review of the key strategic risks for the Group with input from the Group Management Board (GMB) and the Strategic Business Units (SBUs). The GRC allocates responsibility for each of the risks to individual members of the Group's executive management team. Formal monitoring of the key strategic risks is undertaken quarterly including progress of risk management actions and is overseen by executive risk committees.

Ecclesiastical has clearly defined the accountabilities, roles and responsibilities of all key stakeholders in implementing and maintaining its Risk Management Framework. These are defined, documented and implemented through the terms of reference of board sub committees, management and executive forums, position descriptions and functional charters.

The Group's Risk Management Framework is part of a wider Internal Control Framework. Systems of internal control are designed to manage rather than eliminate the risk of failure to achieve business objectives, and provide reasonable, but not absolute assurance as to the prevention and detection of financial misstatements, errors, fraud or violation of law or regulations.

Key to the successful operation of the internal control framework is the deployment of a strong Three Lines of Defence Model whereby:

· 1st Line (Business Management) is responsible for strategy execution, performance and identification and management of risks and application of appropriate controls;

· 2nd Line (Reporting, Oversight and Guidance) is responsible for assisting the Board in formulating risk appetite establishing minimum standards, developing appropriate risk management tools, providing oversight and challenge of risk profiles and risk management activities within each of the business units and providing risk reporting to executive management and the Board.

· 3rd Line (Assurance) provides independent and objective assurance of the effectiveness of the Group's systems of internal control. This activity principally comprises the Internal Audit function which is subject to oversight and challenge by the Group Audit Committee.

We seek to develop and improve our risk management framework and strategy on an ongoing basis to ensure it continues to support the delivery of our strategy and objectives.

The Group risk appetite defines the level of risk-taking that the Board considers to be appropriate for the Group as we pursue our business objectives. It is defined in line with the different categories of risk that the Group faces, and provides the backdrop against which the business plan is developed and validated. This ensures that the risk profile resulting from the business plan is in line with the risk-taking expectations of the Board. Compliance with the risk appetite is formally monitored every quarter and reported to the GRC at each meeting.

The risk appetite is formally reviewed annually with approval and sign-off by the Board and there are ongoing assessments to ensure its continued appropriateness for the business.

The Own Risk and Solvency Assessment (ORSA) process is carried out at least once a year and is a key part of the business management and governance structure. This integrates the risk management, business planning and capital management activities and ensures that risk, capital and solvency considerations are built into the development and monitoring of the Group's business strategy and plans and all key decision making.

The Group has regulatory approval for the use of an Internal Model to determine our regulatory capital requirement. In addition, the Internal Model's capability to quantify material risks and assess the impacts on capital requirements across a range of scenarios allows us to gain a deeper insight into the relationship between risk and capital management.

The Internal Model is used extensively to inform key business decisions across the Group, including setting business strategies and objectives, producing risk profiles and capital requirements for different scenarios, informing risk taking guidelines, informing and defining the Group risk appetite and Investment Strategy, determining risk mitigation mechanisms and responses to regulatory capital requirements.

Risk environment

The risk environment is monitored on an ongoing basis and key areas of concern are escalated to the Group Risk Committee.

The Covid-19 pandemic has had a wide- ranging impact on the Group and the environment in which we operate. The management of various risks arising from the evolving position has been co-ordinated by the GMB. As well as significant operational implications there were impacts on the insurance policies written by Group companies and on the Group's investment assets.

A Crisis Management Team (CMT) was convened as the Group's Business Continuity Plans were triggered, and this remained in place throughout the year to oversee the ongoing management of operational elements. The primary focus of the CMT was oversight of the effective transition to remote working, with particular emphasis on people and technology. This event provided the Group an opportunity to test its operational resilience in practice and overall the required activity was completed successfully over a relatively short time period.

Responses to other specific risk-types were delegated to existing bodies within the risk framework, with focused management groups set up where considered appropriate.

The UK based general insurance business was one of the eight insurers involved in a Test Case brought by the Financial Conduct Authority to seek clarity on the eligibility of business interruption claims linked to Covid-19. The judgement confirmed that losses arising from the Covid-19 pandemic were not covered by our BI policies considered in the case. This high profile case had potential reputational implications for the whole insurance industry. However, there are a small number of policies that do provide cover and appropriate provisions are in place.

Substantial falls in equity markets during the first quarter of 2020, as the pandemic took hold globally, adversely affected the value of our investment assets. We monitored markets closely and used derivatives to provide protection against the risk of further falls, though overall we maintained our existing investment approach and made no material changes to our asset mix.

Markets at least partially recovered later in the year and we continue to hold a diversified portfolio of assets including equities which we believe remain a good prospect for long-term returns. Consequently, we continue to take a relatively high level of market risk, which is well understood and closely managed.

Uncertainty around the eventual outcome of Brexit negotiations continued during 2020. The main risk identified for the Group as a result of Brexit was the loss of our ability to carry out business in the Republic of Ireland using the freedom to provide services previously afforded by the United Kingdom's membership of the EU. To mitigate this risk the Ireland branch has been granted authorisation by the Central Bank of Ireland to operate as a Third Country Branch ensuring continuity of operations for our customers.

The profitable management of our insurance businesses on a portfolio basis in hardening markets continues to be a key area of focus for the Group; ensuring that the business written and retained is profitable and sustainable. Competitor activity is an ever-present risk across all our business operations and chosen niches and 2020 was no exception. Our strategy remains to achieve controlled and profitable growth within our defined specialist niches. During 2020 there have been improvements in rate strength and we have maintained our strong underwriting discipline and risk appetite.

The potential for adverse development of long-tail liability claims, particularly in respect of PSA claims, remains a key risk that we continue to actively manage. The Independent Inquiry into Child Sexual Abuse in the UK is progressing and we participated in one of the investigations that delivered its report in 2020. Further investigations as part of the Inquiry are underway and we continue to monitor these and also developments in the other territories in which we operate, to determine the potential impacts on such claims.

The Covid-19 pandemic was the trigger for a high volume of regulatory guidance issued in all territories during 2020. Consequently, some other elements of regulatory change have been delayed, though we expect the pace of change to increase again as we move forward. Management of change in the regulatory environment continues to be a focus to ensure that we operate within relevant legal, regulatory and consumer protection requirements and guidelines and that our people maintain the highest standards of conduct with continued commitment to placing customers at the centre of everything we do.

Cyber risk remains a constantly evolving threat due to the threat of zero day attack. We hold customer data and therefore any event involving a significant loss of such data could result in harm to the data subjects, significant operational disruption and an impact on our service to customers as well as sizeable regulatory fines and reputational damage. The increased societal focus on data security and appropriateness of use, through regulations such as GDPR, results in increased scrutiny and prominence. Threat actors view the disruption arising from the move to a remote working environment as an exploitable opportunity and there has been a general increase in social engineering and phishing attacks across the financial sector. Employee awareness and vigilance is therefore highly important at this time and the Group operates an ongoing programme of training and awareness exercises.

The Group aims to be the most trusted, specialist insurer and therefore maintaining a positive reputation is critical. Our reputation could potentially be damaged as a result of a range of factors including poor business practices and behaviours. High standards of conduct are a core part of the Group's brand, values and culture and there is an ongoing focus on ensuring this is maintained.

Climate change presents increasing levels of risk to our businesses and our customers. Whilst the greatest impacts of these risks are expected to materialise in the medium to long-term, it is important that we take actions to mitigate and manage these risks now. Our exposures to climate change risk include transition risk, primarily related to our investment portfolio, and physical risk which additionally affects the insurance risks that we cover.

Principal risks

Insurance risk

The risk that arises from the fluctuation in the timing, frequency and severity of insured events relative to the expectations of the firm at the time of underwriting.

Other financial risks

The risk that proceeds from financial assets are not sufficient to fund the obligations arising from insurance contracts

Operational risk

The risk of loss arising from inadequate or failed internal processes, people and systems, or from external events.

Regulatory and conduct risk

The risk of regulatory sanction, operational disruption or reputational damage from non-compliance with legal and regulatory requirements or the risk that Ecclesiastical's behaviour may result in poor outcomes for the customer.

Reputation risk

The risk that our actions lead to reputational damage in the eyes of customers, brokers, or other key stakeholders.

Directors' Responsibility Statement

The following statement is extracted from page the Directors' report of the 2020 Annual Report & Accounts, and is repeated here for the purposes of the Disclosure and Transparency Rules. The statement relates solely to the Company's 2020 Annual Report & 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 in the Governance section of the full Annual Report & Accounts.

The directors confirm to the best of their knowledge:

§ The financial statements, which have been prepared in accordance with IAS in conformity with the requirements of the Companies Act 2006 and IFRS adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union, give a true and fair view of the assets, liabilities, financial position and loss of the Group.

§ The Strategic Report within the 2020 Annual Report & Accounts includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

§ The Annual Report and financial statements, taken as a whole, are fair, balanced and understandable, and provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

For the year ended 31 December 2020

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2020

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2020

The revaluation reserve represents cumulative net fair value gains on owner-occupied property. Further details of the translation and hedging reserve are included in the notes to this announcement.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

At 31 December 2020

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 31 December 2020

NOTES TO THIS ANNUAL FINANCIAL REPORT ANNOUNCEMENT OF RESULTS

for the year ended 31 December 2020

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 2020 as prepared in accordance with IFRS applicable at 31 December 2020 issued by the International Accounting Standards Board (IASB) in conformity with the requirements of the Companies Act 2006 and pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union (EU).

A number of amendments and improvements to accounting standards have been issued by the International Accounting Standards Board (IASB) with an effective date of on or after 1 January 2020, and are therefore applicable for the 31 December 2020 financial statements. None had a significant impact on the Group.

IFRS 9, Financial Instruments, is effective for periods beginning on or after 1 January 2018. However the Group has taken the option available to insurers to defer the application of IFRS 9 as permitted by IFRS 4, Insurance Contracts. The Group qualifies for the temporary exemption, which is available until annual periods beginning on or after 1 January 2023, since at 31 December 2015 greater than 90% of its liabilities were within the scope of IFRS 4. There has been no significant change to the Group's operations since 31 December 2015 and as a result, the Group continues to apply IAS 39, Financial Instruments.

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 18 March 2021.

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2020 or 2019, but is derived from those accounts. Statutory accounts for 2019 have been delivered to the Registrar of Companies and those for 2020 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 18 March 2021.

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 Benefact House, 2000 Pioneer Avenue, Gloucester Business Park, Brockworth, Gloucester, GL3 4AW.

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 2020.

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 of this announcement. 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 (the risk of failing to ensure disciplined risk selection and to obtain the appropriate premium), claims reserving risk (the risk of actual claims payments exceeding the amount we are holding in reserves) and reinsurance risk (the risk of failing to access and manage reinsurance capacity at a reasonable price).

(a) Risk mitigation

Statistics demonstrate that the larger and more diversified the portfolio of insurance contracts, the smaller the relative variability in 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 and net underwriting exposure is protected through the use of a comprehensive programme of reinsurance using both proportional and non-proportional reinsurance, supported by proactive claims handling. The overall reinsurance structure is regularly reviewed and modelled to ensure that it remains optimum to the Group's needs. The optimum reinsurance structure provides the Group with sustainable, long-term capacity to support its specialist business strategy, with effective balance sheet and profit and loss protection at a reasonable cost.

Catastrophe protection is purchased following an extensive annual modelling exercise of gross and net (of proportional reinsurance) exposures. In conjunction with reinsurance brokers the Group utilises the full range of proprietary catastrophe models and continues to develop bespoke modelling options that better reflect the specialist nature of the portfolio. Reinsurance is purchased in line with the Group's risk appetite.

(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 miscellaneous financial loss class of business covers personal accident, fidelity guarantee and loss of money, income and licence. The other class of business includes cover of legal expenses and also a small portfolio of motor policies, but this has been in run-off in the United Kingdom since November 2012. The Group's whole-of-life insurance policies support funeral planning products.

The table below summarises written premiums for the financial year, before and after reinsurance, by territory and by class of business:

(c) General insurance risks

Property classes

Property cover mainly compensates the policyholder for damage suffered to their property 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, 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, escape of water, explosion (after fire), riot and malicious damage, subsidence, accidental damage, theft and earthquake. Subsidence claims are particularly difficult to predict because the damage is often not apparent for some time. The ultimate settlements can be small or large with a risk of a settled claim being reopened at a later date.

The number of claims made can be affected in particular by weather events, changes in climate, economic environment, and crime rates. Climate change may give rise to more frequent and 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, 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.

Contracts are underwritten on a reinstatement basis or repair and restoration basis as appropriate. Costs of rebuilding properties, of replacement or indemnity for contents and time taken to bring business operations back to pre-loss levels for business interruption are the key factors that influence the cost 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 earthquake, weather or major spreading fire 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 and business interruption claims taking much longer depending on the length of the indemnity period involved.

Liability classes

The main exposures are in respect of liability insurance contracts which protect policyholders from the liability to compensate injured employees (employers' liability) and third parties (public liability).

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. 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 can be affected by several factors. Most significant are the increasing level of awards for damages suffered, legal costs and the potential for periodic payment awards.

The severity of bodily injury claims can be influenced particularly by the value of loss of earnings and the future cost of care. The settlement value of claims arising under public and employers' liability is particularly difficult to predict. There is often uncertainty as to the extent and type of injury, whether any payments will be made and, if they are, the amount and timing of the payments, including the discount rate applied for assessing lump sums. 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 may make 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 evolve, 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 to four 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, during which time there can be particular uncertainty as to the number of future potential claims and their cost. 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. Although assets are well matched to liabilities, there is a risk that returns on assets held to back liabilities are insufficient to meet future claims payments, particularly if the timing of claims is different from that assumed. This is not one of the Group's principal risks and new policies are no longer being written in the life fund, with only minimal premiums now being received each year.

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 and its own experience. 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 interest rate and inflation risk within this has been largely mitigated by holding index-linked assets of a similar term to the expected liabilities profile. The main residual risk is the spread risk attached to corporate bonds held to match the liabilities. The Group holds a reserve to meet the costs of future expenses in running the life business and administration of the policies. There is a risk that this is insufficient to meet the expenses incurred in future periods. The small mortality risk is retained by the Group.

Financial 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, equity price and currency risk.

There has been no change from the prior period in the nature of the financial risks to which the Group is exposed. Despite the conclusion of Brexit and the US election at the end of 2020 and Covid-19 vaccine programmes, uncertainty remains in relation to the economic risks to which the Group is exposed, including equity price volatility, movements in exchange rates and long-term UK growth prospects. The Group's management and measurement of financial risks is informed by either stochastic modelling or stress testing techniques.

(a) Categories of financial instruments

(i) Categories applying IAS 39

*Financial liabilities are held at amortised cost.

The carrying value of those financial assets and liabilities not carried at fair value in the financial statements is considered to approximate to their fair value.

(ii) Categories of financial assets applying IFRS 9

As disclosed in the accounting policies, the Group has chosen to defer application of IFRS 9 and classifies and measures financial instruments using IAS 39. To facilitate comparison with entities applying IFRS 9, the table below sets out the Group's financial assets at the balance sheet date, split between those which have contractual cash flows that are solely payments of principal and interest on the principal outstanding (SPPI), other than those which are held for trading or whose performance is evaluated on a fair value basis, and all other financial assets.

There has been a £62,109,000 increase (2019: £13,925,000 decrease) in the fair value of SPPI financial assets of the Group, and a £32,112,000 decrease (2019: £63,099,000 increase) in the fair value of other financial assets of the Group during the reporting period.

(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 bid 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, translated into the Group's functional currency 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.

The derivative liabilities of the Group are measured at fair value through other comprehensive income. Derivative liabilities are categorised as level 2.

Fair value measurements based on level 3

Fair value measurements in level 3 consist of financial assets, analysed as follows:

All the above gains or losses included in profit or loss for the period are presented in net investment return within the statement of profit or loss.

The valuation techniques used for instruments categorised in levels 2 and 3 are described below.

Listed debt and equity securities not in active market (level 2)

These financial assets are valued using third-party pricing information that is regularly reviewed and internally calibrated based on management's knowledge of the markets.

Non exchange-traded derivative contracts (level 2)

The Group's derivative contracts are not traded in active markets. Foreign currency forward contracts are valued using observable forward exchange rates corresponding to the maturity of the contract and the contract forward rate. Over-the-counter equity or index options and futures are valued by reference to observable index prices.

Unlisted equity securities (level 3)

These financial assets are valued using observable net asset data, adjusted for unobservable inputs including comparable price-to-book ratios based on similar listed companies, and management's consideration of constituents as to what exit price might be obtainable.

The valuation is sensitive to the level of underlying net assets, the Euro exchange rate, the price-to-book ratio, an illiquidity discount and a credit rating discount applied to the valuation to account for the risks associated with holding the asset. If the illiquidity discount or credit rating discount applied changes by +/-10%, the value of unlisted equity securities could move by +/-£7m (2019: +/-£7m).

Unlisted debt (level 3)

Unlisted debt is valued using an adjusted net asset method whereby management uses a look-through approach to the underlying assets supporting the loan, discounted using observable market interest rates of similar loans with similar risk, and allowing for unobservable future transaction costs.

The valuation is most sensitive to the level of underlying net assets, but it is also sensitive to the interest rate used for discounting and the projected date of disposal of the asset, with the exit costs sensitive to an expected return on capital of any purchaser and estimated transaction costs. Reasonably likely changes in unobservable inputs used in the valuation would not have a significant impact on shareholders' equity or the net result.

(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 insurance liabilities for which discounting is applied at a market interest rate. The Group's investment strategy is set in order to control the impact of interest rate risk on anticipated 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 life business, the average duration of the Group's fixed income portfolio is three years (2019: three years), reflecting the relatively short-term average duration of its general insurance liabilities. The mean term of discounted general insurance liabilities is disclosed in note 28(a)(iv) to the full financial statements.

For the Group's life business, consisting of policies to support funeral planning products, 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 is mitigated by purchasing fixed interest investments with durations that 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 the 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 life business assets and liabilities that are exposed to interest rate risk.